U.S. Supreme Court Reaffirms Prohibition On Post-Expiration Patent Royalties, And The Vitality Of Stare Decisis, In The Kimble 'Spider-Man' Case

On June 22, 2015, in a 6-3 decision in Kimble et al. v. Marvel Enterprises, LLC, 576 U.S. (2015), the United States Supreme Court reaffirmed its holding in Brulotte v. Thys, 379 U.S. 29 (1964), that it is per se patent misuse for a patentee to charge royalties for the use of its patent after the patent expires. While acknowledging the weak economic underpinnings of Brulotte, the Court relied heavily on stare decisis and Congressional inaction to overrule Brulotte in also declining to do so itself. Although Kimble leaves Brulotte intact, the decision restates the rule of that case and provides practical guidance to avoid its prohibition on post-expiration royalties. Critically, the Court appears to condone the collection of a full royalty for a portfolio of licenses until the last patent in the portfolio expires. In addition, the Court's reasoning provides guidance as to how patent licensors can draft licenses to isolate the effect of a later finding that patents conveyed under those licenses were previously exhausted.

Brulotte v Thys

In Brulotte, the owner of several patents for hop-picking machines sold the machines for a flat sum and issued licenses that required the payment of royalties after the date that the last patent expired. The licensees claimed that the arrangement was patent misuse and refused to make royalty payments. The trial court ruled in favor of the patent holder and the Supreme Court of Washington affirmed. The U.S. Supreme Court reversed insofar as the judgment allowed royalties which accrued after the last of the patents incorporated into the machines had expired.

The Brulotte Court conducted a straightforward application of patent law. It noted that patent rights terminate upon the expiration of the patent, but in the contract at issue the royalty payments for the post-expiration period were for product use during the post-expiration period, and did not constitute deferred payments accrued during the pre-expiration period. Nor were the royalties paid for the use of non-patented articles. In short, in the Court's view, the licensor was using the licenses impermissibly to achieve the effective extension of its patent rights beyond the patent period. "[W]e conclude that a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se. If that device were available to patentees, the free market visualized for the post-expiration period would be subject to monopoly influences that have no proper place there." Brulotte, 379 U.S. at 33. Justice Harlan dissented, pointing out that the economic substance of the transaction could be achieved through different contract terms that remained lawful.

The Brulotte decision was met with withering criticism over the years. Perhaps most succinctly and famously, Judge Richard Posner explained the weak economic underpinnings of the decision as follows:

The Supreme Court's majority opinion reasoned that by extracting a promise to continue paying royalties after expiration of the patent, the patentee extends the patent beyond the term fixed in the patent statute and therefore in violation of the law. That is not true. After the patent expires, anyone can make the patented process or product without being guilty of patent infringement. The patent can no longer be used to exclude anybody from such production. Expiration thus accomplishes what it is supposed to accomplish. For a licensee in accordance with a provision in the license agreement to go on paying royalties after the patent expires does not extend the duration of the patent either technically or practically, because . . . if the licensee agrees to continue paying royalties after the patent expires the royalty rate will be lower. The duration of the patent fixes the limit of the patentee's power to extract royalties; it is a detail whether he extracts them at a higher rate over a shorter period of time or a lower rate over a...