Kimble et al v Marvel Entertainment, LLC, 576 U.S. ____ (2015)

A recent decision by the U.S. Supreme Court reaffirmed a rule that prohibits royalties from being charged on formerly patented products after the patent has expired. The principle being protected is that patented technology should be free to use by all once the patent expires, and that even one license inhibiting that free use offends that principle. [4] Practically speaking, the longstanding rule means that negotiators may need to be creative if the parties plan to spread the costs of acquiring patented technology over longer periods of time.

In the 6-3 decision, the U.S. Supreme Court upheld the 50 year old rule from Brulotte v Thys Co, 379 US 29 [Brulotte]. The majority and dissent thoroughly canvas the economic debate surrounding the rule: Is it anticompetitive to allow royalties to be charged post patent expiry? Or would preventing parties from charging such royalties present a barrier to parties coming to an agreement, so that in some cases licensing deals cannot be reached at all? Furthermore, which rule is more in line with commercial parties’ expectations?

The facts of this case suggest that a typical commercial party would expect to be able to charge royalties in whatever manner, and for as long as, they wish. In this case, that was precisely the kind of arrangement that that Kimble and Marvel entered into. Marvel agreed to pay to Kimble a 3% royalty on all sales of a Spider Man Web Blaster that was developed and patented by Kimble. [2] At the time of making this agreement, neither party was aware of the rule from Brulotte. [2] It seems that Marvel then “stumbled across” Brulotte, and then sought a declaratory judgment in the federal district court confirming that it could cease paying the royalties to Kimble. [2] Upholding Brulotte, the lower court granted Marvel its relief. [2]

The present appeal presented an opportunity for the Courts to revisit the Brulotte decision and allows new economic arguments to come to the fore. For example, it was argued that if royalties could only be charged during an ever-closing 20-year patent period, that would make the royalty on each individual widget higher – and in some cases too high – for a potential licensee to afford. Conversely, the possibility for royalties to be charged indefinitely provides an opportunity for costs to be spread over a longer period, reducing the cost of individual widgets, and more competitors being able to pick the license, in turn leading to more competition and innovation in the marketplace. [12-13]

On the whole, the economic debate seems to tilt, as both the majority and the dissent agreed, in the direction that the Brulotte rule might be economically harmful. [Majority, 13, Dissent, 4] As such, Kimble (and the dissent) reason that since Brulotte was grounded on poor economic theory that has now been debunked, the rule should be abolished and parties should be able to charge royalties post patent expiry if they wish. [Dissent, 1]

The majority took the firm stance that the economic argument is beside the point. The majority mounted a strong defence of the principle of stare decisis, which, as it put it, “means sticking to some wrong decisions.” [7] The Supreme Court didn’t go as far as saying they were outright wrong, legally speaking, in Brulotte, but they did acknowledge that there might have been shaky economic reasoning that supported it. [13] The majority’s position was that departing from Brulotte would require extraordinary circumstances, and these circumstances have not been met. [10] The majority cited numerous occasions upon which congress seemingly had the opportunity to change the rule through its legislative power, but chose not to. [8] For the courts to make the change now would, in the majority’s view, unsettle stable law. [11] In sum, even if departing from the Brulotte rule is economically sound in theory, such a decision should be made by congress, not the courts. [17-18]

As it stands, the rule remains that in the United States parties may not charge royalties for sales of patented products after patent expiry. If financial constraints compel the parties to extend the payment period beyond patent expiry, they will have to do so in more creative ways.

Commentary

The answer to whether royalties can be extracted from a licensee beyond the term of a patent came before Canadian courts in Culzean Inventions Ltd v Midwestern Broom Company Ltd, 1984 CanLII 2276 [Culzean]. In that case, the Saskatchewan Court of Queen’s Bench found the answer would depend on whether or not there was an express stipulation in the contract as to its duration. If there was an express stipulation of duration, then that stipulation would hold. If there was not, then royalties could not be extracted after patent expiry. [49, Culzean] The Court also looked for reasons to invalidate the provision, including whether it was a restraint of trade or unconscionable, but found none. [51, Culzean] In that case, the royalties were therefore payable even after patent expiry. [52, Culzean]