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Supreme Court Upholds Limit On Royalties To Life Of Patent, But Other Strategies Exist To Extend Life Of Compensation

A patent issued under the U.S. Patent Laws has a finite life, which is 20 years from the date of filing.  A strategy to monetize a patent through licensing must take into consideration that finite life span because after the 20 year patent term, the underlying invention falls into the public domain.  A patent holder may not continue to receive license royalties after the patent’s expiration, as long ago decided by the U.S. Supreme Court in Brulotte v. Thys Co., 379 U. S. 29 (1964). 

The Brulotte rule has been largely criticized as being too rigid for failing to take into account commercial and economic reasons for providing for patent royalty payments beyond the patent’s expiration date.  Business reasons can sometimes motivate the patent owner and licensee to structure the payment of royalties as an agreeable allocation of risk.  For example, the patent owner could agree to a low royalty rate over a longer period of time to entice a licensee to invest.  Under such an arrangement, a patent could be commercialized when it otherwise might not have been because of a licensee’s unwillingness to take on the risk if charged a higher royalty.  The time limit on the payment of patent royalties therefore places the parties’ respective economic goals in tension.

Recently, the U.S. Supreme Court had an opportunity to revisit the Brulotte rule (Kimble v. Marvel Entertainment, LLC, U.S., No. 13-720, 6/22/2015).  In that case, the patent owner and licensee originally agreed that royalty payments would extend beyond the expiration of the patent.  After the patent’s expiration, however, the licensee had a change of heart and refused to pay any further royalties.  The Court held that the Brulotte rule still controlled, notwithstanding its substantial criticism, and declined to overrule the law that patent royalties may not continue past a patent’s expiration.  Accordingly, the licensee rightfully discontinued any further payment of royalties notwithstanding its original agreement that it would pay royalties well after the patent’s expiration.

Accordingly, parties negotiating a patent license need to be mindful of the Brulotte rule and be aware that royalties under the patent may not extend past the patent’s expiration. 

Nevertheless, there still exist strategies to enable parties to a patent license agreement to tailor compensation and appropriately allocate risks whereby compensation could still extend beyond the patent’s term.  For example, if a portfolio of patents is licensed, the royalty payments can be based on the overall portfolio, such that one patent’s expiration could be survived by the remaining patents in the portfolio.  Another strategy is to license the invention together with an associated trade secret (if it exists) for a particular royalty rate, with the royalty rate being discounted after the patent’s expiration but still associated with the trade secret.

Using appropriate strategies, a patentee need not be unnecessarily hamstrung in structuring a favorable long term compensation arrangement in any patent it wishes to license.

This blog post was drafted by Glenn Robbins, an attorney at Spencer Fane. For more information, visit spencerfane.com.