Can royalty payments from a patent licensing contract extend beyond the life of the patent?
In this case, the Supreme Court will reconsider Brulotte, which held that a “royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” Kimble argues that the Court should overturn Brulotte and replace it with a flexible rule grounded in a reasonable standard. However, Marvel counters that the Court should not overrule Brulotte because there are insufficient reasons to deviate from stare decisis. The Court’s decision may alter patent licensing practices by transforming the evaluation of patent agreements, and may affect the public’s access to patented inventions.
Questions as Framed for the Court by the Parties
Petitioners are individuals who assigned a patent and conveyed other intellectual property rights to Respondent. The court of appeals "reluctantly" held that Respondent, a large business concern, was absolved of its remaining financial obligations to Petitioners because of "a technical detail that both parties regarded as insignificant at the time of the agreement." App. 2-3; 23. Specifically, because royalty payments under the parties' contract extended undiminished beyond the expiration date of the assigned patent, Respondent's obligation to pay was excused under Brulotte v. Thys Co., 379 U.S. 29, 32 (1964), which had held that "a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se."
A product of a bygone era, Brulotte is the most widely criticized of this Court's intellectual property and competition law decisions. Three panels of the courts of appeals (including the panel below), the Justice Department, the Federal Trade Commission, and virtually every treatise and article in the field have called on this Court to reconsider Brulotte, and to replace its rigid per se prohibition on post--expiration patent royalties with a contextualized rule of reason analysis.
The question presented is:
Whether this Court should overrule Brulotte v. Thys Co., 379 U.S. 29 (1964).
Stephen Kimble patented a Spider-Man toy that was set to expire in May 2010. Importantly, “[a] patent grants the patent holder the exclusive right to exclude others from making, using . . . and selling the patented innovation for a limited period of time.” In December 1990, pending patent approval, Kimble met with Lou Schwartz, the President of Toy Biz, Inc., to discuss the toy. Toy Biz, Inc. was the predecessor to Marvel Enterprises, LLC (“Marvel”).
In December 1990, Schwartz expressed no interest in the toy, but Kimble claims that Schwartz verbally agreed to compensate Kimble if Marvel appropriated any of the toy design. Subsequently, Marvel produced the “Web Blaster”, a toy similar to Kimble’s design. As a result, in 1997 Kimble filed suit in the United States District Court for the District of Arizona (“Arizona district court”) against Marvel, including a claim for a breach of contract. Kimble asserted that Marvel, in creating the “Web Blaster”, breached the oral agreement by appropriating Kimble’s toy design without paying him.
The jury in the Arizona district court sided with Kimble on the contract claim, and Marvel appealed the jury’s verdict. Nonetheless, in 2001, the parties agreed to settle and dismiss the case. Under the Settlement Agreement, Kimble assigned his patent to Marvel. Marvel paid Kimble $516,214.62 and agreed to pay Kimble a continuing 3% royalty on “net product sales.” The Settlement Agreement did not include an expiration date regarding Marvel’s commitment to pay Kimble the 3% royalty.
In 2006, Marvel entered into a licensing agreement with Hasbro Inc., providing Hasbro the right to produce the Web Blaster. Soon after, Kimble and Marvel disagreed regarding the royalty amount Marvel owed Kimble arising from Web Blasters produced by Hasbro. Kimble thus sued Marvel in Arizona state court, and Marvel subsequently removed the case to the Arizona district court. Marvel also counterclaimed, requesting a declaration that it was not required to pay royalties beyond the expiration date of Kimble’s Spider-Man toy patent.
Both Marvel and Kimble moved for summary judgment, and the Arizona district court consulted a magistrate judge to suggest a ruling. The magistrate judge determined that under the Settlement Agreement, Kimble was not entitled to royalties past the patent’s expiration date. The magistrate judge relied on Brulotte v. Thys Co. (“Brulotte”), which holds that “a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” Kimble objected to the magistrate judge’s recommendation, but despite Kimble’s objection, the Arizona district court implemented the magistrate judge’s recommendation and granted Marvel’s summary judgment motion, holding that the royalties terminated upon the patent’s expiration.
Kimble appealed to the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”). The Ninth Circuit applied Brulotte and affirmed the Arizona district court’s ruling that post-expiration royalties were unlawful. Kimble appealed to the United States Supreme Court. The Supreme Court granted certiorari on December 12, 2014 to determine if it is permissible for a patent holder to collect post-expiration royalties stemming from a patent licensing agreement.
