Patents are viewed as a necessary evil in the United States. Monopolies are considered evil in the United States but patent laws which have monopoly like characteristics are designed to promote the Sciences in that it gives inventors an exclusionary right (i.e., monopoly like right) for a limited period of time in exchange for the inventor’s disclosure of the invention to the public. The government does not want to the power of the patent to influence the marketplace after the patent term has expired.
Based on the foregoing, any royalties collected as a result of the patent license must stop upon expiration of the patent term. In contrast, royalties may be paid to the licensor indefinitely for non patent related rights such as trade secrets and know how licensing. The problem comes when a patent license is extended to a licensee for patent as well as non patent related rights and the agreement dictates that the licensee will pay royalties to the licensor even after expiration of the patent. If the royalty being paid after expiration of the patent is in fact a royalty on the patent, then the patent license is unenforceable even if a portion of the royalty payment is attributable to non-patent rights. (e.g., trademark, know-how and trade secrets).
In Kimble v Marvel, Kimble approached Marvel with a spider man toy where kids could spread a web of string upon mimicking spider-man’s classic hand motion. Marvel rejected Kimble’s idea but went on to market and manufacture a similar product. At the time, Kimble had a pending patent application which later matured into a U.S. patent.
Kimble asserted the patent against Marvel. During litigation, the parties settled the matter with Marvel agreeing to pay a royalty to Kimble. The basis for the royalty payment was in part due to the patent and also a verbal agreement (i.e., contract claim) between Kimble and Marvel at the time of the disclosure. When Kimble disclosed the toy idea to Marvel, they had a verbal agreement for Marvel to pay Kimble money should Marvel incorporate Kimble’s idea into a toy. A part of the royalty was based on the verbal agreement. A part of the royalty was due to the patent rights in Kimble’s issued patent. The agreement between Kimble and Marvel required Marvel to pay Kimble royalties indefinitely even after expiration of the patent. The royalty rate was the same before and after expiration of the patent. As a result, the court concluded that the royalty collected after expiration of the patent must be attributed to the patent. If so, the power of the patent is being leveraged even after expiration of the patent term. Hence, the agreement was unenforceable. Kimble could not reform or rewrite the agreement to collect a smaller royalty for the contract claim in an attempt to apportion out the royalties due to the patent.
The court reviewed prior case law on the subject and held that there should be a two tier royalty payment structure for the agreement to survive. The two tiers must include different royalty rates for royalties for rights during patent rights and another royalty rate for rights surviving expiration of the patent.
The bottom line is that patent license agreements for patent and non patent related rights may cause the patent license agreement to be unenforceable for the part after expiration of patent term unless the royalties for the patent and non patent rights are clearly distinguishable in the royalty rate structure.
I invite you to contact me with your patent questions at (949) 433-0900 or [email protected] Please feel free to forward this article to your friends. As an Orange County Patent Attorney, I serve Orange County, Irvine, Los Angeles, San Diego and surrounding cities.