Supreme Court: A Web of Post-Issuance Licensing Restrictions

by Dennis Crouch

Last year I wrote about the patent licensing decision captioned Kimble v. Marvel Enterprises Inc. (9th Circuit 2013)Kimble involved a patent license agreement tied to Marvel’s web-shooter toy sales. On its face, the agreement appears to remain in force so long as Marvel sold the toys.  However, the 9th Circuit held that the license ended once the patent term lapsed.  The 9th Circuit decision was easy because there is a Supreme Court case on point: Brulotte v. Thys Co., 379 U.S. 29 (1964) (licensing agreement unenforceable because it required royalty payments beyond the expiration date of the underlying patent).

Kimble has now pushed the case to the Supreme Court and presents a straightforward petition:

The question presented is: Whether this Court should overrule Brulotte v. Thys Co., 379 U.S. 29 (1964).

SCOTUS-Blog Link.

The basic argument is that the Brulotte improperly imposes a per se limit on contract structure and forces any royalty payments to be amortized only within the term of the patent.  Often, that result does not make business sense. Kimble suggests that the court do-away with the per se rule and replace it with a rule of reason as it has done in other cases – most notably in the area of patent-tying.  See Illinois Tool Works v. Independent Ink, 547 U.S. 28 (2006).

The petition also characterizes Brulotte as “the most widely criticized of [the Supreme] 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, and to replace its rigid per se prohibition on post-expiration patent royalties with a contextualized rule of reason analysis.

The Supreme Court requested that the Solicitor General file the views of the US Government and those have just been filed – with a somewhat surprising recommendation against a grant of certiorari.  The SG’s position is that stare decisis should prevail. Hal Wegner writes about the case in his review of top pending patent cases: See Wegner’s Top Ten.

Unduly Extending Patent Term: An important element of the analysis here is whether overturning Brulotte would somehow allows the patentee to extend its patent term and thereby prevent the public from taking advantage of the invention.  Kimble argues “no” — all that the longterm license agreement did was amortize the license value over the life of the product rather than the life of the patent.  Certainly, once the patent expires then no-one can be liable for infringement and any generic (or branded) company can make, use, and sell the invention as it wishes. However, if we look at this case in particular, all of the products on the market using the patented invention are Kimble-licensed products — even though the patent has been expired now for years.  This suggests to me that the post-expiry-license is having a market impact that is reducing the potential customer surplus.  I suspect that in most situations, the most likely post-patent-expiry suppliers of a product are the companies who were supplying that product pre-patent-expiry.  If those entities are required to continue to pay license post-patent-expiry then consumers may never see the benefits typically associated with patent expirations.

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One factor pushing toward grant of certiorari is the underlying subject-matter.  The patent at issue covers a nifty web-shooting toy designed to mimic (in toy form) spider-man’s super powers. See U.S. Patent No. 5,072,856.


27 thoughts on “Supreme Court: A Web of Post-Issuance Licensing Restrictions

  1. 9

    BTW, the use of such “running royalties” patent license agreements has considerably declined ever since it became possible for the licensee to challenge the patent’s validity any time during the license term with a reexamination. The first, ex parte, reexaminations could even be done anonymously. Furthermore since then we have even more post-grant validity challenge opportunites, and even judicially created opportunities for D.J. suits.
    On the other hand, the Brulotte royalty term restriction can be carefully partially avoided in some cases by a license agreement that includes more than just patents, such as trade secrets, know-how assistance, tooling, turn-key plant transfers and/or trademarks.

    1. 9.1

      BTW2, this reduced opportunity for a “running royalty” patent license to survive for the full term of the patent is not necessarily a good thing economically. Running royalties can make economic sense for both parties in a patent license for a new product. Often there is a high cost and risk for the licensee to bring a fully developed product using the invention to market, and to [unpredictably] succeed in the market. Thus a licensee may not be willing to also have to make a big up-front license payment to the patent owner. Likewise a licensor [especially a private inventor who naturally thinks the patented product is going to sell like hotcakes] can contract to get much more in royalties for the patent, if the product actually does later greatly succeed, with a running royalty.

    2. 9.2

      Paul, you make a very good point about the collateral damage caused by the demise of licensee estoppel. All that doctrine has done is put a monkey wrench into the freedom to bargain — and for no good purpose.

      I would actually favor a statutory overrule here.

