Do your royalty payments in a patent license extend beyond the life of a patent?

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In Kimble v. Marvel Entertainment, Inc., the Supreme Court decided to let stand its 1964 ruling that royalty payments for a patent after it expires are invalid.

Stephen Kimble (the Petitioner) obtained U.S. Patent No. 5,072,856 in 1990 on a patent for a toy that allows a user to pretend to be a spider or a “spider person” by shooting a spider web “from the palm of [the] hand.” After receiving his patent, Kimble approached Marvel to sell or license his patent. Marvel did not purchase or license his patent, but did start selling its Spider-Man “Web Blaster” toy. Kimble then sued Marvel for patent infringement.

Kimble and Marvel settled the patent infringement lawsuit, with Marvel agreeing to purchase Kimble’s patent in exchange for a lump sum payment of about a half-million dollars and a 3 percent royalty on Marvel’s future sales of the Web Blaster and similar products. The agreement did not have an end date and both parties admitted that they were unaware of the Supreme Court law that precludes post-expiration royalty payments. After the relationship soured, Marvel sought a declaratory judgment in federal court that it would no longer be bound by the agreement once the patent expired. The court agreed with Marvel that it was not obligated to make royalty payments upon expiration of the patent. The Ninth Circuit affirmed, and the Supreme Court agreed to hear the case.

Justice Kagan, writing for the majority, applied stare decisis (“the idea that today’s Court should stand by yesterday’s decisions”) to keep in place a decision that has been highly criticized by economists and legal scholars. The Court reasoned that “Kimble’s real complaint may go to the merits of that principle as a policy matter. But Congress, not this Court, gets to make patent policy.”

In the wake of this decision, it is a good time for parties, particularly licensees, to review their license agreements to analyze when patent royalty payments should end.

It is also an opportunity to consider licensing options going forward. Both the Supreme Court and the Ninth Circuit noted that parties are free to contract around this rule so that licensing agreements effectively extend beyond the expiration date of a patent. The Supreme Court identified at least three examples on how to circumvent this rule: 
  1. A licensee could agree to pay the licensor a sum equal to percentage of sales during the 20-year patent term, but to amortize that amount over a longer period of time. 
  2. Post-expiration royalties are allowable so long as tied to a non-patent right, even when closely related to a patent. For example, a license involving both a patent and a trade secret can set a 5 percent royalty during the patent period (as compensation for the two combined) and a 4 percent royalty afterward (as payment for the trade secret alone). 
  3. The parties can agree to business arrangements other than royalties – such as joint ventures.

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