In a long-awaited decision, the U.S. Supreme Court declined to overrule its much criticized 51 year-old ruling that made contracts for post-expiration royalties unenforceable (Docket No. 13-720). Finding that it was “required” to do so by stare decisis, the Court, on June 22, 2015, affirmed the Ninth Circuit’s judgment in Kimble v. Marvel Enters. Inc. 727 F.3d 856 (9th Cir. 2013), and upheld Brulotte v. Thys Co., 379 U.S. 29 (1964), which held that a patentee cannot continue to receive royalties for sales made after the patent expires.
Kimble concerned the enforceability of an agreement to make royalty payments beyond the life of the patent rights in the context of a “hybrid” agreement that included both patent rights and non-patent intellectual property rights. The agreement in Kimble, which included indistinguishable patent and non-patent rights covering the Web Blaster, a Spider-Man® inspired toy, did not provide a stepped-down royalty rate following patent expiration rights. The Ninth Circuit, noting Brulotte’s rule as counterintuitive and its rationale unconvincing, reluctantly applied it, and held that the agreement to pay the post-expiration royalties was unenforceable because the agreement did not “provide a discounted rate for the non-patent rights or some other clear indication that the royalty…was in no way subject to patent leverage.”
While consideration permissible under a hybrid license was the central issue in the Ninth Circuit opinion, it did not factor into the Supreme Court decision. Instead, both the Court’s opinion and the parties’ arguments focused solely on post -expiration royalties for patent rights. The Court in its discussion stated as a foregone conclusion that post-expiration royalties for non-patent rights in a hybrid license are enforceable. In doing so, however, it described the example of a stepped-down rate, leaving open the very question practitioners had hoped Kimble was to answer.
As a result of Kimble, parties should continue to structure patent license agreements with a view that enforceability of royalty payments will be evaluated under the Brulotte per se rule. When structuring hybrid licenses, the parties should consider step-down royalties for non-patent rights, provisions that explain the business justifications for the payment provisions, or “other clear indications that the royalty was in no way subject to patent leverage.”