The U.S. Supreme Court, in a 6 to 3 ruling citing stare decisis, upheld the half-century rule against royalty payments accruing after expiration of a patent. The Court’s decision in Kimble v. Marvel Entertainment, LLC is a reminder to all current and potential licensing parties that patent royalties cannot be obtained after a patent expires. This decision upholds the Brulotte Rule, named after the 1964 decision in Brulotte v. Thys Co., which the Court declined to overturn.
I. Background to Marvel Dispute
The Court’s 1964 Brulotte ruling held a patent agreement unenforceable as “unlawful per se” to the extent it required accrual of royalties for use of a product after expiration of the last patent covered by the agreement. The Brulotte Court applied the principle that all patent-related benefits must end when the patent term expires. Otherwise, the agreement conflicts with patent law’s policy of establishing a post-expiration public domain.
II. Supreme Court’s Decision
In 1990, Stephen Kimble obtained a patent on a gloved-toy allowing users to role-play as a “spider person” with the ability to shoot foam string from the wearer’s palm. See U.S. Patent No. 5,072,856. Marvel initially met with Kimble to discuss his invention, but soon began marketing its own “Web Blaster.” The Marvel “Web Blaster” provided similar role-play enjoyment via palm-ejected spray foam. Kimble sued Marvel in 1997 for patent infringement, and the parties settled for, inter alia, a 3% royalty on Marvel’s future sales of the Web Blaster and similar products. Noticeably absent from the agreement was a termination date for the royalty payments.
At some point, Marvel uncovered the Brulotte holding. Apparently, neither side knew of the case during settlement negotiations. Marvel filed for declaratory relief claiming that it no longer owed royalty payments post-expiration, and both the district court and the U.S. Court of Appeals for the Ninth Circuit sided with Marvel.
Kimble sought a ruling from the U.S. Supreme Court overturning Brulotte. In its place, to find a post-expiration royalty agreement “unlawful per se,” Kimble urged a “case-by-case” approach based on the “rule of reason” test found in antitrust law. The rule of reason analysis forces courts to evaluate a practice’s effect on competition by taking into account a variety of factors, including specific information about the relevant business, its condition before and after the practice was imposed, and the practice’s history, nature and effect. State Oil Co. v. Kahn, 522 U.S. 3, 10 (1997). Kimble hoped to convince the Court that the primary factor to be analyzed for post-expiration royalty agreements is whether the patent holder has power in the relevant market to curtail competition – requiring a full economic inquiry into market definition, barriers to entry and so forth under the antitrust case law. Only then could such an agreement be found “unlawful per se.”
Notably, Kimble was not without supporters on the bench. Justice Samuel Alito, joined by Chief Justice John Roberts and Justice Clarence Thomas, dissented. Alito disagreed with the Brulotte Rule as decided “based on an economic theory . . . interfere[ing] with the ability of parties to negotiate licensing agreements that reflect the true value of the patent.” The plain language of the patent act, cited Alito, grants rights to the patentee and “heirs or assigns” for a term of 20 years. 35 U.S.C. § 154(a)(1) and (2). That language includes nothing banning post-expiration royalty payments. Brulotte did not actually interpret the patent statute, but instead was a “bald act of policymaking.”
Ultimately, six Justices upheld the Brulotte Rule due to stare decisis, which is the basic jurisprudential concept that today’s Court should stand by yesterday’s decision. Of importance is that stare decisis promotes evenhanded, predictable, and consistent development of the law, while also bolstering reliance on judicial decisions and dissuades the expense of endless re-litigation. In an opinion sprinkled with humorous references to the Spider-Man superhero character, the Court found no “special justification” to overrule the prior case, based on the length of time since Brulotte, and the possibility that many parties have structured agreements in accordance with its holding. The Court said “superspecial justification” would be needed to overcome “this superpowered form of stare decisis.” The Court also acknowledged support for the Brulotte ruling over the last fifty years, because: (1) at any point critics of the ruling could have approached Congress for a change in the law; but (2) Congress, having had multiple opportunities in the various patent laws enacted since 1964, has declined to address this issue.
III. Impact of Decision
This decision expressly approves some long-standing work-arounds. The majority decision expressly notes that even though the upheld Brulotte Rule limits patent royalties from accruing after expiration, a royalty due, for example, during the patent term may be amortized over many years after expiration. Or, non-patent royalties can be made payable after patent expiration even if very closely related to the patent, such as royalties paid for the licensing of trade secrets, copyrights, trademarks and trade dress. In any agreement, a licensor should be sure to expressly link any post-expiration royalty to the non-patented property right.