In July of 2013, I wrote a blog post about the Ninth Circuit Court of Appeal’s decision in Kimble v. Marvel Entertainment LLC and its effect upon royalty provisions in hybrid IP license agreements.  You can read that article here.  By “hybrid” I am referring to an agreement under which the licensor grants a license to one or more patents, as well as to non-patent IP rights such as copyrights, trademarks, trade secrets, know-how, etc., all covering a particular product or technology.  The Kimble case involves a Spider-Man toy that allows the user to shoot a “web” of foam string from a canister strapped to the user’s wrist.  The parties had entered into a settlement agreement whereby Marvel agreed, among other things, to pay a 3% royalty to Kimble in perpetuity for as long as Marvel sold certain products.  This contractual obligation extended past the expiration of the patent, which occurred in 2010.

Kimble later sued Marvel for breach of the settlement agreement.  Marvel filed a counterclaim contending that its royalty obligations under the settlement agreement ended when the Kimble patent expired.  In response, Kimble claimed that because the royalty provision covered both patent and non-patent rights, it should continue to be enforced with respect to the non-patent rights under the settlement agreement.  Marvel prevailed on summary judgment, and the Ninth Circuit “reluctantly” affirmed, despite recognizing that in the circumstances of this particular case, “the patent leverage . . . was vastly overshadowed by what were likely non-patent rights.” The problem was this 50-year old Supreme Court case called Brulotte v. Thys Co., which held that a patent holder cannot charge a royalty for use of the patented invention after the patent term has expired, and the fact that the settlement agreement did not differentiate between the patent rights and the non-patent rights with respect to the royalty payment.

The Supreme Court agreed to hear Kimble’s appeal requesting that Brulotte be overruled, but on June 22, 2015, it affirmed the Ninth Circuit’s decision and re-affirmed Brulotte on grounds of stare decisis.  The Supreme Court acknowledged and even seemed to accept that Brulotte, which has been highly criticized, is not consistent with sound economic analysis and may pose significant barriers to certain license agreements.  Nevertheless, the Court found no “special justification” for departing from the stare decisis rule of respecting its prior decisions.  It reiterated that it is often “more important that the applicable rule of law be settled than that it be settled right.” If Brulotte was wrongly decided, then Congress must be the body to fix it.

Thus, it remains the case that royalty provisions in any license agreement conveying rights both in a patent and in non-patent IP rights should be carefully considered and negotiated.  As a licensor, do not fall into the trap of a bundled royalty provision covering all of the licensed rights if the intention is to continue to receive a royalty stream even after the patent expires.  There are many ways to structure the economics of the deal to avoid an unexpected stoppage in royalty income.