U.S. Supreme Court To Review Whether Post-Patent Term Royalty Schemes Lawful

On Friday, December 12, 2014, the U.S. Supreme Court granted certiorari on Kimble v. Marvel Enterprises, Inc., No. 13-720, opening the possibility that the Supreme Court will overturn Brulotte v. Thys Co., 379 U.S. 29 (1964), the widely criticized case holding that patent royalties beyond a patent's expiration date are "unlawful per se." Consequently, the Court will be considering whether to replace its rigid per se prohibition with a more flexible antitrust test called the rule of reason, which would carry significant implications for licensing agreements in the future. The Kimble case comes to the Supreme Court from the U.S. Court of Appeals for the Ninth Circuit. In that decision, 727 F.3d 856 (9th Cir. 2013), the Ninth Circuit refused to enforce royalty obligations payable under a "hybrid" intellectual property agreement - that is, an agreement involving a bundle of patent, trade secret, and other intellectual property rights - because the agreement called for a single royalty rate that did not step down following expiration of the patent included in that bundle of rights.

Under the 50-year-old Brulotte rule, royalty payments extending beyond the expiration of a patent are per se unlawful, because such royalties extend the duration of a patent monopoly beyond the lawful time period. In Brulotte, the Supreme Court refused to treat post-expiration royalties as merely deferred payments for use of a patent during the pre-expiration period, since the Court was hesitant to guess what parties' bargaining position would have been had post-expiration royalties been separated from the patent. This rule was further developed in Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979). In that case, the Supreme Court clarified that patent law allows indefinite royalty payments where no patent is ultimately issued. The facts of the Aronson case involved a 5% royalty that decreased to 2.5% if a patent was not issued within five years. Such a decrease in the royalty rate, whether to account for non-patent intellectual property rights or the failure of a patent to issue, is commonly known as a "step-down."

The recent Kimble controversy arose over the Web Blaster, a gloved Spider-Man toy that could shoot foam string. Kimble shared such a concept with Marvel's predecessor, Toy Biz, on the condition that he would receive compensation if the company used the idea. Part of Kimble's idea was allegedly covered by a then-pending patent application filed by...