In 2013, the United States Court of Appeals for the Eighth Circuit granted the appeal of Kimble v. Marvel Enterprises, Inc., to determine whether royalty payments are required to end when the underlying patent expires.
Appellant Stephen Kimble (“Kimble”) invented a Spider-Man toy that allowed a user to mimic Spider Man’s web-shooting abilities with foam string. Kimble patented the apparatus under U.S. Patent No. 5,072,856 (‘856 Patent), with an expiration on or about May 25, 2010. Kimble had approached Marvel Enterprises (“Marvel”) in 1990, hoping to arrange a license for the ‘856 Patent between the parties. Marvel declined the license opportunity and thereafter began manufacturing a similar Spider-Man toy called the “Web Blaster.” Following litigation for patent infringement and breach of contract initiated in 1997, the parties settled the case in 2001. Pursuant to the settlement agreement, Marvel, among other things, agreed to purchase the ‘856 Patent. In addition, Marvel agreed to compensate Kimble with 3% of past, present, and future Web Blaster net product sales. The settlement agreement contained no expiration date and did not include any specific time limit on Marvel’s obligation to pay the 3% of net product sales to Kimble.
Marvel went on to license the Web Blaster technology to Hasbro in 2006. Subsequently, disagreements arose between Marvel and Kimble concerning the royalty payments. As a result, Kimble filed suit in Arizona state court for breach of contract and related claims. Marvel counterclaimed seeking a declaration that it was no longer obligated to pay Kimble after the expiration of the ‘856 Patent. The district court agreed with Marvel, and held that the royalties had to end when the ‘856 Patent expired.
The three circuit justice panel affirmed the district court’s holding that a licensing agreement encompassing patent and non-patent rights is unenforceable beyond the patent’s term, unless the agreement offers some clear indication that the royalty at issue was in no way subject to patent leverage. Thus, the panel held summary judgment was properly granted in favor of Marvel Enterprises, discontinuing the royalties for the Web Blaster.
In reaching its decision, the Eight Circuit relied on the frequently-criticized Supreme Court decision in Brulotte v. Thys Co. The Court in Brulotte held that a patent licensing agreement requiring a licensee to make royalty payments beyond the underlying patent was unenforceable. In its reasoning, the Court stated such an agreement represented an improper attempt to extend the patent monopoly. The Court explained that Congress had granted inventors “the exclusive right” to make, use, or sell their discoveries for “limited times.” However, after the relevant period expires “these right become public property.” Any attempt to reserve or continue the patent monopoly after expiration “runs counter to the policy and purpose of the patent laws” regardless of what “legal device” is employed.
Judge Consuelo M. Callahan, writing for the Eighth Circuit, alluded to the court’s reluctance to apply the Brulotte rule. Reiterating that the rule is counterintuitive and has an arguably unconvincing rationale. However, bound by Supreme Court authority, the court could not reach a contrary decision.
The case is slated for the Supreme Court’s docket in 2015. The Court will be presented with the question of whether to overrule Brulotte v. Thys Co., holding a “patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.”