In this case, the Supreme Court must decide whether to follow its holding under Brulotte—which limits royalties stemming from patent licensing agreements to the life of the patent—or to overturn Brulotte and create more flexibility in patent licensing contracts.
Kimble contends that the Supreme Court should overturn Brulotte, arguing that Brulotte’s per se prohibition on patent holders collecting royalties after a patent has expired is “fundamentally misguided and economically unsound.” Kimble asserts that in certain situations royalty fees should be permitted to exceed a patent’s life, and that this determination should stem from a “flexible, case-by-case analysis under the rule of reason.” Furthermore, Kimble believes that Brulotte conflicts with the underlying policies of the patent system.
On the other hand, Marvel argues that Supreme Court’s existing case law—culminating in Brulotte—still provides incentive for inventors and prevents patent holders from leveraging monopoly power beyond the life of the patent. Marvel argues that the Supreme Court should not undermine the existing per se rule prohibiting royalties beyond the life of the patent. Additionally, Marvel argues that Kimble has not met the standard needed for the Court to shift away from its rule under Brulotte; thus abandoning the rule would undermine stare decisis—the doctrine of adhering to previous precedent.
SHOULD THE SUPREME COURT APPLY STARE DECISIS AND UPHOLD BRULOTTE?
Marvel argues that Kimble has not made a sufficient argument for the Supreme Court to reverse its previous holding under Brulotte and depart stare decisis. According to Marvel, “stare decisis promotes the evenhanded, predictable, and consistent development of legal principles, fosters reliance on judicial decisions, and contributes to the actual and perceived integrity of the judicial process.” Marvel contends that in Brulotte, the Supreme Court created “a narrow and workable rule” that acts as a shield to patent licensees. Thus, Marvel maintains that stare decisis will preserve this practical rule without affecting the rights of patent holders. Moreover, Marvel contends in Brulotte, the Court interpreted a statute and thus, Congress could have overruled Brulotte when passing patent legislation. However, Marvel notes that Congress, when redrafting rules on patents, did not change the rules and policies underlying Brulotte. Marvel argues, therefore, that Congress effectively upheld Brulotte by not interfering with the Court’s rule. Lastly, Marvel argues that Congress, not the Court, should alter Brulotte since Brulotte relies heavily on policy implications—something that Congress is well suited to handle. For all of these reasons, Marvel believes that the Supreme Court should not shy away from stare decsis.
Conversely, Kimble argues that—although stare decisis creates a presumption against the Court overturning its precedent—the Court can still reconsider its previous holding here. In disagreement with Marvel, Kimble maintains that Brulotte did not interpret the language of any Congressional statute, thus the Court can reexamine the precedent’s holding. Additionally, Kimble contends that the Supreme Court has never failed to reconsider a previous holding simply due to a potential Congressional response to Court action because Congress faces substantial challenges to passing a law. Lastly, the application of stare decisis, Kimble contends, is not appropriate here in the face of new evidence illustrating the “harmful real-world economic consequences of Brulotte’s per se rule.” More specifically, Kimble argues that allowing royalty agreements that extend beyond the patent’s expiration date are economically efficient because allowing post-expiration royalties will “lower prices and raise output during the patent term.” Further, Kimble argues that post-expiration royalties will increase competition by encouraging “new entrants.” In short, Kimble argues that although Congress could have drafted new rules regulating patent royalties, it is up to the Supreme Court to reduce limitations royalty fees in patent contracts by overturning Brulotte.
Should the Supreme Court Adopt a More Flexible Rule to Determine if a Patent Licensing Agreement Can Include Post-Expiration Royalties?
Kimble dislikes Brulotte’s per se prohibition on royalty contracts beyond the life of the patent, and instead offers a more flexible rule. Characterizing Brulotte as a rigid rule which prevents “case-by-case analysis,” Kimble criticizes the per se rule by arguing that merely forming a royalty contract between two parties does not extend the monopoly power of the patent beyond the life of the patent; instead, upon expiration, virtually all companies can create competing products. Kimble, thus, asserts Brulotte imposes substantial limits on patent licensing to the detriment of both parties. To replace Brulotte’s rigid rule, Kimble favors a flexible rule that would allow patent holders to seek royalties beyond the life of their patent in certain situations. Specifically, Kimble proposes a two-step test: first, a court would look at the patent holder to determine if the patent holder possessed relevant market power at the time of contracting; then if market power existed, the court would determine whether the patent holder engaged in conduct that “impose[d] an unreasonable restraint on competition.” Kimble argues that this flexible rule will permit patent licensees and licensors to create contracts that better suit both parties—including paying lower royalty rates over a longer period of time.
