Royalty Payments for Hybrid Agreements Covering Inseparable Patent and Non-Patent Rights End When the Patent Expires
Friday, August 30, 2013

Addressing a “hybrid” license agreement that extended beyond the life of a patent, the U.S. Court of Appeals for the Ninth Circuit affirmed summary judgment in favor of the licensee, finding that the agreement encompassing inseparable patent and non-patent rights is unenforceable beyond the expiration date of the underlying patent absent a discounted rate or a clear indication that the royalty is in no way subject to patent leverage. Kimble v. Marvel Enterprises Inc., Case No. 11-15605 (9th Cir., July 16, 2013) (Callahan J.).

In 1990, Kimble invented a toy that mimicked Spider-Man’s web-shooting abilities using foam string that is shot from a can mounted on the user’s wrist.  Kimble obtained a patent directed to the toy which expired in 2010.  Kimble and Marvel entered into a settlement agreement in 2001 to end a patent infringement and breach of contract suit brought by Kimble whereby Marvel agreed to pay a 3 percent royalty on “net product sale” without an expiration date.  The agreement stated the royalty was for product sales that would infringe the patent as well as sales of Marvel’s “Web Blaster” product, without differentiating the product from the patent.  After further disputes between the parties regarding payment of royalties, Kimble again sued Marvel for breach of contract, and Marvel countersued claiming it was not required to make payments after the patent expired.  The district court found the settlement agreement was a “hybrid” for the patent rights and the rights to the toy because there was no distinction between the royalties for the two categories and granted summary judgment for Marvel.  Kimble appealed.

In upholding the district court’s decision, the 9th Circuit, following the Supreme Court’s decision in Brulotte v. Thys Co., held that a patent licensing agreement that requires a licensee to make royalty payments beyond the expiration date of the underlying patent is unenforceable as an improper attempt to extend the patent monopoly.  The court was critical of the Brulotte rule as counterintuitive and stated that its rationale is arguably unconvincing.  The court further declined to require agreements to include a discounted rate to avoid the Brulotte rule.  The 9th Circuit found that where an agreement that extends royalty rates beyond the patent expiration and the agreement does not include a discount rate after expiration, there must be some other clear indication that the royalty was in no way subject to patent leverage in order to be enforceable.


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