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Royalties End When Patent Expires Though Noninfringement Judgment Led to Agreement

Wednesday, July 17, 2013

By Tony Dutra  

 

Royalty payments to an inventor of a Spider-Man role-playing toy were no longer due after the expiration of the underlying patent, the U.S. Court of Appeals for the Ninth Circuit ruled July 16 (Kimble v. Marvel Enterprises Inc., 9th Cir., No. 11-15605, 7/16/13).

The court affirmed a lower court's judgment in favor of Marvel Enterprises Inc., the parent of the publisher of Spider-Man comic books, which had signed an agreement to pay royalties in settlement of a case where summary judgment of noninfringement had been granted.

Much as it had done six years earlier, the court criticized the U.S. Supreme Court's controlling ruling in Brulotte v. Thys Co. that worked against the patent holder here, but ultimately the court concluded that it was “bound by … the strong interest in maintaining national uniformity on patent law issues.”

Marvel Pays Royalties on Web Blaster Toy

Stephen Kimble was granted a patent (U.S. Patent No. 5,072,856) on a Spider-Man toy simulating release of a spider web by shooting a foam string from a can mounted on one's wrist.

Marvel rejected Kimble's offer of a technology license in 1990 and instead introduced its own Web Blaster toy with similar functionality.

Kimble sued Marvel for patent infringement and contract breach in 2001. Kimble was appealing a lower court's summary judgment of noninfringement and Marvel was appealing a verdict against it on the contract claim when the parties agreed to settle.

Under the settlement agreement, Marvel paid over $500,000 to purchase the '856 patent and further agreed to a 3 percent royalty on “net product sales” of the Web Blaster, with no end date specified. The relevant sales were further defined as “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.”

However, after further disputes between the parties related to payments, Kimble filed a contract breach action that ended up in the U.S. District Court for the District of Arizona, with a counterclaim by Marvel that it was not required to make payments after the expiration of the patent in May 2010.

Judge David C. Bury agreed with Marvel, determining that the settlement agreement was a “hybrid”--transferring inseparable patent and non-patent rights. Kimble appealed.

Patent Leverage in Agreement Creates End Date

Judge Consuelo M. Callahan first quoted from Brulotte v. Thys Co., 379 U.S. 29, 32, 143 U.S.P.Q. 264 (U.S. 1964), that “a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.”

In contrast, the court said, Aronson v. Quick Point Pencil Co., 440 U.S. 257, 201 U.S.P.Q. 1 (1979), determined that royalty payments should proceed indefinitely when the agreement was reached while a patent application was pending but no patent was ever issued.

The court said that sister circuit courts reconciled the two cases by pointing to the different royalty rates at issue in the Aronson agreement, with a lower rate to be paid if the patent was not granted.

A different panel of the Ninth Circuit criticized the “overread[ing] of the two cases” in 2007 in Zila Inc. v. Tinnell, 502 F.3d 1014, 84 U.S.P.Q.2d 1090 (9th Cir. 2007). But the Zila court “reluctantly followed the other circuits' 'consensus,' ” according to the instant panel. “We are compelled to do so again.”

The court thus agreed with its sister courts 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,” but it added the possibility that the party seeking payment could give “some other clear indication that the royalty at issue was in no way subject to patent leverage.”

Agreement Here No Exception

Each of Kimble's arguments failed to convince the court that an exception applied in this case.

Kimble noted that the lower court's noninfringement finding provided the backdrop for the settlement agreement, and both parties agreed on appeal now that the Web Blaster did not infringe the '856 patent. However, the appeals court said, only one royalty rate was included in the settlement agreement, and the definition of “net product sales” clearly covered patent rights.

“If there were two distinct royalties at issue, the parties could have easily specified as much,” the court said. “Their failure to do so is dispositive.” And there was no evidence here of “some other clear indication” of no patent leverage underlying the royalty, the court said.

Notably, the court said, Kimble was appealing the noninfringement judgment and “likely derived some amount of leverage from his patent infringement appeal. … Thus, the patent rights and non-patent rights were intertwined and Brulotte's presumption must apply.”

More Brulotte Criticism in Closing

The court closed by quoting at length a passage from the Seventh Circuit's opinion that ended with the statement, “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.” Scheiber v. Dolby Laboratories Inc., 293 F.3d 1014, 1017, 63 U.S.P.Q.2d 1404 (7th Cir. 2002).

“The Seventh Circuit's criticism is particularly apt in this case,” the court said. “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.”

But because it was bound to follow Brulotte, the court affirmed the district court's judgment.

Judges Diarmuid F. O'Scannlain and Sidney R. Thomas joined the opinion.

Antonio R. Durando of Tucson, Ariz., argued on behalf of Kimble. David Fleischer of Haynes and Boone, New York, represented Marvel.

 


Text is available at http://www.bloomberglaw.com/public/document/Stephen_Kimble_et_al_v_Marvel_Enterprises_Inc_Docket_No_1115605_9.

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