Supreme Court Upholds Precedent Prohibiting
Post-Expiration Patent Royalties, but Leaves Open
Parties’ Options for Creative Licensing
June 23, 2015
On June 22, 2015, the United States Supreme Court upheld the 50-year-old “Brulotte rule,” which prohibits a patent owner from negotiating a
license agreement that requires royalties to be paid after the expiration of the patent as a form of patent misuse. In an opinion authored by
Justice Kagan, the 6-3 Court relied on stare decisis (“the idea that today’s Court should stand by yesterday’s decisions”), refusing to adopt a
case-by-case “rule of reason” in favor of maintaining the simple per se rule ensuring that patents remain in the public domain upon expiration.
In short—and in keeping with a superhero motif—the Court held that “[p]atents endow their holders with certain superpowers, but only for a
limited time.” Kimble v. Marvel Entm’t, LLC, No. 13-720, at *4 (U.S. June 22, 2015).
Background of the Case
Petitioner Stephen Kimble invented and patented a Spider-Man toy that allows its users to mimic the Marvel superhero’s ability to shoot spider
webs from his palms. The toy shoots foam webs from a canister strapped to the user’s wrists by activating a trigger attached to a valve in the
palm of a glove. Marvel did not license Kimble’s invention and instead began manufacturing a similar Spider-Man role-playing toy called the
“Web Blaster.”
In 1997, Kimble sued Marvel, alleging, among other things, patent infringement related to Marvel’s Web Blaster. In 2001, while the case was
pending appeal, the parties settled. As part of the settlement, Kimble sold his patent to Marvel in exchange for $516,214.62 and 3 percent of
the Web Blaster’s net sales made after December 31, 2000. The agreement has no expiration date and does not include any specific time limit
on Marvel’s obligation to pay 3 percent of net sales. At the time the settlement was negotiated, neither Kimble nor Marvel was aware of the
Supreme Court decision in Brulotte v. Thys Co., 379 U.S. 29 (1964), which prohibited the payment of royalties beyond the life of a patent.
Later, Marvel became aware of the Brulotte rule and sought a declaration that it was no longer obligated to pay Kimble royalties after the
patent’s expiration. The district court found that, under Brulotte, Kimble could not recover royalties beyond the expiration of the patent despite
the language in the settlement agreement. The Ninth Circuit faithfully applied precedent and “reluctantly” affirmed, describing Brulotte as
“frequently-criticized,” “counterintuitive,” and “arguably unconvincing.”
The Supreme Court Decision
In an opinion that embraces the case’s superhero origins, the Court determined that “the intersection of two areas of law: property (patents)
and contracts (licensing agreements)” creates a “superpowered form of stare decisis,” requiring “a superspecial justification to warrant
reversing Brulotte.” The Court found that petitioner Kimble failed to establish: (1) the traditional justifications for overruling a prior decision; or
(2) a “special justification” for the Supreme Court, rather than Congress, to upend Brulotte. Accordingly, the Court’s decision was largely
deferential: first, deferential to its own precedent, as the Court explained that “[r]especting stare decisis means sticking to some wrong
decisions;” and second, deferential to Congress as the proper branch of government to create innovation and patent policy.
Addressing traditional stare decisis considerations, the Court explained that the statutory and doctrinal underpinnings of Brulotte have not
eroded over time. Notably, “Congress has rebuffed bills that would have replaced Brulotte’s per se rule with the same antitrust-style analysis
Kimble now urges.” The Court explained that “the core feature of the patent laws on which Brulotte relied remains just the same.” Patent
rights expire; the law “draws a sharp line cutting off patent rights after a set number of years.” Moreover, the Court explained that “nothing
about Brulotte has proved unworkable,” as parties are often able to contract around the simple rule; “for example . . . a license involving both a
patent and a trade secret can set a 5 percent royalty during the patent period (as compensation for the two combined) and a 4 percent royalty
afterward (as payment for the trade secret alone).” The Court thus concluded that rather than infuse patent law with a costly and elaborate
rule of reason, “[a] court need only ask whether a licensing agreement provides for royalties for post-expiration use of a patent. If not, no
problem; if so, no dice.”
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Supreme Court Upholds Precedent Prohibiting Post-Expiration Patent . . .
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The Court also addressed Kimble’s additional justifications for overruling Brulotte, namely that the Brulotte rule rests on a mistaken view of the
anticompetitive effects of post-expiration royalties, and that the rule suppresses technological innovation and thus harms the nation’s economy.
Rather than engage in an in-depth discussion of economic theory and potential drag on innovation, the Court largely dodged the debate,
explaining that: (1) Brulotte did not hinge on the mistake Kimble identifies; (2) patent (not antitrust) policy gave rise to the Court’s conclusion in
Brulotte; and (3) it is the job of Congress to determine innovation and patent policy, “not our[s].”
The dissent, authored by Justice Alito and joined by Chief Justice Roberts and Justice Thomas, argued that Brulotte was not entitled to stare
decisis, stating, “we do not give super-duper protection to decisions that do not actually interpret a statute.” The dissent favored overturning
Brulotte, arguing that the case was originally decided under antitrust concepts and economic theories that have since been debunked. The
dissent believed that abolishing the Brulotte rule would provide an economically efficient means for "licensees to spread their costs, while also
allowing patent holders to capitalize on slow-developing inventions."
Maintaining its superhero defense of stare decisis, the majority acknowledged that “[w]hat we decide, we can undecide,” but advised that
such authority should be used sparingly. Citing S. Lee and S. Ditko, Amazing Fantasy No. 15: “Spider-Man,” p. 13 (1962) (“[I]n this world, with
great power there must also come—great responsibility”).
Practical Effects
The Supreme Court’s decision maintains the status quo prohibition on agreements that provide for the payment of license royalties post-patent
expiration. The decision, however, acknowledges that the Brulotte rule does not prohibit some flexible strategies for contracting around the
rule. For instance, parties may agree to postpone the payment of royalties based on pre-expiration practice of the patent to a time after the
patent’s expiration, tie post-expiration royalties to the license of non-patented technologies in hybrid licenses for both patents and non-patent
rights, charge consulting fees post-expiration, have the royalty term end on the expiration of the last surviving patent when multiple patents
are licensed, and adopt other royalty structures based on the convenience of the parties.
For more information on how the decision may affect your situation or circumstances, please contact a member of the technology transactions
practice or intellectual property litigation and counseling practice at Wilson Sonsini Goodrich & Rosati.
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AUSTIN
BEIJING
BRUSSELS
HONG KONG
LOS ANGELES
NEW YORK
PALO ALTO
SAN DIEGO
SAN FRANCISCO
SEATTLE
SHANGHAI
WASHINGTON, DC
WILMINGTON, DE