Contract Enforceability Beyond Patent TermJuly 23, 2013

InKimble v. Marvel Enterprises, the plaintiff patent owner appealed the United States District Court for the District of Arizona's decision to not extend royalty payments beyond the life of a licensed patent. The United States Court of Appeals for the Ninth Circuit affirmed the lower court's decision.

In December 1990, Kimble met with an officer Marvel to discuss licensing his patent for a device that allowed a user to sling web like Spider-Man. Marvel initially decided not to license the patent, but instead chose to manufacture an infringing product. Kimble subsequently filed a patent infringement suit against Marvel and won a reasonable royalty of 3.5 percent. Both parties appealed this verdict, but during the appeals process the two sides decided to settle the case, agreeing that Marvel would pay Kimble "3% of "net product sales",[which] include product sales that would infringe the Patent… [as well as] sales of the Web Blaster product that was the subject of the [initial] action." The agreement between the two parties had no expiration date and did not include any specific time limit on Marvel's obligation to pay the royalty fee.

In 2006, Marvel entered into a licensing agreement with another company that would create products that infringed the patent in the initial suit. Kimble filed another suit against Marvel, but this time for breach of contract and related claims, contending he was owed a reasonably royalty for the infringing products. Marvel counter sued taking the position that they were not obligated to pay any royalties because the patent had expired. The District Court granted Marvel’s motion for summary judgment, concluding that the settlement agreement between the parties was a “hybrid” and that the royalties had to end when the patent expired. Kimble appealed the decision to the United States Court of Appeals for the Ninth Circuit.

In deciding the case, the Ninth Circuit focused primarily upon two Supreme Court cases: Brulotte v. Thys Co. and Aronson v. Quick Point Pencil Co., with Brulottei bearing a strong factual similarity to the present case. In Brulottei, a patent owner licensed his patent to a company, but the license was extended beyond the life of the patent. The company eventually stopped paying royalties and the licensor brought suit to collect the unpaid portion. The Supreme Court held that "a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se." The Supreme Court reasoned that a patent is the legal right to exclude. That right has a finite term, and "[a]fter the relevant period expires… 'these rights become public property.'" Any attempt to extend the right to exclude would "run[] counter to the policy and purpose of the patent laws."

The Supreme Court in Aronson decided that "patent law did not preclude the enforcement of an agreement to provide royalty payments indefinitely where no patent had issued." In Aronson, the petitioner licensed his product to a company. In the agreement there was a contingency clause that stated if the petitioners patent did not issue, the company would pay a reduced royalty rather than the higher rate had the patent issued. Because of the contingency, the Supreme Court concluded that "patent law was not a 'barrier' to the contract" in the case.

In the case at hand, Ninth Circuit explained "the rule that follows . . . is that a license for inseparable patent and non-patent rights involving royalty payments that extends beyond a patent term is unenforceable for the post-expiration period unless the agreement provides a discount for the non-patent rights from the patent-protected rate." The agreement between Kimble and Marvel had "one royalty rate for both patent and Web Blaster rights, with no discount or other clear indication that the Web Blaster royalties were not subject to patent leverage." The agreement contemplated "one royalty for patents" and other non-patent rights and was thus invalid per se. As a result, the Ninth Circuit affirmed the district court's judgment.

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