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Kimble v. Marvel: SCOTUS to Re-examine Patent Royalty Agreements

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By William Peacock, Esq. on December 16, 2014 8:57 AM

On Friday, the U.S. Supreme Court agreed to re-examine an oft-criticized, decades-old intellectual property precedent, Brulotte v. Thys Co. In Brulotte, the Court held that patent royalty agreements could not extend past the life of the patent -- no contractual extension of a patent right beyond its expiration, in other words.

Who is challenging this ruling? It's not quite Spider-Man, but it is an inventor who seems to be a big fan of his. Steven Kimble invented a toy that mimics the comic book character's ability to shoot webs from his wrists. Marvel promised to provide royalties if they made the web shooter toy, and eventually they did -- after years of litigation. In 2001, Marvel purchased the patent -- No. 5,072,856 -- for a lump sum plus annual royalties in perpetuity.

The patent expired in 2010. The agreement, however, was supposed to last forever.

An Odd Duo of Decisions [Doctor] Dooms Kimble's Case

As you might have guessed, Brulotte controlled and doomed Kimble's case in the district court, and on appeal to the Ninth Circuit. In Brulotte, the court held "that a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se" because "the free market visualized for the post-expiration period would be subject to monopoly influences that have no proper place there."

Oddly, in in Aronson v. Quick Point Pencil, the Court held that indefinite royalty payments were allowable where there is no patent.

In other words, you can create an indefinite monopoly contractually out of thin air, but if you have a legal monopoly via a patent, you cannot.

Sloppy Drafting

As the law tends to do, these two rules evolved through lower circuit court cases into a dual system for royalties: A post-patent royalty agreement can exist, and it can be part of the same agreement as the in-patent royalties, but there must be a distinction in the contract between the two types of royalty payments -- the Brulotte royalties until expiration and the Aronson royalties afterwards.

A properly drafted agreement that wants to provide royalties in perpetuity should therefore have one provision providing patent royalties, and a clear, separate provision for post-patent royalties. As you probably guessed, Kimble's agreement did take into account this critical distinction.

Is the Court Itching to Overturn Brulotte?

This wasn't a close case -- precedent doomed Kimble from the start. A cert. grant means the High Court wants to look at changing that clear precedent. Indeed, the question on the cert. petition plainly asks whether the Court should overrule Brulotte.

How eager is the Court to look at Brulotte? Not only did justices ask for the Solicitor General's input on whether certiorari should be granted -- a sign of interest in and of itself -- but the Court went ahead and granted cert. even though the Solicitor General recommended that the Court reject the case, calling it "a poor vehicle for reexamining Brulotte."

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