The U.S. Supreme Court’s decision Monday to leave intact a 50-year-old rule barring royalty agreements that continue after a patent expires means that companies interested in striking long-running licensing deals will have to find creative ways to structure them to get around the rule, attorneys say.
In a 6-3 decision in a case involving an expired Spider-Man toy patent, the justices ruled that they were bound by stare decisis not to overturn the ban, which was established in 1964 in Brulotte v. Thys Co.
Justice Elena Kagan wrote for the majority that inventor Stephen Kimble, who challenged the rule in a dispute with Spider-Man rights holder Marvel Enterprises Inc., had not shown a compelling reason to end the ban. However, she noted that “parties can often find ways around Brulotte,” allowing them to achieve the same goal of crafting licenses that last longer than the patent.
Those techniques, including spreading payments over a longer period of time or licensing other intellectual property along with a patent, have been used for years but will now be front and center in licensing negotiations, attorneys say.
Since trade secrets and trademarks do not expire like patents do, agreements that include those types of intellectual property with a “step down” in the royalty rate after the patent expires have long been a popular way to deal with Brulotte.
“If you pick up 100 license agreements that have a post-patent-term royalty in it, 95 percent would have a step down,” said Basam Nabulsi of McCarter & English LLP. “That’s the most common way to do it, and it will continue to be the most common way to do it.”
If Brulotte had been overturned, parties would have had much greater leeway to structure licensing agreements in ways that might make business sense for them but didn’t fall within the categories the Supreme Court said were allowed under the rule, Nabulsi said.
“There are creative ways to work around it, but changing the rule would have made it easier and would have been more in keeping with commercial realities,” he said.
However, attorneys pointed out that Congress is now deep into consideration of a wide-ranging patent bill, and it would be relatively easy to insert language overruling Brulotte if lawmakers were so inclined.
“Congress has shown a lot of interest in patent issues in recent years, so I don’t think it’s inconceivable that Congress can be persuaded that this is worth their time, especially since the majority and the dissent both say that the economic analysis presented by Kimble is viable,” Nabulsi said.