The Supreme Court this week upheld a long-standing precedent that restricts the ability of a patent holder to charge a royalty beyond the term of a patent. In a 6-3 decision, the court in Kimble v. Marvel Entertainment declined to overrule Brulotte v. Thys Co., a 1964 decision in which the Court ruled that an obligation to pay royalties for use beyond the expiration of the patent was unenforceable.
“Overruling precedent is never a small matter,” the Court explained in its June 22 opinion, and the petitioner failed to persuade the Court to overrule the controlling precedent here.
Petitioner Kimble was the original owner of a patent to a toy for shooting webs, in the form of pressurized foam string, from the palm of one’s hand, à la Spiderman. Kimble sued Marvel, the respondent, in 1997 for infringing the patent, and the parties settled the litigation for (i) a lump sum payment and (ii) a 3 percent royalty on Marvel’s future sales of the accused product. As the opinion sets forth, “[t]he parties set no end date for royalties, apparently contemplating that they would continue for as long as kids want to imitate Spider-Man (by doing whatever a spider can).”
After negotiating and executing the settlement, Marvel learned of Brulotte and read it to “sunset the settlement’s royalty clause.” Marvel then filed a declaratory judgment action seeking a finding that Marvel could cease paying royalties at the end of Kimble’s patent term in 2010. The district court found in Marvel’s favor. Citing Brulotte, the Ninth Circuit affirmed.
The Court’s analysis began with a discussion of why Brulotte is correct under existing patent law. The Court reasoned that the end of a patent term is a carefully guarded end to one’s monopoly right: “when the patent expires, the patentee’s prerogatives expire too, and the right to make or use the article, free from all restriction, passes to the public.” To that end, contract provisions that accrue a running royalty beyond the expiration of the patent contradict patent law’s policy of “establishing a ‘post-expiration . . . public domain’ in which every person can make free use of a formerly patented product.”
The Court acknowledged that Brulotte restricts a patentee’s and an accused infringer’s right to freely contract to a royalty that runs beyond the patent’s term and noted that extending the term of the patent, in some circumstances, “may better allocate the risks and rewards associated with commercializing inventions.” But parties “can often find ways around Brulotte, enabling them to achieve those same ends,” the Court reasoned. For instance, the parties could agree to a structured payment that amortizes the royalty, which may run for the term of the patent, over a longer period, or the patentee could agree to license multiple patents with a running royalty until the latest-running patent in the licensed portfolio expires. The Court also pointed out that post-expiration royalties are allowable so long as they are tied to a non-patent right, even when closely related to a patent.
Kimble turns on the principle of stare decisis, which provides that the Court generally should stand by prior decisions, particularly where the prior decision interprets a statute. But the Court acknowledged that a consequence of stare decisis is “sticking to some wrong decisions.” So, while the Court was not convinced that it should overturn Brulotte, it invited the critics of Kimble to “take their objections across the street, and Congress can correct any mistake it sees.”
Justice Samuel A. Alito, joined by Chief Justice John Roberts and Justice Clarence Thomas, dissented and argued that the Court’s reliance on stare decisis is misplaced. Stare decisis, according to the dissent, is a doctrine that teaches judicial restraint; it should not be invoked to maintain precedent like Brulottethat is “a clear case of judicial overreach.” According to the dissent, Brulotte is not a proper interpretation of the Patent Act but is “based instead on an economic theory—and one that has been debunked.”
Kimble serves at least three important functions:
First, the decision and the dissent remind practitioners that the Court will not overturn precedent lightly, giving market participants at least some confidence and certainty in past decisions, particularly where the decision is grounded in statutory interpretation.
Second, the decision affirms the finality of a patent’s term yet provides guidance for parties to structure license and settlement agreements that extend payments beyond the term without running afoul ofBrulotte.
Third, the decision may serve as a call to action, an invitation to interested parties to take these arguments to Congress; the Court has invited the discussion to continue in what it views as the appropriate forum.