      1. 9.2.1

        To feed on Ned’s point, the issue here is far less a patent issue and far more a freedom to contract issue.

        People commit to obtaining goods at prices regardless of patent coverage (the goods can be supplied by whomever). Just because a patent expires is no reason to shred a perfectly valid contract that two parties willingly entered into.

        The licensee is perfectly able to say no to ANY contract offer by any patentee.


          To feed on Ned’s point, the issue here is far less a patent issue and far more a freedom to contract issue.

          There’s anti-competitionissues as well. Patent issues, freedom to contract issues, and anti-competition issues.

          Just because a patent expires is no reason to shred a perfectly valid contract that two parties willingly entered into.

          Depends on the contract. As far as I can tell, it’s entirely possible to draft a contract relating to a patent, where the contract remains valid after the patent expires. The question is: does the contract raise any anticompetition concerns (e.g., is the patent term effectively and improperly extended)?


            Good points – I agree with you completely and would only add that existing law already covers such problematic contracts.

  2. 8

    They’d be opening a can of worms by overruling Brulotte. The government is right.

    If they’re really concerned about the amortization period the licensee can go to a bank and get a loan with a longer term than the patent.

    But it’s not really about the amortization period, which is convenient a cover. It’s about opening the door for effective extensions of term.

    The anti-patent crazies who dwell (rather just than stop by) in this basement are mostly just crazy, but, like broken clocks, they do have a point every once in a while. This is one of those times.

  3. 7

    One of my first cases out of law school involved a royalty agreement whereby a company I represented agreed to pay an inventor a certain royalty for “use” of the invention, in exchange for an assignment of the patent and all improvement patents. The royalty base was for the use of a defined set of products/services, and there was no term.

    In court I argued Brulotte v. Thys. I also demonstrated the economic impact to consumers caused by the royalties that had continued well after the expiration of the basic patent.

    The problem I had was that my client was the sole user of the invention, and therefore was a monopoly. The other side argued that the courts not listen to a monopolist on antitrust violations by an individual inventor. And that is what the court did, dismissing the case.

    1. 7.1

      People who discount Brullotte should consider how they would feel if, for example, Bell and his family trust, would received royalties on every telephone installation by AT&T forever in exchange for the transfer to the company of his patent rights. Recall, at one time, until broken up, AT&T was a monopoly.

      True, AT&T would not be the company it now is without Bell and his patent. But does that justify a royalty forever?

      1. 7.1.1

        It seems to me it would be pretty easy to step around any overruling of Brulotte. Once the patent expired, the licensee could just form some sort of shell company to sell the product. The product is no longer infringing because the patent expired, and the shell company is not bound by the license.


            Well then, let me assert that economics will nullify any effect of overruling Brulotte. The license’s value is reduced upfront on any license that imposes restrictions only on the licensee once the patent expires.


              Michael, you are making assumptions.

              In the case the patent helps create a monopoly that is sustainable for the long term, like AT&T, the long term royalty can effectively extend patent term.

  4. 6

    As the Ninth Circus points out, the agreement defined “net product sales” as follows:

    “net product sales” shall be deemed to include product sales that would infringe the Patent but for the purchase and sale thereof pursuant to this Agreement as well as sales of the Web Blaster product that was the subject of the Action and to which the Judgment refers.

    Once the patent expired, the product sales would not infringe the patent. And the judgment necessarily only refers to infringing products, not noninfringing ones. So it doesn’t look like the court even has to rely on Brulotte, because there are no products remaining to incur royalties under this definition of “net product sales”.

    The amortization argument, by the way, is laughable. Suppose Marvel unexpectedly sells ten times the number of web-slinging gadgets for several years after the expiration of the patent than what they sold before the patent expired. How could it possibly be reasonable to say that those unexpected sales were contemplated during the drafting of the agreement and therefore extending the payments to cover those sales represents an amortization of the royalties owed during the patent term over a longer period of time?

    1. 6.1

      Dennis: The Supreme Court requested that the Solicitor General file the views of the US Government and those have just been filed – with a somewhat surprising recommendation against a grant of certiorari. The SG’s position is that stare decisis should prevail.

      What’s “surprising” about this recommendation?

      Seems to me that the 9th Circuit got it right here. When the patent expires, the license based on the patent also expires.

