On June 22, 2015 in Kimble v. Marvel Entertainment, 576 U.S. ___ (2015), the U.S. Supreme Court upheld a rule it established in 1964 in Brulotte v. Thys Co., 379 U.S. 29, which said that a patent holder cannot charge royalties for the use of a patented invention after the patent has expired. As a result of this ruling, Marvel does not owe royalties to Stephen Kimble based on sales of Spider Man “Web Blaster” accessory toys that fell under Kimble’s expired patent. (The Web Blaster lets would-be spidermen shoot foam web strands from their wrists, just like Peter Parker. Shazam!)
Marvel’s payments to Kimble were being made under a settlement agreement resulting from a patent infringement suit Kimble brought against Marvel. Under the agreement, Kimble sold his patent to Marvel in exchange for a royalty on sales of Web Blasters, but the agreement did not specify when the royalty obligation would end. Some years later, Marvel was no longer content to operate under the agreement, the relationship with Kimble broke down, and Kimble sued again. At that point, Marvel discovered Brulotte and asked the trial court to declare that no royalties were due on sales that occurred after Kimble’s patent expired. Kimble appealed to the Ninth Circuit and then to the Supreme Court, asking the Court to reverse Brulotte, but the Court declined to do so.
Justice Kagan wrote the majority opinion for the Kimble court, summarizing the Brulotte decision as one that involved an inventor who licensed his patented hop-picking machine to farmers in exchange for royalties from hop crops harvested both before and after his patents’ expiration dates. The Brulotte Court held the agreement unenforceable—“unlawful per se”—to the extent it provided for the payment of royalties “accru[ing] after the last of the patents incorporated into the machines had expired.” The idea was that allowing royalties to accrue after a patent expired would be tantamount to an unwarranted extension of a patent owner’s exclusionary rights beyond the limited statutory term required by the Constitution and set by Congress, and would be contrary to the intended outcome that patented inventions fall into the public domain after the patent holder has benefitted from his limited monopoly.
The Kimble Court upheld Brulotte reluctantly. As Justice Kagan admitted in plain terms in Kimble, and Justices Alito and Thomas argued in dissent, the rationale behind Brulotte seems dubious. For example, Brulotte limits freedom of contract and outlaws certain longer payment plans which some licensees would prefer, even though the patent statutes do not dictate such constraints. Ultimately, however, the majority decided to uphold Brulotte as the law of the land, citing the doctrine of stare decisis as the primary concern. Quoting from Justice Brandeis’ dissent in Burnet v. Coronado Oil, 285 U.S.393 (1932), J. Kagan explained that it is often “more important that the applicable rule of law be settled than that it be settled right.” Justices Alito and Thomas were not so enamored of stare decisis as a rationale for upholding a precedent they view as baseless, but were unable to convince the majority of the need for the Court to correct a 50+ year old mistake. So, the Brulotte rule will remain until Congress changes it, and Kimble’s hope for unending royalty payments has been lost in Brulotte’s web.
Licensors should be aware that Brulotte can be applied to license agreements made before a patent on the licensed technology has issued, if a court finds that the parties entered the agreement with clear expectations that a patent would issue. See Boggild v. Kenner Products, 776 F. 2d 1315 (6th Cir. 1985) (Brulotte limited the duration of royalties even though the license agreement was signed before any patent application was filed); Pitney Bowes v. Mestre, 701 F.2d 1365 (11th Cir 1983) (Brulotte was found applicable to a license agreement which referred to pending patent applications with terms triggered by patent grant, indicating a high expectation of attaining patents and sufficient patent leverage to invoke Brulotte). But license agreements are not always explicit as to whether they convey rights under a patent or not. When the situation is not explicit, the law seems to require inquiry into the nature and circumstances of the license transaction in order to determine whether the licensor gets caught in the Brulotte web. The essential inquiry is whether the court can determine that post-expiration royalties represent leverage of the patent, or even an expected patent, after its term. See, Boggild and Pitney Bowes, supra.
On the other hand, the Brulotte web has holes through which some licensors may impose royalty obligations that exceed the life of a patent. Justice Kagan discussed these in the Kimble decision, almost by way of apology for upholding Brulotte despite its dubious foundation. For example, when a patent license encompasses a number of patents, the royalties may be required until the last of the patents expires, thus apparently giving some post-expiration force to those that expired sooner. Also, a license which is ‘hybrid’ in nature – based on patent rights and non-patent rights (such as know-how or a disclosed trade secret) – can extend beyond the life of the patent as long as there is a differential in the royalty rate which becomes effective upon expiration of the patent. Finally, it is acceptable for payments to extend beyond the patent life, as long the amount due is based on pre-expiration use of the patent.
A common way to rely on the ‘hybrid license’ exception to Brulotte is for the license document to state that the license is for operation not only under an identified patent, but also under know-how (or other consideration) disclosed to the licensee apart from the patent, with a statement that the royalty shall be X % while the patent is in force and something less than X% after the patent expires. However, in such cases it is incumbent on the Licensor to establish that there is a difference between payments for patent rights as opposed to payments for know-how outside the patent; if the two are indistinguishable the licensor might be snared in the Brulotte web. (SeeBoggild, supra.)
Another hole in the Brulotte web is that Brulotte does not apply to license agreements for technology on which no patent is applied for, or is not obtained, as happened in Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979). But even Aronson would have been caught in the Brulotteweb and lost the post-expiration royalties if the patent which had be applied for had been granted.
Overall, licensors of technology for which patent rights might be involved will benefit from keeping their senses attuned to the reach of Brulotte, until the U.S. Congress untangles the patent licensing web.