Kimble subsequently sued Marvel alleging breach of the settlement agreement. In defense, Marvel argued that, under the rule of Brulotte v. Thys Co., 379 U.S. 29 (1964), Kimble could not recover royalties beyond the date of expiration of the patent. Although acknowledging that Brulotte is "frequently-criticized" (727 F.3d at 857), the Ninth Circuit agreed with Marvel, "because Brulotte and its progeny are controlling" and "[w]e are bound to follow Brulotte." Id. at 866-67.
Kimble has petitioned for certiorari, raising as the question presented "[w]hether this Court should overrule Brulotte v. Thys Co., 379 U.S. 29 (1964)." The petition for certiorari calls Brulotte "the most widely criticized of this Court's intellectual property and competition law decisions. Three panels of the courts of appeals (including the panel below), the Justice Department, the Federal Trade Commission, and virtually every treatise and article in the field have called on this Court to reconsider Brulotte …."
In Brulotte, the patent owner had licensed use of a patented hop-picking machine for a lump sum and a running royalty to be paid based on use of the machine "each hop-picking season" in perpetuity, even after the patent expired. 379 U.S. at 29-30. The Court, held that "a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se." Id. at 32. While a patent "empowers the owner to exact royalties as high as he can negotiate with the leverage of that monopoly." It is improper, according to the Court, "to use that leverage to project these royalty payments beyond the life of the patent." Id. at 33. It is "an assertion of monopoly power in the post-expiration period when . . . the patent has entered the public domain." Id.
The flaw in this reasoning is easy to spot. As explained by Judge Posner in Scheiber v. Dolby Laboratories, 293 F.3d 1014 (7th Cir. 2002) (while noting that "we have no authority to overrule a Supreme Court decision no matter how dubious its reasoning strikes us" (id. at 1018), there is no such thing as post-expiration patent leverage. Any leverage used to "extract" an obligation to pay post-expiration royalties is due solely to a current threat of a patent infringement lawsuit, at a time when the patent has not yet expired:
"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 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 longer period of time….
'When the patent term ends, the exclusive right to make, use or sell the licensed invention also ends. Because the invention is available to the world, the license in fact ceases to have value. Presumably, licensees know this when they enter into a licensing agreement. If the licensing agreement calls for royalty payments beyond the patent term, the parties base those payments on the licensees' assessment of the value of the license during the patent period.'" Id. at 1017-18 (emphasis added; citation omitted).
Although never overruled, the scope of the rule in Brulotte has been narrowed. Only a few years after Brulotte, the court limited its prohibition on post-expiration royalties in Zenith Radio Corp. v. Hazeltine Research, 395 U.S. 100, 136 (1969), in which the Court found nothing unlawful in a license that extended royalty payments beyond the expiration date, if the payments were expressly based on pre-expiration use. Under Zenith, amortizing all or part of a lump-sum payment due for a license over a period of years that exceeds the term of the patent should not violate the Brulotte rule, even though conceptually the patent owner's use of the leverage created by his patent monopoly in that situation is no different than what occurred in Brulotte.
Other exceptions further undermine the rationale of Brulotte and emphasize its artificiality. It is common practice to license patents in a package or a bundle, with a single royalty rate applying to licensed sales, even though the patents in the bundle may have different expiration dates, and even though the rate doesn't diminish as each of the patents expires. Courts have generally found that practice to be acceptable under Brulotte. Hull v. Brunswick Corp., 704 F.2d 1195, 1202-03 (10th Cir. 1983); Hearing Components, Inc. v. Shure, Inc., 9:07-cv-104, 2009 U.S. Dist. LEXIS 25050, *28 (E.D. Tex. 2009). Brulotte itself distinguished an earlier Supreme Court case upholding a license agreement on the ground that "[w]hile some of the patents under that license apparently had expired, the royalties claimed were not for a period when all of them had expired." 379 U.S. at 33.
Courts also recognize an exception to Brulotte for "hybrid" agreements, allowing royalty payments to continue post-expiration where a license conveys both patent and non-patent rights, such as trade secrets. Kimble, 727 F.3d at 862. The plaintiff in Kimble argued that the license with Marvel fell under the latter exception. The Ninth Circuit, though, rejected the argument, because the patent and non-patent rights were subject under the agreement to the same royalty rate, with no discount for the patent rights, indicating that "patent leverage" played a part in negotiation of the royalty. Id. at 864-65.
So will the Supreme Court grant certiorari in Kimble? Defendant Marvel Enterprises filed a waiver of its right to oppose the petition, but the court requested a response one day after the petition was distributed for conference. The deadline for the response has been extended three times (currently it is April 23, 2014). Three amici briefs, representing academics (the Center for Intellectual Property Research of the Indiana University Maurer School of Law, and others); patent practitioners (the Intellectual Property Law Association of Chicago); and research centers (Memorial Sloan Kettering Cancer Center, and others), have been filed, all urging that certiorari be granted and that Brulotte be overruled.
Although nothing is certain where the grant of certiorari is concerned, given the opportunity provided by Kimble v. Marvel, and the seemingly unanimous dislike of the case, there is a good chance that, on the eve of its 50th anniversary, Brulotte is nearing its expiration date. As Spider-Man's creator Stan Lee would say, "Excelsior!"
