Supreme Court Affirms 50-year Rule Banning Royalties on Expired Patents
On June 22, 2015, the Supreme Court in Kimble v. Marvel Entertainment, LLC, No. 13-720, upheld the “Brulotte rule,” which prohibits a patent holder from collecting royalties for the use of the invention after the patent has expired. In a 6-3 decision, the Court refused to overrule Brulotte v. Thys. Co., 379 U.S. 29 (1964), adhering to principles of stare decisis. The Court’s decision removes any uncertainty around the Brulotte rule, making it clear that a patent holder may not receive post-expiration royalties for use of a patented invention.
Stephen Kimble obtained a patent for a toy that imitated Spider-Man’s web-blaster by shooting foam “webs” from a glove on the user’s hand. Kimble sued Marvel Entertainment in 1997, alleging patent infringement. The parties settled the litigation with an agreement where Marvel purchased Kimble’s patent for a lump sum plus 3 percent royalty on its sales of products that used the patented invention. The parties set no end date for royalties, “apparently contemplating that they would continue for so long as kids want to imitate Spider-Man.” When the patent expired in 2010, Marvel sought a declaratory judgment in federal district court seeking a ruling that it could cease paying Kimble royalties as of the expiration of the patent term.
The district court agreed with Marvel and the Ninth Circuit affirmed. The Ninth Circuit held that it was “bound to follow Brulotte,” but also signaled its view, shared by others, that the Brulotte rule is “counterintuitive and its rationale is arguably unconvincing.”
In an opinion by Justice Kagan, the Court relied primarily on the doctrine of stare decisis in affirming the 9th Circuit and Brulotte. The Court determined that there was no “special justification” to overturn Brulotte. Further, the Court stressed that statutory interpretation stare decisis “carries enhanced force” and that considerations favoring stare decisis are “at their acme” in cases involving patent and contract rights. Accordingly, the Court stated that to overcome “this superpowered form of stare decisis” there needs to be a “superspecial justification.” The Court found that no “superspecial justification” was presented here. Rather, the Court instructed, “[c]ritics of the Brulotte rule must seek relief not from this Court but from Congress.”
The Court acknowledged that the Brulotte rule may prevent parties from entering into deals they desire. However, the Court made clear that Brulotte only prohibited a patentee from receiving royalties for sales made after the expiration of the patent, leaving open the possibility of creative license drafting. For instance, rather than agreeing to continue paying royalties after the patent expires, a licensee can defer payments for pre-expiration use of a patent into the post-expiration period.
The Court noted that post-expiration royalties might also be allowable if they are tied to a non-patent right like trademarks or trade secrets. For example, the Court noted that a license involving both a patent and a trade secret can set a 5 percent royalty during the patent period (as compensation for both the patent and trade secret) and a 4 percent royalty afterward (as payment for the trade secret alone).
Finally, the Court addressed Mr. Kimble’s argument that the Brulotte rule has discouraged technological innovation and harmed the American economy. The Court recognized that while “post-patent royalties are sometimes not anticompetitive, we just cannot say whether barring them imposes any meaningful drag on innovation.” The Court added that post-expiration royalty obligations “conflict with patent law’s policy of establishing a ‘post-expiration . . . public domain’ in which every person can make free use of a formerly patented product.”
Writing for the dissent, Justice Alito (joined by Chief Justice Roberts and Justice Thomas) criticized the majority’s reliance on stare decisis and Congressional failure to overrule Brulotte. The dissent argued that Brulotte was not based on statutory construction, but rather on “debunked” antitrust concepts and economic theories.
The Court’s decision makes clear that a patent owner may not receive post-expiration royalties for use of a patented invention. Patent owners and licensors will no doubt test the creative drafting strategies proposed by the Supreme Court: for example, should the license be structured to provide for “deferred,” post-expiration royalties based on pre-expiration use of a licensed patent? Should the license be structured as a joint venture with a term that does not need to be limited to patent life? Or, should the royalties be tied to other intellectual property such as trade secrets? These alternative strategies for license contracting without incurring Brulotte’s per se rule against post-expiration royalties are patent owners’ best course – at least until Congress addresses the issue following the clear invitation of the Supreme Court for it to do so.