Fifty years ago, the U.S. Supreme Court ruled that a patent license agreement that requires the licensee to pay royalties after the expiration of the licensed patent is unlawful per se, because such payments effectively extend the patent monopoly beyond the statutory term and prevent the invention from becoming part of the public domain. Brulotte v. Thys Co., 379 U.S. 29 (1964). In a recent decision, the Court declined to jettison the Brulotte rule, despite a chorus of criticism by economists and lower courts. In a 6-3 decision, the Court ruled that the questionable rule is protected by stare decisis, and any change in the law must come via an act of Congress, rather than judicial reinterpretation of the Patent Act. Kimble v. Marvel Entertainment, LLC, No. 13-720 (U.S. Jun. 22, 2015).
Kimble owned U. S. Patent No. 5,072,856, entitled “Toy web-shooting glove.” The patent covered a glove that allows the user to shoot a stream of foam from the wearer’s palm and pretend to be Spider-Man, the famous web-spinning comic book and movie superhero. Kimble sued Marvel, which has rights to the Spider-Man character and sold a Spider-Man glove toy, for infringement. The case settled when Kimble assigned the ‘856 patent to Marvel and Marvel agreed to pay Kimble three percent of revenue from its accused toys. The settlement did not contain a fixed duration, so that payments were due for as long as Marvel sold its toys.
In 2010, when the ‘856 patent term expired, Marvel filed a declaratory judgment action seeking a declaration that under the Brulotte rule its obligation to pay royalties ended when the patent expired. The district court and the U.S. Court of Appeals for the Tenth Circuit agreed. Kimble then appealed to the Supreme Court, asking it to overrule Brulotte.
Practice Points:
- Supreme Court declined to modify much-criticized Brulotte Rule governing payment of royalties in patent licenses and similar agreements.
- A license provision requiring a licensee to pay royalties after the expiration of the licensed patent’s term is unlawful.
- Court holds that Brulotte rule is protected by stare decisis and any change in law must come through Congressional action.
- With careful planning, transactions involving patent rights may be structured to avoid Brulotte rule.
Supreme Court Decision
On appeal, Kimble and several amici argued that the Brulotte rule is based on an incorrect analysis of the economic effect of post-expiration royalty payments. They argued that a license agreement calling for payments over a longer time period, but at a lower royalty rate, actually promoted licensing and innovation by making access to patented technology more affordable and by better allocating the risks for some technologies. As a result, they proposed that the Court replace the Brulotte rule with a flexible standard based on a “rule of reason,” taking into account all circumstances of a license. Although the Court acknowledged that the Bruotte rule was questionable, the Court rested its decision on stare decisis, the doctrine that cautions a court generally to adhere to its prior rulings. Or, as Justice Brandeis characterized the doctrine, it is usually “more important that the applicable rule of law be settled than that it be settled right.” Burnet v. Coronado Oil & Gas Co., 285 U. S. 393, 406 (1932) (dissenting opinion).
In a decision written by Justice Kagan, the Court ruled that stare decisis is particularly important for the Brulotte rule. First, stare decisis is stronger when a court has interpreted a statue, rather than ruling on a constitutional issue. Second, Congress repeatedly has debated amending the Patent Act to overrule Brulotte, but has failed to enact such legislation. This history counselled the Court not to overrule the case by judicial interpretation. Third, the Brulotte rule concerns patents and antitrust, areas affecting commercial interests in which parties may have relied on the long-standing rule in structuring contracts and business dealings. As a result, the Court noted, “[a]s against this superpowered form of stare decisis, we would need a superspecial justification to warrant reversing Brulotte.” It found the justifications proposed by Kimble and the amici to be insufficient. As a result, any change in the law must come from Congress, not the courts:
Kimble’s real complaint may go to the merits of such a patent policy—what he terms its “formalis[m],” its “rigid[ity]”, and its detachment from “economic reality.” But that is just a different version of the argument that Brulotte is wrong. And it is, if anything, a version less capable than the last of trumping statutory stare decisis. For the choice of what patent policy should be lies first and foremost with Congress. So if Kimble thinks patent law’s insistence on unrestricted access to formerly patented inventions leaves too little room for pro-competitive post-expiration royalties, then Congress, not this Court, is his proper audience.
Slip op. at 16 (citation omitted).
Impact on Patent Licensing
As a result of the Court’s decision, the Brulotte rule remains a pitfall that must be considered when negotiating license agreements. Any license that calls for the payment of a royalty for the right to practice a patent after the patent has expired is unlawful. The provision is invalid and the inclusion of such a term in a license may constitute patent misuse rendering the affected patent unenforceable. As Kimble illustrates, the rule also applies when payments for the assignment of a patent are based on use and continue beyond the patent term.
As the Court notes, however, the Brulotte rule leaves multiple options for companies seeking to structure an agreement with a long-term stream of payment. Some possible solutions include:
- Calculating royalty payments based on a licensee’s use during the patent term, then extending payments for that amount over a longer period extending beyond the patent term.
- In a license agreement including multiple patents with different terms, providing that the set royalty applies until the last patent term expires.
- In a “hybrid” intellectual property license including patents and related IP assents with longer or no term, structuring royalties with a step down in effective rate upon patent expiration, but requiring the payment of a somewhat lower post-expiration royalty for related IP assets, such as trade secrets.
- Transferring patents or license rights to a separate company, such as a limited partnership, and compensating the patent owner with an interest in that entity or a share of its profits.
By carefully structuring license arrangements to avoid the Brulotte rule, parties frequently will be able to address their business concerns without including invalid or unenforceable royalty provisions.