Conversely, Marvel argues that a more flexible rule may undermine current and future license agreements. The patent licensing market, according to Marvel, has acclimated to Brulotte’s per se rule. Marvel contends, therefore, that eliminating or limiting the per se rule will increase the uncertainty surrounding patent licensing—especially since the patent licensing market has equilibrated in response to Brulotte. Marvel asserts, furthermore, that even if the Supreme Court overturns its Brulotte, the Supreme Court should adopt another narrow rule than Kimble’s suggested rule (under which courts apply a rule of reason analysis). Marvel argues that, unlike the narrow rule in Brulotte, Kimble’s suggested rule will prove “unpredictable,” leading to a variety of litigation and transaction costs. Additionally, Marvel maintains that Kimble’s rule does not create sufficient safeguards to prevent abuses by patent holders with market power. In short, Marvel Enterprises argues that the Supreme Court’s per se prohibition on royalties after the expiration of the patent limits contracting costs and preserves the “settled interests” of parties to patent licensing agreements.
Does the Current Prohibition on Post-expiration Royalties Interfere with The Goals OF Patent Law?
Kimble argues that the existing body of patent law and the patent system is undermined by the limited royalty contract life required under Brulotte. Kimble argues that the patent law is generally aimed at encouraging innovation. Conversely, Kimble characterizes the per se limit on royalty contracts as an rigid rule which (1) increases the deadweight loss of the period of time where only the patent holder can exclude others from using the patent and (2) harms the licensing of early-stage technologies. Kimble argues that patent law should encourage the recovery of the full value of the patent, including potential post-expiration date royalties, because this encourages innovation. Yet, Kimble notes that the Brulotte rule forces an upfront payment because patent holders can only royalty fees over a limited time. As a consequence, Kimble maintains, the current rule prevents commercial businesses from licensing early-stage technologies (often created within university laboratories). Early-stage technologies are often too speculative to determine the value of the patent at the onset, Kimble explains. Thus, Kimble proposes that the rigid rule in Brulotte disincentivizes the licensing—and thus the use—of these technologies.
Marvel counters that the rule in Brulotte fits within patent law and increases the integrity of the patent system. Marvel argues that purpose of creating the patent system was to provide inventors with monopoly power for a limited time; the per se rule ensures that the inventor’s period of monopoly power is cabined (balancing the rewards for the inventor with the need to limit market power). Consequently, Marvel asserts that a private agreement should not be able to override patent law’s interest in allowing the public free access to a patented invention after the patent’s expiration date. Lastly, Marvel argues that the legislative intent behind recent changes to patent law emphasize the need to benefit consumers by putting patented products into the public domain after expiration. In fact, Marvel states that if a more flexible rule permitted royalty fees beyond the life of a patent, patent holders could undermine the legislative intent underpinning patent laws and invalidate the restrictions imposed on patent holders.
Should Patent Law Adapt to Reflect Changes in Antitrust Law?
Kimble argues that a presumption in antitrust law motivating Brulotte has changed. Kimble notes that Congress in 1988 (via legislation) and the Court in 2006 both stated that the existence of a patent alone is not sufficient to establish market power—an idea that Brulotte “irrebuttably presumed.” Therefore, Kimble argues that since this presumption in antitrust law that Brulotte seemingly relied on has disappeared, the Court should overturn Brulotte.
In opposition, Marvel argues that changes to antitrust statutes do not implicate the per se rule in Brulotte. Marvel concedes that the per se rule in Brulotte is analogous to the language in anti-tying rules in antitrust. However, Marvel maintains that anti-tying and other antitrust statutes do not form the basis of Brulotte. Rather, Marvel believes that contends that the policies underlying patent law, and thus Brulotte, are different from those of antitrust law.
This case presents the Supreme Court with the opportunity to reexamine an intellectual property precedent, Brulotte. In Brulotte, the Court held that patent royalty agreements could not extend beyond a patent’s expiration date. Kimble urges the Supreme Court to overturn Brulotte, contending that it not only conflicts with the goals of patent law, but also that the motivations behind Brulotte have disappeared. Nevertheless, Marvel disagrees and maintains that Brulotte should not be overturned because Kimble has failed to show sufficient reasons to ignore stare decisis—the doctrine of adhering to previous decisions. If the Court overrules Brulotte, the decision will change the analysis of patent agreements and may affect the public’s ability to utilize patented inventions.
