Hybrid Licensing Agreement Unenforceable Beyond the Patent Expiration Date

This case highlights the importance of separating license grants by the type of intellectual property (IP) right granted and clearly identifying the royalty rates and rights associated with a particular type of IP.  In other words, trademark, copyright and patent rights should be granted in separate sections of an agreement and the rights and obligations associated with each should be clearly identified.  Otherwise, the copyright and trademark rights, which could continue indefinitely or at least extend beyond our lifetimes, will end when the patent expires.  In most instances, patents expire twenty years from the date of the patent application.

In Kimble v. Marvel Enterprises, Inc., the Ninth Circuit recently applied the U.S. Supreme Court’s ruling in Brulotte v. Thys Co., to hold that because the patent royalties in the agreement between Kimble and Marvel were not separated from the non-patent royalties, Marvel’s obligation to pay royalties under the agreement ended when Kimble’s patent expired on May 25, 2010.  Brulotte held that “a patent licensing agreement requiring a licensee to make royalty payments beyond the expiration date of the underlying patent was unenforceable because it represented an improper attempt to extend the patent monopoly.”  (Opinion pdf page 3).  Brulotte has been widely criticized as depriving the patent holder of the benefit of her bargain by preventing her from agreeing to receive a lower rate of royalties over a longer period of time, instead of a higher rate of royalties over a shorter period of time.  In Kimble v. Marvel, the Ninth Circuit felt compelled to apply Brulotte, even though it considers the reasoning in that case to be flawed.

Stephen Kimble received a patent for a Spider-Man toy in which the user could shoot foam string from the palm of her hand, mimicking Spider-Man’s web-shooting abilities.  While the patent application was pending, Kimble met with Marvel representatives to discuss Kimble’s patent application and his other ideas and know-how.  According to Kimble, Marvel representatives verbally agreed to compensate Kimble if Marvel used any of Kimble’s ideas.  Marvel later told Kimble it wasn’t interested in using Kimble’s ideas, but then manufactured a similar web-shooting Spider-Man toy called the “Web Blaster.”

Kimble sued Marvel for patent infringement and breach of contract for violating the verbal agreement.  The district court granted Marvel’s motion for summary judgment on Kimble’s patent infringement claim.  The case went to trial on the breach of contract claim and the jury found in Kimble’s favor.  Both sides appealed.  The parties agreed to settle the case while the appeals were pending.  Marvel agreed to pay Kimble a lump sum and royalties.  After a few years, disputes over the calculation of royalty payments broke out.  Kimble sued Marvel for breach of contract on the settlement agreement.  Marvel counterclaimed, requesting a declaration that because the patent was expired, Marvel was no longer obligated to pay royalties under the settlement agreement.  The district court agreed with Marvel and ruled that Marvel was no longer obligated to pay the royalties agreed to in the settlement agreement.

The Ninth Circuit affirmed the district court’s ruling. 

We join our sister circuits in holding that a so-called “hybrid” licensing agreement encompassing inseparable patent and non-patent rights is unenforceable beyond the expiration date of the underlying patent, unless the agreement provides a discounted rate for the non-patent rights or some other clear indication that the royalty at issue was in no way subject to patent leverage.

(Opinion pdf page 3).

The patent owner cannot use the leverage of the patent beyond the time the patent expires.  When a patent is not granted by the USPTO, the inventor can claim royalty payments indefinitely.  When a patent is not granted, the royalty was not negotiated with the leverage of a patent.  The Ninth Circuit found that the parties’ settlement agreement did not create a distinct royalty for non-patent rights, so that the obligation to pay all royalties ended when the patent expired.

The patent leverage in this case was vastly overshadowed by what were likely non-patent rights, and Kimble may have been able to obtain a higher royalty rate had the parties understood that the royalty payments would stop when the patent expired. Nonetheless, Brulotte and its progeny are controlling. We are bound to follow Brulotte and cannot deny that it applies here. Accordingly, the district court’s judgment is AFFIRMED.

(Opinion pdf page 23).

In a separate, but related case, the Ninth Circuit ruled that Kimble could pursue his breach of contract claim against Marvel on the theory that “much like a quantum meruit plaintiff, Kimble is essentially asking to be placed in the position that he would have occupied had the Settlement Agreement never been made.  Like the Seventh Circuit, we do not read Brulotte to preclude such a claim.”  (Opinion pdf page 23).  Quantum meruit provides a recovery to the plaintiff for the unjust enrichment of the defendant.

This case is Kimble v. Marvel Enterprises, Inc., No. 11-15605, Ninth Circuit Court of Appeals.

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