9th Circuit Holds That a “Hybrid” License Agreement Requiring Undiscounted Post-Expiration Royalties Is Presumptively Unenforceable

On July 16, 2013, in Kimble v. Marvel Enterprises, No. 11-15605 (9th Cir. July 16, 2013), the 9th U.S. Circuit Court of Appeals applied the U.S. Supreme Court’s holding in Brulotte v. Thys Co., 379 U.S. 29, 30-33 (1964)—that requiring a licensee to pay royalties after the expiration of a patent is per se unlawful—and “join[ed its] sister circuits in holding that a so-called ‘hybrid’ licensing agreement encompassing inseparable patent and non-patent rights is unenforceable beyond the expiration of the underlying patent, unless the agreement provides a discounted rate for the non-patent rights or some other indication that the royalty at issue was in no way subject to patent leverage.” Kimble, slip op. at 3.

Although Kimble is a patent case, the decision affects the antitrust-based defense of patent misuse where the defendant asserts that the license in unenforceable because it requires the payment of royalties after the expiration of the patent. Brulotte has been heavily criticized because it is economically irrelevant whether what could be paid as a lump sum royalty is paid during the life of the patent or for a period that extends after the expiration of the patent.

Nonetheless, the Supreme Court has not revisited its decision in Brulotte and the 9th Circuit, like other Circuits, has felt bound to follow it even while trying in many cases to narrow its applicability to the facts at issue. See Zila, Inc. v. Tinnel, 502 F.3d 1014, 1021 (9th Cir. 2007). In Kimble, Kimble sued Marvel, asserting claims for patent infringement and breach of contract. The parties entered into a settlement agreement covering both claims that provided for a lump sum payment and a running royalty that did not have a termination date and that was not discounted after the patent expired. The 9th Circuit concluded that, “the patent rights and non-patent rights were intertwined and Brulotte’s presumption [of unenforceability] must apply.” Kimble, slip op. at 21.

The 9th Circuit’s decision in Kimble confirms that requiring the payment of royalties after the expiration of a patent presumptively constitutes per se patent misuse. In situations where royalties for a patent are intertwined with non-patent rights, or are part of a patent package that includes patents with different expiration dates, it may be possible to avoid patent misuse by discounting the royalties as the patent (or patents) expire.

The decision is available here.