Supreme Court Maintains Licensing Status Quo in Kimble v. Marvel Entertainment, LLC

A bedrock principle of U.S. patent law is that the patent grant comprises a quid pro quo. In exchange for a limited term of exclusivity (presently, twenty years from the earliest filing date), the patented invention is placed in the public domain when the patent expires. While this principle is both simple and fundamental (and patent expiry is expressly contained in the statute, codified at 35 U.S.C. § 154), it finds its most controversial application in a Supreme Court case from 50 years ago, Brulotte v. Thys Co.^[1] Brulotte stands for the rule that a patentee cannot receive royalties for activities falling within the scope of the patent claims once the patent has expired. Roundly criticized on economics grounds since it was handed down, the Court refused to walk back the Brulotte rule in a case decided at the end of the past term, Kimble v. Marvel Entertainment, LLC.^[2]

The facts of the case do not provide any equities to the licensee, Marvel. The issue arose regarding Kimble’s U.S. Patent No. 5,072,856 for a toy that simulated the web-shooting devices used by the fictional Spiderman.^[3] As any child or pop culture fan knows, Marvel is the purveyor of all things Spiderman, owning the rights to the character, comic books, movies, and ancillary merchandise. Kimble attempted to license his invention to Marvel, but they chose to copy the invention, bringing their own version of the toy to market.^[4] The parties settled Kimble’s resulting patent infringement lawsuit on terms wherein Marvel purchased the patent for a lump sum (approximately $500,000) plus a 3% royalty.^[5] The settlement contained no limit on this royalty obligation with regard to patent expiry.^[6] According to the opinion, the parties were apparently unaware of the Brulotte rule that precluded Kimble from receiving royalties after the ‘856 patent expired, but (once purportedly apprised of the existence of the rule) Marvel brought a declaratory judgment action against paying post-expiry royalties, in which it prevailed.^[7]

The Court affirmed Marvel’s victory in an opinion by Justice Kagan, joined by Justices Scalia, Kennedy, Ginsberg, Breyer, and Sotomayor; Justice Alito dissented, joined by the Chief Justice and Justice Thomas. While the opinion acknowledged that the Brulotte rule had been the subject of judicial and scholarly criticism,^[8] the majority refused to overrule it. The reason is stare decisis, the majority stating that “[i]n crafting the patent laws, Congress struck a balance between fostering innovation and ensuring public access to discoveries.”^[9] The opinion justifies letting the Brulotte rule stand because “[t]his Court has carefully guarded that cut-off date, just as it has the patent laws’ subject-matter limits” based on the public interest.^[10] This is reflected in other examples of its precedent consistent with Brulotte, including situations where it has prevented, inter alia, parties from agreeing not to challenge a patent.^[11]

The majority found the statutory basis for the Brulotte rule in the patent term provisions of § 154, which limits the duration within which the patentee can exercise the right to exclude. Thereafter, the patent quid pro quo demands that the invention is freely available to the public. The Court recognized that “[t]he Brulotte rule, like others making contract provisions unenforceable, prevents some parties from entering into deals they desire” and that royalty plans like the one in Brulotte (and here) can have advantages including “draw[ing] out payments over time and t[ying] those payments, in each month or year covered, to a product’s commercial success.”^[12] The majority also recognized the traditional justification for extending the term for paying royalties, that “[a] more extended payment period, coupled (as it presumably would be) with a lower rate, may bring the price the patent holder seeks within the range of a cash-strapped licensee,” the opinion analogizing the situation with purchasing a consumer product on an installment plan.^[13] Alternatively, “such an extended term may better allocate the risks and rewards associated with commercializing inventions—most notably, when years of development work stand between licensing a patent and bringing a product to market.”^[14]

Nevertheless, the majority believes that the statutory term is sufficiently important to require patentees and their licensees to “find ways around Brulotte” using other means.^[15] These include deferred payments on royalties earned during the patent term,^[16] or extending royalties until the last-to-expire of a patent portfolio. Also permitted would be licensing non-patent rights – such as “know-how” or trade secrets (no matter how closely tied to the patent). “Finally and most broadly, Brulotte poses no bar to business arrangements other than royalties—all kinds of joint ventures, for example—that enable parties to share the risks and rewards of commercializing an invention,” according to the opinion.^[17]

The majority rejected Kimble’s argument that these situations should be subjected to a “case-by-case,” “rule of reason” approach.^[18] This is where the Court most directly resorts to stare decisis principles, stating that “[o]verruling precedent is never a small matter.”^[19] The benefits of not overruling Brulotte (or any other decision) include that “it promotes the evenhanded, predictable, and consistent development of legal principles, fosters reliance on judicial decisions, and contributes to the actual and perceived integrity of the judicial process.”^[20] But in doing so, the Court adopted Justice Brandeis’ view that “it is usually “more important that the applicable rule of law be settled than that it be settled right.”^[21]

The opinion also states that “[a]ccordingly, an argument that we got something wrong—even a good argument to that effect—cannot by itself justify scrapping settled precedent.”^[22] Rather the majority believes that “[t]o reverse course, we require as well what we have termed a ‘special justification’—over and above the belief ‘that the precedent was wrongly decided.’”^[23]

The majority opinion also states that stare decisis is more important when the Court interprets a statute because the party can “take their objections across the street” and have Congress change the law.^[24] In this case, the majority perceives that Congress has declined this opportunity repeatedly (“long congressional acquiescence”), citing the implementing statutes for the GATT/TRIPS agreements as well as specific bills introduced (but never enacted) aimed at changing the law to abrogate the Brulotte rule.^[25]

Other reasons contained in the majority opinion for refusing to overrule Brulotte include the special characteristics of cases at the nexus between property law and contract law, where the majority believe stare decisis principles to be “at their acme” because such precedents are used by parties when “ordering their affairs.”^[26] This reasoning harkens back to the sentiment that the Court should not upset settled expectations: “[s]o long as we see a reasonable possibility that parties have structured their business transactions in light of Brulotte, we have one more reason to let it stand.”^[27] In addition, the majority believes that Brulotte remains consistent with other precedent supporting “bright line” patent term expiry and that the rule (according to the majority) remains “workable” in practice, particularly when compared with antitrust law.

