It is tempting to begin analysis of the recent US Supreme Court patent case Kimble v Marvel Enterprises by slinging around some Spiderman puns. After all, the patent involved was for a device shooting foam ‘webs’ from the wrists of those who wanted to role play the action hero.
But the Court has done a much better (Marvel-ous?) job of this itself: ‘Patents endow their holders with certain superpowers, but only for a limited time,’ Justice Kagan wrote for the majority.
In the US, there has been a ban on licence agreements providing for royalties to be paid after that limited time expires (i.e. at the end of the life of the patent) since 1964, but until now there has been significant judicial criticism of that rule. The Kimble decision confirms that the old rule is alive and well.
This post takes a quick look at the decision and compares it with a recent Australian case tackling the same question.
Not a whole Brulotte love
The US ban on patent royalties continuing after a patent has expired comes from the 1964 case of Brulotte v Thys. In that case, the licence agreement provided for royalties to be paid on a rolling basis, whether the patent had expired or not. This was found to be unenforceable.
The same issue arose in Kimble. Mr Kimble unsuccessfully tried to license his patented foam web-shooting canisters to Marvel, which owns the rights related to Spiderman. Marvel later made a web-shooting toy, Kimble sued, and Marvel bought the patent in a settlement agreement for a $500,000 up-front payment and a 3% royalty on future sales – with no expiration date.
There were a few strands (sorry) to the Court’s judgment in Kimble.
First, Brulotte was affirmed. The principle is simple: ‘A court need only ask whether a licensing agreement provides royalties for post-expiration use of a patent. If not, no problem; if so, no dice.’
Secondly, the Court considered submissions made on economic and competition grounds against the Brulotte rule, and essentially found the Patents Act was not necessarily consistent with those types of policy arguments. Unlike laws which try to increase competition, patent law largely does the opposite. The interpretation of the statute called for a ‘bright-line rule’, rather than a ‘practice-specific analysis’.
Thirdly, that meant it was up to the legislature to make changes if previous judicial decisions created practical difficulties, not for the Court to overrule them.
Finally, the Court provided some tips on getting around the Brulotte rule anyway – such as deferred payments, royalties tied to non-patent rights, or joint ventures.
The position in Australia is less clear.
Generally speaking, it is not permissible for royalties tied to a patent licence to continue after the expiry of a patent.
However, last year in ARB Corp v Roberts, Vickery J considered whether royalties payable under an agreement for a patented “diff lock” were still payable after the patent expired. (Speaking from personal experience, a diff lock is a very handy four-wheel-drive component that’s full value is made apparent when bogged diagonally halfway up a sand-dune.)
The contract of sale did not set out a time limit on the royalties, but ARB argued that nevertheless the obligation should be limited to the patents’ term.
The vendors argued the sale agreement meant exactly what it said, and that ARB should keep paying royalties while it made products ‘pursuant’ to the patents.
Vickery J took a contractual interpretation approach, and reviewed the authorities on ‘business commonsense’ as well as the patent law at the time of the agreement.
His Honour noted that, at the time, the patents were still pending and that they have different expiry dates in different jurisdictions. Since the agreement contemplated royalties before the life of the patent, the ‘commercially sensible’ construction of the contact was that royalties were not contingent on the life of the patent.
This construction, Vickery J wrote, “provides for an arrangement whereby each party managed its risk as to the proper price to pay (from ARB’s perspective) and to charge (from the Vendors’ perspective) in relation to the bundle of rights sold.”
The power (or superpower) of a patent’s term allows the patentee to negotiate royalties. But depending on the jurisdiction, those royalties might not be payable when that power fades.
The different approaches to this question reflect the different outcomes. If it’s all about contract interpretation, the parties may well have agreed to ongoing royalties. But where it’s a question of overruling US Supreme Court precedent, different factors are at play.
Finally, along with the puns, the Kimble case also provides a delightful bit of trivia – the correct way to cite a comic book: S Lee and S Ditko, Amaazing Fantasy No 15: “SpiderMan”. p 13 (1962). But remember to use this newfound great power the way Uncle Ben would have wanted, for it comes with great responsibility.