A Win for Licensees: Royalty Payments Stop at Patent’s Expiration
On June 22, 2015, the U.S. Supreme Court affirmed that if a patent holder’s invention was properly filed and approved by the United States Patent and Trademark Office, then the patent holder is granted a term of twenty (20) years, during which it can charge royalty fees. However, once the patent term expires, the patent may be used by the public without obtaining permission from the inventor. The Court affirmed the term of the patent for royalty enforcement, basing its decision on Brulotte v. Thys Co., 379 U.S., 29 (1964).
Background of Brulotte v. Thys Co.
The U.S. Supreme Court’s decision in Brulotte is relied on by other courts for disallowing the extension of expired patent royalty agreements. In Brulotte, the inventor was the owner of patents for hot-picking machines. He issued licenses for the use of his machines to the petitioners, who refused to make payments before and after the expiration of the patents. The court ruled that “a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” Therefore, the petitioners were only obligated to pay royalties for the registered term and nothing further, thus granting the expired patent public property status.
Background and Facts of Kimble v. Marvel
In a prior suit for patent infringement on a toy, the parties settled, agreeing that Marvel would purchase Kimble’s patent in exchange for a royalty payment. Kimble v. Marvel Entm’t, LLC, Successor to Marvel Enters, 576 U.S. 6, 6 (2015). There was no set end date for the royalty payments, but to Marvel’s advantage they discovered the Brulotte case, stating that patent laws prevent a patentee from receiving royalties for sales made after the patent’s expiration. Marvel sought a declaratory judgment in federal district court seeking to cease paying royalty payments after the allowed term. The District Court for the District of Arizona ruled in favor of Marvel, holding that Marvel was not required to pay royalty payments after the term. Kimble v. Marvel Enters. 692 F. Supp. 2d 1156, 1163 (D. Ariz. 2010).
Kimble appealed the District Court’s ruling, stating that the settlement agreement provided two separate rights, one for the patented rights and one for the non-patented rights. Kimble v. Marvel Enters. 727 F. 3d 856, 864 (9th Cir. 2013). The Appellate Court stated that the agreement demonstrated that the rights were intertwined and could not be separated. Therefore, the court affirmed the lower court’s decision, thus affirming the ruling in Brulotte and its controlling precedent.
Supreme Court Ruling
The issue before the U.S. Supreme Court was whether to overrule Brulotte, which would allow royalty agreements to continue after a patent expired. Kimble v. Marvel Entm’t, LLC, Successor to Marvel Enters, 576 U.S. 6, 6 (2015). Brulotte cites to statutory law, 35 U.S.C. §§ 154(a)(1) and 154(a)(2), which states that regarding their invention, the patentee has “the right to exclude others from making, using, or offering for sale” and “such grant shall be for a term beginning on the date on which the patent issues and ending 20 years from the date on which the application for the patent was filed.” 35 U.S.C § 154. Therefore, based on statutory law, the patentee has no right to exclude others from using his patent upon the end of the completed term.
Justice Elena Kagan wrote the majority opinion stating that if the Court did decide to reverse the Brulotte decision, there would need to be a “special justification” for why the precedent is incorrect. Kimble v. Marvel Entm’t, LLC, Successor to Marvel Enters, 576 U.S. 6, 15 (2015). The Court did not find this “special justification” and reasoned as follows: Brulotte’s statutory interpretation has not “eroded over time,” the patent law (§154) still remains the same and nothing in Brulotte was proven as unworkable. Although Kimble argued that the Brulotte decision affects economics by creating post-patent royalty arrangements that are anticompetitive and discourage technological innovation, the Court rejected this view, stating this was incorrect and relatable to antitrust and not patent law.
Additionally, to further affirm the Court’s decision not to overrule Brulotte, Justice Kagan stated that stare decisis “carries enhanced force when a decision, like Brulotte, interprets a statute.” The Court also established that while Congress (1) had multiple opportunities to overturn Brulotte, the ruling has governed licensing agreements for more than half a century and (2) amended the patent laws numerous times, Brulotte survives. Therefore, for the following reasons the Supreme Court affirmed the Appellate Court’s holding and ruled in favor of Marvel.
Justice Alito, Justice Thomas and Chief Justice Roberts dissented with the majority opinion. Kimble v. Marvel Entm’t, LLC, Successor to Marvel Enters, 576 U.S. 6, 31 (2015) (Alito, J., dissenting). The Justices agreed with Kimble that the decision of Brulotte interferes with the ability of parties to negotiate and compete. Furthermore, they disagreed with how the Brulotte court came to their decision, alleging that the court places too much weight on Congress’s failure to overturn Brulotte, stating “stare decisis does not require us to retain this baseless and damaging precedent.” Therefore, they concluded that the decision of Brulotte should be reexamined.
The Supreme Court had the opportunity to decide whether to extend the expiration of royalties for patent contracts – taking a more flexible approach or using the precedent of Brulotte to bar royalty agreements that continue after a patent expires. Ultimately, the Supreme Court in accordance with stare decisis, decided to adhere to the ruling of Brulotte. Overturning the Brulotte ruling might have provided economic benefits and overall benefits to innovators by providing licensing agreements over a longer period of time. However, as evidenced by Kimble, Congress and previous court rulings, which relied on stare decisis, Brulotte will not be overturned without a strong justification.
Naomi P. Singh assisted in researching and drafting this article.