U.S. Supreme Court Confirms That Post Patent Expiration Royalties Are Prohibited

Background of the Case

The dispute in Stephen Kimble v. Marvel Enterprises, Inc., Case No. 13-720, ___ U.S. ___ (2015), arose out of a 2001 settlement of a prior lawsuit between the parties. The prior suit had resulted in a settlement that called for Marvel to pay a 3% royalty to Kimble on products that would have infringed the patent-in-suit. The agreement contained no expiration date for the royalty payments. In the current case, Marvel argued that it did not have to pay royalties under the settlement agreement for sales occurring after the patent expired. The district court found that under Brulotte v. Thys, 379 U.S. 29 (1964), the settlement agreement was unenforceable to the extent it called for the payment of post-expiration patent royalties. The 9th Circuit affirmed, Stephen Kimble v. Marvel Enterprises Inc., 727 F.3d 856, (9th Cir. July 16, 2013), and the Supreme Court granted certiorari.

Analysis

Post-expiration royalties are royalties that continue to accrue after the patent expires. Agreements purporting to call for such royalties have been per se unenforceable since Brulotte was decided over 50 years ago. However, not all patent owners are aware of the rule. Some patent owners, like Stephen Kimble, have negotiated license provisions calling for post-expiration royalties only to find out later that they cannot enforce those provisions. Kimble argued that some post-expiration patent royalty agreements should be permitted, and that each agreement should be evaluated on a case-by-case basis using the “rule of reason” analysis from antitrust law. However, the Supreme Court, in a 6 to 3 decision, upheld the per se rule. Justice Kagan authored the opinion, and was joined by Justices Scalia, Kennedy, Ginsburg, Breyer, and Sotomayor. Justice Alito dissented and was joined by Chief Justice Roberts and Justice Thomas.

The Court began by acknowledging that “Brulotte may pose an obstacle” that “prevents some parties from entering into deals they desire.” According to the Court, drawn-out royalty plans extending past the expiration date of the patent may be in the interests of cash-strapped licensees. The Court also acknowledged that licenses with extended terms could be the best way to “allocate the risks and rewards associated with commercializing inventions...when years of development work stand between licensing a patent and bringing a patent to market.” However, the Court did not find this a persuasive reason to change the per se rule because patent owners and licensees may, without running afoul of Brulotte, construct agreements that accomplish the same goals. Examples of those alternatives are discussed below.

The Court relied heavily on the doctrine of stare decisis, under which the Court will not overturn one of its precedents, even if wrongly decided, without a very persuasive reason. The Court explained that because Congress passed up multiple opportunities to change Brulotte and because of the importance of having settled law, a particularly strong justification was required to change the rule that post-expiration royalty agreements were unenforceable. The Court noted that Brulotte’s bright-line rule was far clearer than the “rule of reason,” and that overturning Brulotte could have unintended consequences due to its interaction with other related doctrines. According to the Court, Kimble’s argument that the rationale for the per se rule was economically unjustifiable did not warrant upsetting settled law, even if true. The patent laws were not designed solely with economic objectives, according to the Court. The Court also found a lack of support for Kimble’s assertion that Brulotte suppressed innovation. Finally, the Court noted that these were matters of public policy best left to Congress.

The dissent argued that Brulotte’s rule was based on bad policy and that there was no justifiable reason not to reverse it. In particular, the dissent noted that Brulotte’s holding was based on preventing, as the 1964 Court put it, “effort[s] to enlarge the monopoly of the patent.” The 1964 decision used this rationale to label post-expiration patent royalties “patent misuse” — a label that, in certain contexts, could potentially apply to render a patent unenforceable. It is worth noting that the majority did not appear concerned with defending the anti-monopoly rationale, which indicates that while Brulotte’s per se rule survives, it is unlikely that post-expiration patent royalties would be considered patent misuse to the extent that the subject patent is rendered unenforceable. Rather, the likely result of a challenge to a post-expiration royalty agreement is only to relieve the licensee from any obligation to pay royalties purporting to accrue beyond the expiration of the patent, with the enforceability of the patent left intact.

Observations

In the opinion, the Court encourages parties to “find ways around Brulotte, enabling them to achieve those same ends,” including deferring payments for pre-expiration use of a patent until after expiration. Most notably, the Court condoned the use of long-practiced exceptions to Brulotte, including that royalties tied to multiple patents “may run until the latest running patent in the parties’ agreement expires,” and that post-expiration royalties are permissible if they are “tied to a non-patent right—even when closely related to a patent.” According to the Court, bundling royalties for use of a trade secret into the same agreement as royalties for use of a patent permits the agreement to call for the payment of royalties past the expiration of the patent as long as the royalty rate is reduced after expiration. This explicit approval by the Supreme Court of Brulotte work-arounds provides licensing practitioners an opportunity to be creative in meeting their clients’ goals.