Ninth Circuit Holds Hybrid IP Agreement With Flat Royalty Rate Unenforceable Post Patent Expiration

The Ninth Circuit U.S. Court of Appeals recently reluctantly refused to enforce a hybrid intellectual property agreement - that is, an agreement involving a bundle of patent, trade secret, and other intellectual property rights - with a single royalty rate beyond the expiration date of the patent included in that bundle of rights. The court in the case, Kimble v. Marvel Enterprises Inc., No. 11-15605 (9th Cir. July 16, 2013), found itself bound by the Supreme Court's holding in Brullote v. Thys Co., 379 U.S. 29 (1964), that charging patent royalties beyond a patent's expiration date is "unlawful per se." The Ninth Circuit, like others, extensively criticized Brulotte, noting that applying the Brulotte rule to the hybrid agreement before it likely resulted in the agreement having less actual value than the parties likely understood when they entered into the agreement. Yet absent "a discounted rate for the non-patent rights [a "step-down"] or some other clear indication that the royalty at issue was in no way subject to patent leverage" in the agreement, even though the "patent leverage in this case was vastly overshadowed" by non-patent rights, the Ninth Circuit felt compelled to cut off the ability to collect royalties beyond the life of the patent.

The Supreme Court in Brullote held royalty payments beyond the expiration date of a patent unlawful per se, viewing such royalties as impermissibly extending the duration of a patent monopoly. The Supreme Court there rejected arguments that post-expiration royalties were merely deferred payments for use of a patent during the pre-expiration period. In addition, the Court refused to conjecture what the parties' bargaining position would have been and what agreement might have resulted had post-expiration royalties been separated from the patent. Later in Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979), the Supreme Court clarified that patent law permits indefinite royalty payments where no patent is ultimately issued. The Aronson decision largely turned on the fact that the parties had agreed to a 5% royalty, but if a patent application was not allowed within five years, the royalty stepped-down to 2.5%.

The Kimble controversy arose over a Spider-Man Web Blaster toy. Kimble contended he had met with a representative of Marvel Entertainment's predecessor, Toy Biz, and shared ideas Kimble had about a gloved toy that could shoot foam string. Some of those ideas were allegedly covered by a...