      If the parties want to enter into some other agreement that doesn’t involve the patent, they are certain welcome to do that (being mindful of the usual antitrust considerations). It doesn’t seem like a terrifically difficult hurdle for a contract attorney to surmount.


          I remember reading Brulotte in law school and thinking that it was very badly reasoned. There’s also some force to the argument that Kimble had the rug pulled out from under him at the CA9, as neither he nor Marvel was aware of Brulotte when they signed the contract (at least that’s what I think I recall reading).

          The only thing that really surprised me about the cert opp. was that it went to any significant effort to defend Brulotte’s reasoning. Beyond that, the recommended denial didn’t surprise me much. Marvel’s cert opp makes a very convincing case against cert. — Brulotte has been the rule for 50 years; it’s not as bad or rigid as Kimble says it is; Congress can easily overrule it if it wants to.
          link to

          Also, Hal Wegner’s e-mails have suggested (aptly, I think) that it’s questionable whether Brulotte is worth the Court’s time. Right or wrong, it doesn’t seem to affect a lot of cases.

  5. 5

    This is a really interesting question, actually. Sometimes the logic and fairness of both sides can offset… then it becomes almost a choice of fashion.

    What’s the point of a patent term if licensees can be effectively denied its effect at the front-end in order to use the technology at all?

    Yet how can the government arbitrarily not allow two free parties to enter into a contract? Are the parties equally bargaining at the front end?

    Isn’t this easily avoided anyway by creating a new shell corp after the patent expires and setting up business like any other free competitor?

    Maybe patent licenses should be registered by the government like securities, titles, or mortgages?

    1. 5.1

      martin axes “What’s the point of a patent term if licensees can be effectively denied its effect at the front-end in order to use the technology at all? ”

      The licensee can be denied its effect, because he promise to let himself be denied its effect. The rest of the world is free to make and use then now-public-domain invention, so there is not restraint on competition.

  6. 4

    Once upon a time:

    Patentee/Licensor: I offer not to sue you for infringement and will let you sell infringing articles over the next 10 years (till expiry) in CONSIDERATION for your paying me a fee based on x, y, z, over a longer term.

    Licensee: Sure, that sounds reasonable. I PROMISE to pay you the fee based on x, y, z, over a longer term, in EXCHANGE for your not suing me and letting me make and sell articles. We have a deal. (wink wink)….

    (10 years later)

    Licensee: OK Patentee, now that the patent term is over, now that I have RECEIVED your consideration IN FULL, and you CAN no longer sue me for infringement or stop me from selling… I decide I don’t like what I had PROMISED in EXCHANGE for your consideration (paid in full), let’s see if I can breach our contract and appeal to the sentiments of Gov’t to get me off the hook.

    Hey Govt… blah blah blah, “consumer” blah blah blah, “public”, blah blah blah, “unconscionable”, blah “rents” blah “social justice” blah “corporationny”…(wait a minute I’m a BIG corporation…) blah “effective extension of patent term”

    Govt: We have heard both sides. Although this is a contract, an agreement voluntarily signed between traders, we have decided… …. …

    (to be cont.)

  7. 3

    Consequences questions?:
    Is a licensee that belatedly discovers the licenced patent is invalid going to still be able to use reexamination or IPR, even though the patents period of enforcability ended six years after the patent term expired and even then was only for back damages [unpaid royalties from before the patent expired]?

    If the only hold on the licensee for the expired patent is contractual, must all disuputes over an extended royalty term for expired patents be in a state court?

  8. 2

    Is anyone else in agreement that telling SCOTUS that “virtually every[one]” disagrees with SCOTUS is an inconvenient method of convincing any court that their past decisions are wrong? My main hangup with this argument is the tone, but, also, adjectives smack of a lack of proof to me. If they are so sure of their opinion then let res ipsa loquitur.

    1. 2.1

      I would think it depends more on whether or not they can cite accepted articles from academics that the Court respects? {Whether not based on anyones actual experiences.}
      But the J.D. might weigh in on this issue?

    1. 1.1

      I agree. The SCOTUS is doing the bidder of their masters-big corps that don’t want patents, but for them. It is going to be like anti-trust law. There is barely any left of it and what is left is either giant stones that the SCOTUS can’t remove (per se price setting) or parts that serve to give lip service to anti-trust for the public.

      My prediction–that is what patents are headed for. Just look at anti-trust law from 1950-1990.

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