In Kimble v. Marvel Entertainment, LLC, just handed down June 22, 2015, the Supreme Court reaffirmed the 50 year old holding of Brulotte v. Thys Co., 379 U. S. 29 (1964), that patent royalties cannot extend beyond the expiration of the patent. So why is this case being discussed in a blog directed to trade secrets? Because the Court also reiterated that post-expiration royalties are allowable so long as they are tied to a non-patent right; and typically one of the most readily available such rights are trade secrets that almost invariably reside with the technology being licensed (or sold for that matter).
But first, back to the Kimble story, just for fun (and the Supreme Court did have some fun with this story).
Kimble developed a toy that would shoot “webs” (actually pressurized foam string from the palm of the hand). Naturally, he goes to Marvel Entertainment, home to Spider-Man. Marvel then comes out with its “Web Blaster”, for “web-slinging fun”; but without paying Kimble. Kimble puts a spider-bite on Marvel and the resulting lawsuit produces a settlement under which Marvel bought the patent, paying a lump sum and a 3% royalty going forward–except the royalty provision has no expiration date.
Amazingly, both parties later professed that they knew not of the seminal Brulotte case when they entered into the agreement. But Marvel ultimately “stumbled across” it, and thus ensued a DJ action that Marvel could cease paying upon conclusion of the patent’s story-arc. The case found its way to the Ninth Circuit, which while acknowledging extensive criticism of Brulotte over the years, concluded that its holding must reluctantly be followed. The Supreme Court then webbed-up the case on certiorari, to decide whether Brulotte should now be overruled.
Writing for the majority, Justice Kagan said stare decisis had to prevail, notwithstanding that the Court may now believe that the prior decision was incorrect: “we require as well what we have termed a ‘special justification–over and above the belief ‘that the precedent was wrongly decided.’” And since this case lies at the intersection of patent and contract, overturning Brulotte could “upset expectations” of agreements entered into. “As against this superpowered form of stare decisis, we would need a superspecial justification to warrant reversing Brulotte.” (The dissent noted that no such “super-duper protection” for that decision existed). Good alone would not trump evil in this situation. “Stare decisis means sticking to some wrong decisions.”
All said and done, the Supreme Court concluded that plainly Congress wasn’t stirred to change the law over the last five decades. Justice Kagan stated the law “is simplicity itself to apply. A court need only ask whether a licensing agreement provides royalties for post-expiration use of a patent. If not, no problem; if so, no dice.” No dice, because the patent monopoly would thereby extend beyond the life of the patent, violating an essence of the patent grant, which places the invention in the public domain upon expiration, regardless of who you are (even a licensee). “Patents endow the holder with certain super powers, but only for a limited time.” Thus, it was up to Congress to do something, not the Supreme Court. “What we can decide, we can undecide. But stare decisis teaches that we should exercise that authority sparingly. Cf. S. Lee and S. Ditko, Amazing Fantasy No. 15: “Spider-Man,” p. 13 (1962) ([I]n this world, with great power there must also come—great responsibility)”. Therefore unlike Spider-Man, this Justice league would not be coming to the rescue.
So back to trade secrets. There are ways around Brulotte. One is that a licensee and licensor could agree to defer payments for pre-expiration use to a post-expiration period; of course, that could still not be keyed to anything smacking of ongoing “royalties.” Easier is the situation where there are trade secrets involved in the transaction, and know-how, show-how and who-doesn’t-know-what-how is so very often part of the deal. The so-called hybrid license. As Justice Kagan put it, “[t]hat means, for example, that a license involving both a patent and a trade secret can set a 5% royalty during the patent period (as compensation for the two combined) and a 4% royalty afterward (as payment for the trade secret alone).”
Frankly, that is a bit too much of a simplistic example, as the allocation between patent and trade secrets has implications, such as the impact on other just pure patent royalty deals to be had and valuation of the patent rights, just to name two. Further, savvy licensees are not likely to accept a deal that leaves the trade secret part of the arrangement running forever. But it can happen.
The point remains, however, that once you can toss something more into the license or sale of the invention rights beyond the patent, like trade secret transfer, then you can “do whatever a spider can” with royalty expiry.