We recently saw the publication of an interesting decision in the United States concerning patent licences, with the US Court of Appeals for the Ninth Circuit holding that under the terms of a settlement agreement, Marvel, the owners of the Spiderman brand and franchise, were not required to pay royalties to the inventor of a Spiderman toy once the inventor’s patent protecting the toy expired. In reaching its decision (Stephen Kimble v Marvel Enterprises Inc, available here), the Court said it was bound to apply a “frequently-criticized” decision of the US Supreme Court: Brulotte v Thys Co, 379 US 29 (1964).
The aptly named inventor, Stephen Kimble [Ed: True it is, ‘Dr Kimble’ is in The Fugitive, but there is an action hero connotation], filed an application to patent his idea for the Spiderman toy in 1990 (the application was ultimately granted as US Patent No 5.072,856) and he approached Marvel with the idea shortly after. The President of Marvel’s predecessor company at the time promised Mr Kimble that the company would consider his idea and pay him a royalty if it went ahead with it. Marvel later began producing a toy – the “Web Blaster” (see here and then check out Marvel’s 1997 ad for the toy here) – but refused to make good on their promise to Mr Kimble.
For an image of the Web Blaster from the patent, see here:
Click here to view image.
And in its commercialised form:
Click here to view image.
We briefly digress from our legal analysis to express sympathy for the parents who wrote this review on Amazon after purchasing the product for their two boys, aged 6 and 3 for Christmas:
“They were so excited with this toy that they stopped opening presents to play with it.. We moved to the refill pack and they continued to web everything. The living room was completely covered in web.”
Mr Kimble sued. Although Marvel was successful in obtaining summary judgment that it had not infringed Mr Kimble’s patent, Kimble’s claim for breach of contract was upheld. Both parties appealed and the dispute was eventually settled in 2001. Mr Kimble and Marvel reached an agreement for Marvel to pay Mr Kimble a lump sum plus ongoing royalties (at a rate of 3% of ‘net product sales’) in return for Mr Kimble agreeing to assign his rights to the toy and the patent to Marvel and to drop all claims against the company. It’s worth noting that the agreement had no expiration date or limit on the time Marvel was required to pay royalties.
In 2006, Mr Kimble’s royalties began to dry up and a dispute arose as to Marvel’s ongoing obligations under the settlement agreement given, among other issues, new iterations of the Web Blaster toy.
Mr Kimble sued again. In answer, Marvel said it did not have to pay royalties once the patent expired in 2010, citing Brulotte.
In Brulotte, the Supreme Court held that a patent licence agreement requiring a licensee to make royalty payments beyond the expiration date of the underlying patent was unenforceable as the agreement represented an improper attempt to extend the patent monopoly. As the Court of Appeals noted in its decision, “Brulotte has been read to require that any contract requiring royalty payments for an invention either after a patent expires or when it fails to issue cannot be upheld unless the contract provides a discount from the alternative, patent-protected rate”.
Despite clear misgivings, the Court of Appeals applied Brulotte stating that as there was no distinction between the royalties payable to Mr Kimble before and after the expiry of the patent. In the Court’s words:
“The rule that follows, in relevant part, is that 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. This is because – in the absence of a discount or other clear indication that the license was in no way subject to patent leverage – we presume that the post-expiration royalty payments are for the then-current patent use, which is an improper extension of the patent monopoly under Brulotte.”
The Court of Appeals’ ruling is, in our opinion, curious (leaving aside the fact the agreement itself had no end date). What the Court basically said was that Mr Kimble was no longer entitled to any royalties because the patent had expired yet, in the prior proceedings, he had been successful not on his patent infringement claim, but on his claim for breach of contract. As the Court of Appeals noted in the final paragraph of its decision:
“The patent leverage in this case 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. Nonetheless, Brulotte and its progeny are controlling. We are bound to follow Brulotte and cannot deny that it applies here.”
This decision makes it very important to consider a step down in royalty rates where patent expiry will occur during the term of an agreement – at least where there is a US angle.