The US Supreme Court heard oral arguments in Kimble v. Marvel Enterprises Inc. on March 31, 2015. Its decision could overturn a half-century old patent licensing rule set out in Brulotte v. Thys. Co. that prevents a licensor from collecting certain royalties after the patent's expiration date (379 U.S. 29 (1964)). Kimble, the patent owner and inventor of a Spiderman toy, argued that this rule is economically irrational, is not supported by patent policy and is based on an outdated view of antitrust law. Marvel, the licensee, argued that the Brulotte rule is narrow and flexible, allowing the parties to structure royalty payments in a variety of ways to allocate risk and should not be changed because of stare decisis.

On July 16, 2013, in its Kimble decision, the US Court of Appeals for the Ninth Circuit held that Kimble could not require the payment of ongoing post-expiration patent royalties under a settlement agreement (727 F.3d 856 (9th Cir. 2013)).

The principles underlying the court's holding arose from the Brulotte decision, where the Supreme Court held that a licensor cannot legally require a licensee to pay patent royalties for activities that are covered by the licensed patent claims but occur after the licensed patent's expiration date. The Supreme Court noted that the royalty payments were not deferred payments for use during the period before the patent expired, but for use after expiration. It concluded that this would be an impermissible extension of the patent monopoly and is therefore per se unlawful.

The Ninth Circuit outlined several criticisms lodged against the Supreme Court's Brulotte holding. For example, the rule may deprive a licensor of the benefit of its negotiated bargain based on a seemingly technical detail. However, the Ninth Circuit recognized that it was bound by the Supreme Court's authority (citing Scheiber v. Dolby Labs., 293 F.3d 1014 (7th Cir. 2002)). The court also gave weight to:

In Kimble, the settlement agreement at issue contemplated just one royalty for both patent and non-patent rights and no discounted royalty rate for the non-patent rights payable after the patent's expiration. The court therefore reluctantly concluded that the royalties paid under the agreement must end on the patent's expiration.

For more information on the Ninth Circuit's decision, see Legal Update, Spiderman Toy Maker Gets Tangled by Ninth Circuit Royalty Decision.

Kimble seeks to have the Supreme Court overturn Brulotte's per se prohibition on collecting patent royalties based on post-expiration use in favor of a more flexible, case-by-case rule of reason analysis.

Kimble argued that the Brulotte rule should be overruled because it is not supported by patent and antitrust policy. For example, Kimble argued that post-expiration royalties do not extend the patent monopoly because:

Kimble also argued that Brulotte forecloses pro-competitive arrangements, since royalties based on post-expiration use may permit licensees to pay lower royalty rates over a longer period of time. Especially for early stage inventions that require further development, the licensee may prefer to defer royalty payments during development and pay royalties on actual sales, which may occur near the end of the patent term, and thereafter post-expiration. Without this flexibility, the parties may not reach an agreement, which would discourage investment in and development of the invention, especially for life sciences inventions.

Therefore, applying the rule of reason would allow the parties to balance and allocate risk in developing and commercializing patentable inventions.

In response, Marvel argued that the rule in Brulotte is narrow and allows several techniques to allocate risk and facilitate licensing. For example, payment for use of the patented invention during the patent term can be structured to:

For sample patent license royalty payment clauses, see Standard Clauses:

In addition, Marvel argued that:

Because of the complications arising from licensing patent rights together with rights in non-patented intellectual property (IP) or technology, where feasible, parties may seek to license these rights in separate agreements. However, whether patents and non-patented IP rights are licensed under one or more instruments, the key to compliance with the rule of Brulotte is to ensure that the royalty term and rates for the non-patent rights do not reflect the licensor's leveraging of its patent rights to extend the statutory term of the licensed patents.

For example, where both patents and know-how are addressed in the same agreement, the licensor must consider whether to seek ongoing royalties after the expiration of the last-to-expire licensed US patent. If the licensee receives know-how in the form of confidential information or trade secrets that enable the licensee's commercialization of a contemplated licensed product, the licensor may require the licensee's ongoing payment of a separate royalty for that non-patent related consideration (see, for example, Warner-Lambert Pharm. Co. v. John J. Reynolds, Inc., 178 F. Supp. 655 (S.D.N.Y. 1959), aff'd 280 F.2d 197 (2d. Cir. 1969) and Nova Chems., Inc. v. Sekisui Plastics Co. 579 F.3d 319 (3d. Cir. 2009)). Similarly, the licensor may include in a hybrid license agreement distinct terms for services or other non-patent consideration, such as licensed trademarks.

To avoid a finding that the non-patent rights and corresponding obligations terminate on the expiration or invalidity of the licensed patents, the licensor in a hybrid patent and know-how agreement should specify:

For more information on drafting hybrid patent and know-how license agreements, see Article, Drafting Hybrid Patent and Know-how License Agreements.

For sample provisions addressing post-expiration royalties, see Standard Document, Patent and Know-how License Agreement (Pro-licensor): Section 6.2.

For patent licenses, the parties should specify either: