New Rules For Patent Royalties?

Royalty arrangements within patent licenses have long been constrained by an almost 50 year old Supreme Court decision in Brulotte v. Thys Co that prevents collection of royalties after a patent has expired. The Justices have now agreed to revisit the precedent set by that often-criticized ruling in a current case, Kimble v. Marvel Enterprises, Inc.

The key criticism of the ruling is based in economic principles. When negotiating the license agreement, the two parties must come to an acceptable compensation arrangement. In order to optimize their respective economic benefit, the two parties could reasonably come to an agreement to pay a lower rate but over a longer period. Such royalties paid after the expiration would represent delayed compensation for allowed use during the term.

In a separate but similar matter, and while making his own ruling in accordance with Brulotte, Judge Posner articulated support for the rule’s reversal :

“The Supreme Court’s majority opinion reasoned that by extracting a promise to continue paying royalties after expiration of the patent, the patentee extends the patent beyond the term fixed in the patent statute and therefore in violation of the law. That is not true. After the patent expires, anyone can make the patented process or product without being guilty of patent infringement. The patent can no longer be used to exclude anybody from such production. Expiration thus accomplishes what it is supposed to accomplish. For a licensee in accordance with a provision in the license agreement to go on paying royalties after the patent expires does not extend the duration of the patent either technically or practically, because, as this case demonstrates, if the licensee agrees to continue paying royalties after the patent expires the royalty rate will be lower. 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” [emphasis added]

The amount and basis upon which royalties are calculated is often the subject of dispute. This can be caused by ambiguous language in the agreement, poor internal controls that result in unintentional omissions or other types of informational errors, or even purposeful misstatements.  However, when a good faith negotiation results in a royalty agreement that clearly represents the intent of the parties exists, it should not be undermined by this type of bright line test that does not serve the interests of the common good, justice or fair dealing.

Additional information regarding this current matter, Brulotte, and other similar cases involving the proper payment of royalties are available in a related article.


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