The opinion acknowledges the scholarly consensus that post-expiration royalties can have pro-competitive effects.^[28] But in their view this is a patent case, not an antitrust case (where the Court has been more flexible due to the dynamic nature of antitrust law), and the public interest trumps these considerations: “[s]o in deciding whether post-expiration royalties comport with patent law, Brulotte did not undertake to assess that practice’s likely competitive effects. Instead, it applied a categorical principle that all patents, and all benefits from them, must end when their terms expire.”^[29] And, “[s]o if Kimble thinks patent law’s insistence on unrestricted access to formerly patented inventions leaves too little room for pro-competitive post-expiration royalties, then Congress, not this Court, is his proper audience.”^[30]

Appeals to innovation, the “wellspring of patent policy,” and the rule’s harm to innovation provided no help: “[n]either Kimble nor his amici have offered any empirical evidence connecting Brulotte to decreased innovation; they essentially ask us to take their word for the problem. And the United States, which acts as both a licensor and a licensee of patented inventions while also implementing patent policy, vigorously disputes that Brulotte has caused any ‘significant real-world economic harm.’”^[31]

Justice Alito disagreed, characterizing Brulotte as “a clear case of judicial overreach” and saying that in his view the rule was based not on patent law but on antitrust principles that have been “debunked.”^[32] Regarding the rationale for the majority opinion, Justice Alito writes that “[o]ur traditional approach to stare decisis does not require us to retain Brulotte’s per se rule. Brulotte’s holding had no basis in the law. Its reasoning has been thoroughly disproved. It poses economic barriers that stifle innovation. And it unsettles contractual expectations.”^[33]

While nothing has changed with this opinion, it is well to remember this reassertion of the Brulotte rule when crafting licensing agreements. Indeed, creativity rules. In those instances where the licensee requires time to bring the claimed invention to market or the invention requires so much development time that the royalty term may be insufficient for a license to make economic sense, non-royalty terms such as milestone payments or other lump sum payments can be included. Other avenues include having royalty payments tied to know-how or trade secrets, both of which met (albeit hypothetically) with the Court’s approval. Payments tied to market success can also be included. While this shifts some of the risk to the patentee (who in many instances has little or no control over whether the licensee will have market success), licenses can include provisions where lack of success terminates the license or converts an exclusive license to a non-exclusive one. Such provisions reduce (but do not eliminate) some of the risk attendant on exclusive licensing even in those situations where an exclusive license is required to justify the costs of bringing a patented article to market. These are just a few of the ways licenses can be structured to avoid the negative consequences of the Brulotte rule. They remain necessary because this Court seems unwilling to reconsider its reliance on categorical rules involving licensing, and there is no indication that this attitude will change.

[1] 379 U.S. 29 (1964).

[2] No. 13-720, slip op. at 1 (Jun. 22, 2015).

[3] Id.

[4] Id. at 2.

[5] Id.

[6] Id.

[7] Id.

[8] Id. at 3 (citing Scheiber v. Dolby Labs., Inc., 293 F. 3d 1014, 1017–1018 (7th Cir. 2002) (Posner, J.) and Ayres & Klemperer, Limiting Patentees’ Market Power Without Reducing Innovation Incentives: The Perverse Benefits of Uncertainty and Non-Injunctive Remedies, 97 Mich. L. Rev. 985, 1027 (1999)).

[9] Id.

[10] Id.

[11] Id. at 4 (citing Scott Paper Co. v. Marcalus Mfg. Co., 326 U.S. 249 (1945); Edward Katzinger Co. v. Chicago Metallic Mfg. Co., 329 U.S. 394, 400–401 (1947) and Lear, Inc. v. Adkins, 395 U. S. 653, 668–675 (1969)).

[12] Id. at 5.

[13] Id.

[14] Id.

[15] Id. at 6.

[16] Id. at 6 (citing Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 136 (1969)).

[17] Id.

[18] Id. at 7.

[19] Id.

[20] Id. (citing Payne v. Tennessee, 501 U.S. 808, 827–828 (1991)).

[21] Id. (citing Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 406 (1932) (which besides being contrary to the Court’s role in actually trying to interpret the laws to effectuate congressional intent, it also must be noted that Justice Brandeis’s statement was made in a dissent and thus not the basis for the Burnet decision)).

[22] Id. at 8.

[23] Id. (citing Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, slip op. at 4 (2014)).

[24] Id. (citing Patterson v. McLean Credit Union, 491 U.S. 164, 172–173 (1989)).

[25] Id. at 8-9.

[26] Id. at 9.

[27] Id. at 10.

[28] Id. at 13.

[29] Id. at 15.

[30] Id. at 16.

[31] Id. at 17 (citing the government’s amicus brief).

[32] Id. at 1 (Alito, J., dissenting).

[33] Id. at 6.

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