Kimble v. Marvel Enterprises, Inc., No. 11-15605 (9th Cir. July 16, 2013)

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Stating that it did so "reluctantly," a panel of the Ninth Circuit Court of Appeals held that inventor Stephen Kimble’s right to collect royalties after the expiration of his patent is precluded by the U.S. Supreme Court decision in Brulotte v. Thys Co., 379 U.S. 29 (1964). As a result, the panel affirmed the district court’s grant of summary judgment to Marvel Enterprises, Inc. on Kimble’s breach of contract claim.

Kimble invented what U.S. Patent No. 5,072,856 describes as "a toy that makes it possible for a player to act like a spider person by shooting webs from the palm of his or her hand," and what the parties and Federal Circuit appropriately called a "Spider-Man toy." Kimble’s invention allowed a user to shoot foam string by activating a trigger attached in the palm of a glove, which was attached to a valve, which in turn was attached to a flexible line leading to a can of foam strapped to the user’s wrist or waist. The patent issued on December 17, 1991, and expired on or about May 25, 2010.

When the patent application was pending, Kimble met with Marvel’s predecessor and presented the idea for the Spider-Man toy. Kimble claimed that at the meeting, Marvel representative verbally agreed that Marvel would compensate Kimble if it used any of his ideas. Marvel later told Kimble that it was not interested in his ideas, but began manufacturing a similar Spider-Man toy called the "Web Blaster," which worked essentially in the same way as Kimble’s invention.

Kimble sued Marvel in 1997 for patent infringement and breach of contract based on the verbal agreement reached at the meeting where Kimble disclosed his ideas. A district court granted summary judgment to Marvel on the patent infringement claim, but a jury found in favor of Kimble on the breach of contract claim and awarded him 3.5% of past, present, and future Web Blaster "net product sales," which excluded foam string refills. Both parties appealed.

While the appeals were pending, the parties agreed to settle the case. The Settlement Agreement provided, in pertinent part, that Marvel would purchase the patent for $516,214 and 3% of "net product sales," which were "deemed to include product sales that would infringe the Patent but for the purchase and sale thereof pursuant to this Agreement as well as sales of the Web Blaster product that was the subject of the Action and to which the Judgment refers." The Federal Circuit noted that the Settlement Agreement "has no expiration date and does not include any specific time limit on Marvel’s obligation to pay ‘3% of "net product sales."’" Marvel royalty payments to Kimble under the agreement totaled more than $6 million.

After 2006, disputes arose concerning royalties Kimble claimed were owed for subsequent iterations of the Web Blaster, and Kimble brought suit, again alleging patent infringement and breach of contract. Marvel counterclaimed seeking, among other things, a declaratory judgment that it was not obligated to pay royalties for the sales of products after the expiration of the patent. On the parties’ cross motions for summary judgment, the district court granted summary judgment in favor of Marvel, finding that Brulotte precluded royalties after the expiration of the ‘856 Patent because the Settlement Agreement was a "hybrid" that transferred both patent rights and "the rights to the toy idea(s) verbally exchanged" between the parties in 1990, rejecting Kimble’s argument that the agreement created "separable" patent and non-patent rights because it made "no distinction between the royalties for these two" categories.

The Ninth Circuit affirmed, holding that Brulotte and its progeny — particularly Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979), which held that patent law did not preclude the enforcement of an agreement to provide royalty payments indefinitely where no patent had issued — established a rule whereby "a license for inseparable patent and non-patent rights involving royalty payments that extends beyond a patent term is unenforceable for the post-expiration period unless the agreement provides a discount for the non-patent rights from the patent-protected rate." Opinion at 16. The Ninth Circuit explained that "in the absence of a discount or other clear indication that the license was in no way subject to patent leverage," it must be presumed that that "the post-expiration royalty payments are for the then-current patent use, which is an improper extension of the patent monopoly." Id.

In reaching its decision, the Ninth Circuit joined others in criticizing Brulotte. According to the Ninth Circuit, the holdings of Brulotte and Aronson do not compel the bright-line rules that other circuits have applied. Id. at 16. The Ninth Circuit noted its previous opinion Zila, Inc. v. Tinnell, 502 F.3d 1014, 1016, 1019–22 (9th Cir. 2007), reasoning that Brulotte turned on the existence of "onerous use restrictions unrelated to the royalty" payment, which showed that the patent owner "was acting in all respects as if the patent remained in place." Id. The Ninth Circuit also stated in Zila that "the language in Aronson suggesting that the patent owner in that case could not have received the full patent royalty beyond the patent term ‘was counterfactual dicta, neither supported by any analysis nor necessary for the decision.’" Id. The Ninth Circuit echoed the Seventh Circuit’s criticism that the rationale of Brulotte is incorrect — the duration of a patent, and the right to exclude others, is not extended "either technically or practically" by the patentee "extracting a promise to continue paying royalties after expiration of the patent." Instead, "[t]he duration of the patent fixes the limit of the patentee’s power to extract royalties; it is a detail whether he extracts them at a higher rate over a shorter period of time or a lower rate over a longer period of time."Id. at 22 (quoting Scheiber v. Dolby Labs., Inc., 293 F.3d 1014, 1017 (7th Cir. 2002)). The criticism was "particularly apt in this [Kimble] case," according to the Ninth Circuit, because "the patent leverage . . . was vastly overshadowed by what were likely non-patent rights, and Kimble may have been able to obtain a higher royalty rate had the parties understood that the royalty payments would stop when the patent expired." Id. at 23.

Nevertheless, the Ninth Circuit concluded that Brulotte was controlling, and thus stated that it would continue to "reluctantly follow[] . . . other circuits’ ‘consensus’ in light of the ‘particularly strong national uniformity concerns’ present in patent cases." Id. at 16 (quoting Zila, 502 F.3d at 1022).