Jeffri A. Kaminski, Venable LLP
The U.S. Supreme Court recently decided a closely watched case concerning contract rights and patent royalties. In Kimble v. Marvel Entertainment, LLC the Court upheld its long standing precedent and determined that parties cannot agree to patent royalty payments that extend beyond the expiration of the patent.
The case originated when Kimble and Marvel agreed to a patent license for a toy glove that Kimble had patented. The licensing agreement called for a lump sum payment and running royalties for a license to the patent as part of a settlement of ongoing litigation. The agreement did not set an end date for the royalty payments. In making its decision the Court upheld its ruling in Brulotte v. Thys Co., 379 U.S. 29 (1964), holding that licenses requiring payment of patent royalties after patent expiration are “unlawful per se.” Brulotte has been the subject of criticism in the 50 years since it was decided, but the Court determined that was not enough of a reason to overturn its longstanding precedent.
The bright-line rule in Brulotte favored maintaining the status quo: . “The decision is simplicity itself. A court need only ask whether a licensing agreement provides royalties for post-expiration use of a patent. If not, no problem; if so, no dice.” The opinion also noted that parties have likely relied on the Brulotte opinion when conducting their affairs.
The Court did note that their ruling may prevent parties from entering into deals that they desire. However, agreements can be structured in such a way to achieve the same results without running afoul of the post-expiration royalty rule. Justice Kagan wrote:
A licensee could agree, for example, to pay the licensor a sum equal to 10% of sales during the 20-year patent term, but to amortize that amount over 40 years. That arrangement would at least bring down early outlays, even if it would not do everything the parties might want to allocate risk over a long timeframe.
In addition, “parties have still more options when a licensing agreement covers either multiple patents or additional non-patent rights.” In a multi-patent license the royalties may run until the latest expiration date of the licensed patents. Further, royalty payments post-expiration are permissible when tied to non-patent rights, such as trade secrets or technical know-how. The opinion gives an example: “a license involving both a patent and a trade secret can set a 5% royalty during the patent period (as compensation for the two combined) and a 4% royalty afterward (as payment for the trade secret alone) patent.” This type of “step-down” license may now become more popular.
Business arrangements other that royalties are also available to parties to enter into. Joint ventures and other arrangements allow the parties to allocate the risk and rewards of developing new technologies and products.
In sum, the rule on post-expiration patent royalty payments is clear—they are not permitted. But as the Court noted, there are other ways for parties to define their relationship that can achieve the same results.