Ninth Circuit Holds Royalty Payments Unenforceable Beyond Expiration of Underlying Patent

In the interest of maintaining national uniformity on patent law, the U.S. Court of Appeals for the Ninth Circuit ruled July 16, 2013 that royalty payments to an inventor are no longer due upon expiration of the underlying patent.

Kimble v. Marvel Enterprises Inc., 9th Cir., No. 11-15605, is a dispute arising out of the Marvel Enterprises (Marvel) Web Blaster, a Spider-Man toy which allows users to shoot foam string from a can mounted on the user’s wrist.  In 1990, Stephen Kimble invented a toy with similar functionality and patented the idea.  Thereafter, Kimble met with Marvel to discuss the idea and Marvel rejected his offer of a technology license but agreed to compensate him if they used the idea.  Marvel then began to manufacture the Web Blaster toy without compensating Kimble.  In 1997, Kimble sued Marvel for patent infringement and contract breach, and the parties eventually settled the claims with an agreement paying Kimble $500,000 for the patent and a 3 percent royalty on net product sales of the Web Blaster toy.  Marvel paid Kimble more than $6 million in royalties altogether under the agreement.  Later disputes regarding payments, however, led Kimble to file suit for contract breach, with Marvel counterclaiming seeking a declaration that it is no longer obligated to pay Kimble under the agreement for products sold after expiration of the patent.  The lower court ruled for Marvel, finding that the settlement agreement was a “hybrid” because it transferred both patent and non-patent rights, and thus the royalties had to end when the patent expired.

The Ninth Circuit affirmed the lower court’s ruling, citing the U.S. Supreme Court decision in Brulette v. Thys Co., 379 U.S. 29 (1964).  The Court in Brulette found that hybrid licensing agreements enforced beyond the expiration date of the patent improperly extend the lifetime of patents, unless the agreement provides for a discounted royalty rate after the expiration date or is otherwise clear that the royalty rate was not driven by the patent rights.  The hybrid licensing agreement here contained no reduced royalty rate and was not clearly unaffected by the patent rights.  Thus, although the Ninth Circuit expressed frustration with the rationale in Brulette, it held for Marvel that the royalties following expiration of the patent are unenforceable.

The Ninth Circuit’s decision to maintain national uniformity on this patent issue has significant implications for those drafting licensing agreements containing patent rights.  In order to avoid these types of disputes, hybrid licensing agreements should clearly delineate when the patent rights expire, the basis for the royalty rate and the relationship between the two.