SPIDERMAN, PATENTS AND ROYALTY ARRANGEMENTS: UNTANGLING WHAT KIMBLE MEANS IN PRACTICE AND HOW TO WEAVE AROUND BRULOTTE'S ECONOMIC CONSTRAINTS.

• Author: Retta, Nebyu

1. Introduction

   Article I, Section VIII of the U.S. Constitution fosters and promotes innovation and new discovery. (1) The Framers gave Congress the authority to give inventors the exclusive right to secure their discoveries for a limited time. (2) Approximately one year later, President George Washington signed The Patent Act of 1790; a bill that laid the foundation for today's modern American patent system. (3) In 1964, the U.S. Supreme Court established a firm and bright-line rule in Brulotte v. Thys, holding that parties forming private contracts for payments of royalties beyond the patent term-limit were unenforceable patent misuse. (4) But over the years, as modern patent law has commercially advanced, concerns surrounding royalty agreements became a paramount issue. (5) As a result, the Brulotte decision has been widely criticized by academics and legal scholarship. (6)

   Despite the legal community's growing disdain for Brulotte, on June 22, 2015, the U.S. Supreme Court in Stephen Kimble et al. v. Marvel Entertainment, decided not to strike down the precedent, on the basis of stare decisis (7) The Court upheld the rule established in Brulotte, that post-patent term royalties are unlawful per se, even where parties enter into voluntary agreements and equal bargaining power exists among them. (8) Although, the decision in Kimble reetched Brulotte''s bright-line, the Court hinted at creative ways parties can structure agreements without disturbing the precedent. (9)

   This Note discusses four ways patent licensors can draft agreements without infringing on Brulotte. These include: (1) amortization agreements--where parties set a royalty based on sales during the patent term, and remunerating it over a longer period extending passed the end of the patent term; (2) patent groupings--where a large family of patents are licensed, royalties may run for all patents in the portfolio until the expiration of the last patent terminates; (3) hybrid agreements--which encompasses both the right to use the patent as well as trade secrets, and the licensor provides technical support, or some other source of value to the licensee throughout the term of the license, which may extend beyond the term of the patent and; (4) business arrangements such as joint ventures--which would enable parties to share the risks and rewards of commercializing an invention. (10) In addition, this Note seeks to dispel some of the misconceptions surrounding the limitations posed by the aforementioned precedents. (11) Part II examines the history, development and policy objectives of the modern patent system--including the lasting jurisprudential footprint left behind by Brulotte (12) Part III provides a discussion of Kimble, including the scope of limitations regarding patent royalty agreements. (13) Part IV analyzes and advances four legal royalty arrangements that circumvent Brulotte to ultimately achieve the same ends advocated by the petitioners in Kimble (l4) Ultimately, this Note will conclude that the Supreme Court decision in Kimble signified that Brulotte hardly set economic constraints on licensing arrangements because other legal agreements may be implemented involving ongoing payments for patent rights. (15)

2. History

   1. A Brief Introduction to US Patent Law

      Since 1953, the patent laws have been revised and codified under Title 35 of the United States Code. (16) The Patent Act, as amended, broadly grants to: "[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof...." (17) As defined by the statute, patents are broadly classified into categories of design, utility or plants. (18) An inventor may apply to obtain a patent to an invention from the United States Patent and Trademark Office ("USPTO"). (19) Once the patent is issued and without aid of the USPTO, the patent holder has the right to exclude others (20) from making using, selling or importing the invention during the term of the patent. (21) Under the Patent Act, a patent holder may license his or her property interest in an invention, in writing, prior to its expiration. (22) Likewise, a patentee may license the patent for any royalty, or upon any condition, which is normally and reasonably adapted to the patent policy of securing to the inventor the rewards of the invention. (23) Accordingly, the royalties must be reasonably related to the licensee's use of the patented invention. (24)

   2. Patent Rights Under the US Patent System

      In 2013, President Barack Obama signed into law, changing what has long been known as a uniquely American approach to patent law--the "first to invent" to a "first-inventor-to-file" system. (25) The antecedent to this law came in 1999, when Congress enacted the American Inventors Protection Act of 1999 ("AIPA"), a law that fundamentally changed much of the patent application process, by forcing applications filed in the United States to be disclosed after 18 months, rather than when the patent was granted. (26)

