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IP Alert: Post-Expiration Royalty Term Unenforceable If Tied to Patent

July 29, 2013

Recently, in Kimble v. Marvel Enterprises Inc., the Ninth Circuit Court of Appeals considered a patent license to both patented and non-patented subject matter, and held that a term requiring the payment of royalties after the expiration of a patent was unenforceable. More specifically, the court held that “a license for inseparable patent and non-patent rights involving royalty payments that extends beyond a patent term is unenforceable for the post-expiration period unless the agreement provides a discount for the non-patent rights from the patent-protected rate,” and that “in the absence of a discounted rate, there must be some other clear indication that the royalty was in no way subject to patent leverage.” The decision is of significance for those Fitch Even clients who engage in patent licensing.

In 1990, Kimble approached Marvel Enterprises (owner of the “Spiderman” character) with an idea for a toy that shoots a substance resembling a spider web from the wearer’s wrist. Marvel indicated orally that it would compensate Kimble if Marvel adopted the idea. Later, Marvel began production of a web-shooting toy called the “Web Blaster.” In 1997, Kimble sued for patent infringement and for breach of contract. Kimble lost on the infringement claim, but won on the breach of contract claim. The parties eventually settled and agreed upon a 3% royalty rate to cover (1) products that would infringe the Kimble patent and (2) the Web Blaster product, which had been held not to infringe. The agreement did not include a time limit on the royalty payments, and made no allocation of royalty payments as between the Web Blaster and other products. 

Over time, Marvel paid Kimble several million dollars under the license. After some years, Marvel countersued for a declaration that the royalty agreement was no longer valid in light of the expiration of the patent. The district court found that the agreement was unenforceable and that Kimble could no longer collect royalties. The district court held that the case was controlled by an earlier Supreme Court case, Brulotte v. Thys Co., which held that a post-license royalty was unenforceable as an inappropriate attempt to extend the patent beyond its term. 

On appeal, the Ninth Circuit affirmed. The court first analyzed the 1964 Brulotte case and the policies underlying that decision. Next, the court analyzed another Supreme Court case, Aronson v. Quick Point Pencil Co. In Aronson, the Court held that patent law did not preclude the enforcement of an agreement to provide royalty payments even where no patent had issued, where the parties specifically contemplated a reduced royalty rate in the event the patent did not issue.

The court then observed that other circuit courts have held that “hybrid” license agreements of both patent rights and other subject matter are per se unenforceable after expiration. Nonetheless, following the Supreme Court’s guidance in Brulotte and Aronson, the Ninth Circuit announced that post-expiration royalties were not unenforceable per se. Instead, the court suggested that an agreement that “provides a discount for the non-patent rights from the patent-protected rate” or “some other clear indication that the royalty was in no way subject to patent leverage” would remain enforceable after the expiration of the patent. Otherwise, the court held, “we presume that the post-expiration royalty payments are for the then-current patent use, which is an improper extension of the patent . . . under Brulotte.” But because the Kimble license agreement at issue had no discounted royalty or other clear indication that the post-expiration royalties were unrelated to the patent, the court held the royalty term to be unenforceable.

The Kimble case is of interest to parties engaging in patent licensing, particularly for those states and territories under the federal jurisdiction of the Ninth Circuit. For more information, please contact Fitch Even partner Thomas F. Lebens.

Written by Fitch Even attorney Joshua P. Smith

 

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