UNNECESSARY COMPLEXITY AND CONFUSION?
Biotime, Inc., a biotechnology company writing in support of Kimble, argues that Brulotte’s per se bar on royalties past a patent’s expiration date causes complexity and confusion. Biotime believes that patent license agreements are too complex to be dictated by Brulotte’s per se rule, which currently forces parties to guess how much a patent licensing agreement is worth often before the value of the patent is known. Biotime states that patent license agreements contain uncertainties that cannot be resolved during the creation of a patent license agreement. Therefore, Biotime claims that parties need to be able to adopt “flexible” royalty agreements that can account for the difficulty in evaluating a patent at the formation of an agreement.
However, in support of neither party, the American Intellectual Property Law Association (“AIPLA”) worries that allowing royalty agreements that extend beyond the lifetime of the patent will result in confusion and forgo the clarity offered by Brulotte’s per se rule. Specifically, AIPLA argues that per se rules are “clear and easy to understand”—a principle particularly important in the context of contracts “where parties need a clear understanding of what provisions they may include and whether they will be enforced.”
HARM TO THE PUBLIC?
The Center for Intellectual Property Research of the Indiana University Maurer School of Law and other scholars (collectively, “the Center”), in support of Kimble, argue that allowing royalty agreements that extend beyond the lifetime of a patent harms the public.Specifically, the Center worries that Brulotte deters commercialization and stifles incentives for inventors to disclose their new inventions. The Center states that Brulotte inhibits innovation by prohibiting flexible licensing agreements, which are vital to the commercialization of inventions because these agreements allow for procompetitive royalty contracts. The Center highlights that Brulotte’s per se rule restricts a patent holder’s ability to collect royalties after the patent’s expiration date even when such arrangements are advantageous to both parties. For example, the Center considers a situation where both parties agree on a deal that creates a royalty which allows a licensee to pay a lower price over a longer period of time, rather than a higher price over a shorter period of time. Even though this agreement is advantageous for both parties, Brulotte would forbid this agreement if it extends the scope of the patent beyond its lifetime. The Center states that a rule restricts the patent holder’s ability to engage in procompetitive licensing agreements, which results in less commercialization to the detriment of the public.
Conversely, AIPLA argues that Brulotte protects the public against abuse of the patent system by allowing the public “unfettered access to patented inventions after the expiration of the patent.” AIPLA worries that without Brulotte, the public will not be able to freely modify and experiment with expired patents. AIPLA also stresses that Brulotte promotes scientific exploration by giving inventors the opportunity to expand upon their patented inventions. Brulotte, AIPLA states, advances science by granting inventors the right to alter and build upon expired patents. Finally, AIPLA argues that “post-expiration royalties increase the cost of using the invention in the post-expiration period and thus create a disincentive for the licensee to attempt to build upon the invention even after the patent has expired.”
In this case, the Supreme Court will decide if royalties in patent license contracts can extend beyond the lives of the underlying patents. Kimble argues that a more flexible rule than the per se rule in Brulotte will encourage companies to license more patents and produce more products—especially for patents protecting early-stage technologies. However, Marvel asserts that by lifting the per se rule in Brulotte, the Supreme Court will permit inventors to continue exploiting their market power beyond the life of the patent, harming consumers of new products and technologies (as well as innovators creating new generations of technology). Furthermore, Marvel argues that Kimble has not overcome the presumption against overturning Brulotte under the doctrine of stare decisis. Conversely, Kimble argues that Supreme Court should overturn its holding in Brulotte in light of new evidence of the harm created by the rigid rule of Brulotte. Ultimately, the Supreme Court must decide if greater flexibility in patent licensing offsets the potential additional costs imposed on companies that license patents and consumers who purchase products. The Supreme Court’s decision here will demonstrate the careful balance between rewarding inventors and preserving free market competition—considerations at the heart of the patent system.
- Brulotte v. Thys Co., 379 U.S. 29, 32 (1964).
- Michael Koenig: Patent Royalties Extending Beyond Expiration: An illogical ban from Brulotte to Schieber, Duke Law Review (2003).
- Adam Daniels: The Tangled Web of Patent Licensing, Law 360 (Jan. 15, 2015).