      The law as it stands today allows a utility patent grant to be effective for a term beginning on the earliest date the application was filed and ends 20 years later. (27) Although, the patent term may be extended in certain instances, a patent holder can only charge royalties for use of his or her invention during this timeframe, but not after the period expires. (28) For applications filed before June 8, 1995, the former patent term of 17 years from the date of issuance, or 20 years from the earliest filing date, remains effective, whichever is longer. (29) Although federal courts have exclusive jurisdiction over actions arising under patent laws, actions to enforce license agreements are enforced by general common law of contracts. (30) Nevertheless, federal patent licensing policy preempts state contract law. (31)

   3. The Ongoing Tension Between Patent Law and Antitrust Law

      Since the late 19th and early 20th century, courts have been trying to resolve the pressing tension between antitrust law and patent law. (32) This discordance is not surprising, given that patent law encourages monopoly while antitrust law opposes it. (33) In particular, courts have often interpreted the grant of a patent as a grant of "statutory monopoly." (34) But, when the patent expires, the monopoly created by it expires too, and the subject matter of the invention passes to the public. (35) Thus, the patent system was created to promote invention while at the same time preserve competition. (36)

      Alternately, the principal objective of antitrust policy is to maximize consumer welfare by encouraging firms to behave competitively. (37) At the same time, antitrust law is focused on the misallocation of resources due to monopoly power, primarily caused by anticompetitive conduct that allows market participants to restrict competition and decrease output. (38) As a result, Congress passed the Sherman Act to prevent or suppress devices or practices that create monopolies, or restrain trade or commerce, by suppressing or restricting competition, and obstructing the course of trade. (39) Even so, the application of the Sherman Act is fact-specific since it does not go into detailed definitions and makes only broad prohibitions. (40)

      Section 1 of the Sherman Act is the relevant provision that applies to patent royalty arrangements because it prohibits agreements that unreasonably restrain trade. (41) The rule of reason is the prevailing standard of antitrust analysis, and courts apply it to agreements challenged by [section] 1. (42) This rule often requires an extensive and copious case-by-case inquiry to determine whether the agreement is one that merely regulates or promotes competition or perhaps unreasonably suppresses it. (43) Further, all competitive effects of a restraint--including the anticompetitive effects--along with any potential pro-competitive effects--are balanced to determine whether the net effect of the arrangement is unreasonably anti-competitive. (44)

   4. The Brulotte Legacy

      For economic or technological reasons, a patentee may decide his or her patent can be exploited most advantageously by licensing others to make, use or sell the invention. (45) However, since this right is statutorily limited, a patentee entering into a license agreement providing for royalty payments, which extend beyond the expiration date of the patent may be guilty of patent misuse. (46) The seminal case on the issue of royalties collected on expired patents remains Brulotte v. Thys Co, 379 U.S. 29 (1964). (47)

      Brulotte arose over the sales of hop-picking machines that were covered by seven patents. (48) The terms of the sales included a flat sum purchase price, as well as an ongoing license requiring additional annual royalty payments based on use. (49) The duration of the license extended beyond the date by which all seven patents expired. (50) The license also included restrictions on assignments and relocation of the machines, both before and after the expiration of the patents. (51) In addition, the annual royalty payment calculations were the same for the expiration period as they were for the period of the patent. (52)

      Although the lower court found that the license's extension into the post-expiration period reflected only "a reasonable amount of time over which to spread the payments for use of the patent," the Supreme Court disagreed. (53) In doing so, the Court noted that the "royalty payments due for their post-expiration period are, by their terms, for use during that period, and are not deferred payments for use during the pre-expiration period." (54) The Court explained that the license terms were "apt and pertinent to the protection of the patent monopoly, and their applicability to the post-expiration period is a telltale sign that the licensor was using the licenses to protect its monopoly beyond the patent period." (55) The Court then concluded that, "[i]n...