The hard and fast rule in patent licensing is that demanding patent royalties for a patent that has expired is void against public policy. That was the rule established a half a century ago in Brulotte v. Thys Co. And that is still the rule after the decision in Kimble v. Marvel Entertainment handed down from the Supreme Court on June 22, 2015. The Brulotte case has been criticized in economic and legal circles. But in Kimble, the Supreme Court found no compelling reason to overturn the holding in Brulotte and that stare decisis (the legal doctrine that the court should adhere to its own precedent) mandated the same outcome. (Big yawn.)
So why do I find this case exciting? Because it is an IP case with a 6-3 holding instead of the unanimous or nearly unanimous IP case holdings of the last couple of years? Because it references Spiderman extensively? No. What I find is exciting is that Justice Elena Kagan, writing for the majority, made clear what was still acceptable in licensing, even if there is a tangential relationship with a patent (expired or not).
Here are the takeaways from Kimble (interpreting Brulotte) regarding terms that are still acceptable in license arrangements:
- Deferring payment for pre-expiration use of a patent into the post-expiration period. The Court gives an example of an agreement to pay a patent owner/licensor a sum equal to 10% of the sales during a 20 year patent term, but to amortize the amount over 40 years (that is 20 years past the patent expiration). Here, the payment is for use during the life of the patent, but the payment extends past the patent expiration.
- Licensing multiple patents or additional Non-Patent Rights. Royalties may extend onward even when closely related to a patent. The Court gives an example of a patent and trade secret license for 5%, but after the patent expiration, the trade secret license royalty of 4% continues onward.
- Creating business arrangements, e.g., Joint Ventures, that share risk and rewards. Continuing an interest in (and thus payment from) a business entity created to commercialize the invention is still acceptable.
Going forward, a good technology license will identify and distinguish the various IP rights that are being licensed and allocate the appropriate license (rate, terms) to that particular IP right. Any royalties tied to the use of a patented invention will end upon termination of the patent. But payments related to other IP rights, even those closely related to a patent, do not necessarily have to end with the termination of the related patent. It all comes down to correctly drafting the intent of the parties within the confines of Brulotte—and now Kimble.
To read the entire case, click here.