In 1964, the Supreme Court decided Brulotte v. Thys and held that a patent owner cannot charge royalties for the use of a patented invention after the patent’s term has expired. While the Brulotte rule is simple, it has faced plenty of criticism over the years. Lower courts and academics alike have challenged the economic logic underlying the rule and criticized the decision as counterintuitive.
Earlier this year, the Supreme Court heard argument in Kimble v. Marvel Entertainment, LLC. The dispute revolved around an expired patent covering a toy that allowed one to role-play as a “spider person” by shooting pressurized foam string from the palm of a hand. The inventor licensed the invention to Marvel for a lump sum and 3 percent royalty on Marvel’s Spider-Man-themed “Web Blaster” toy. The license agreement set no end date for royalties.
The dispute began when Marvel sought a declaration from a federal district court confirming that the company could stop paying royalties to Kimble in 2010, the end of the patent term. The district court and court of appeals each applied Brulotte and sided with Marvel. The Supreme Court granted review to consider the question of whether to overrule Brulotte – and with it 50 years of precedent.
By a 6-3 majority, the Court decided to leave Brulotte in place, citing the doctrine of stare decisis (the idea that today’s Court should stand by yesterday’s decisions). The decision itself is not surprising. The Supreme Court rarely overrules itself, and the bright-line rule is easy to apply. Besides, most licensing lawyers today are aware of Brulotte and know that licenses come with the rule baked in. Leaving the rule untouched at least has the benefit of consistency.
But what is most interesting about the Kimble decision (beyond Justice Kagan’s light-hearted Spider-Man quotes) is that the Court went out of its way to point out workarounds to Brulotte:
- A patent owner can lengthen the royalty payment period by agreeing to defer payments for pre-expiration use of the patent until the post-expiration period. As Justice Kagan noted, a “licensee could agree, for example, to pay the licensor a sum equal to 10 percent of sales during the 20-year patent term, but to amortize that amount over 40 years.”
- The parties may include additional patents, because royalties are allowed to continue until the latest-running patent covered in the parties’ agreement expires.
- An agreement can be structured to include other rights. Post-expiration royalties are allowable so long as tied to a non-patent right, such as a trade secret (which does not expire).
- The parties can enter into something other than a license agreement. There is no bar to business arrangements other than royalties, such as a joint venture to commercialize an invention.
The bright-line Brulotte rule may have survived Kimble, but the Supreme Court blessed some creative workarounds. Before licensing a patent, licensors should put on their thinking hats and consider whether there are ways to structure the agreement to last beyond the patent’s expiration.