A patent endows its owner with “superpowers,” but “only for a limited time,” held the U.S. Supreme Court in Kimble v. Marvel (June 22, 2015).
The time-honored formula for action is “ready, aim, fire!” Here, as in many less-than-perfect business/legal cases, the parties reversed the last two steps. To their credit and profit, at least they created and launched a highly successful product. Let’s take a look at what they did right, what they did wrong, and how we can learn from their advances and setbacks. Last but not least, we will study and apply the unusually instructive tutorial provided by the Court on how to get IP deals right.
I. Ready: Kimble Invents & Files for Patent
Stephen Kimble, no relation to Richard Kimble (“The Fugitive”) or Peter Parker of Spider-Man, invented a Web Blaster toy that shoots a web of foam from the wrist.
In the spring of 1990, the same Stephen Kimble, being a smart man, filed a patent application in the U.S. Patent and Trademark Office.
II. Fire: Kimble Proposes, Marvel Launches
Mr. Kimble took his Spider-Man Web Blaster invention to Marvel, a logical candidate to make and sell the action toy. Mr. Kimble seems to have demonstrated the novel toy without getting any commitment from the company, for example, of confidentiality or payment for use of the invention. This is a common mistake even among sophisticated deal-makers.
Marvel liked the Web Blaster invention well enough to launch it into the marketplace to huge success but apparently not well enough to pay any part of the profits to Mr. Kimble.
Meanwhile, a year and a half after Mr. Kimble filed his patent application, he received a Christmas present from the Patent Office in the form of U.S. Patent 5,072,856 for a “Toy Web-Shooting Glove.”
III. Aim: Assessing & Litigating Rights
In 1997, Mr. Kimble sued Marvel for patent infringement. Marvel settled by paying Mr. Kimble a half-million dollars and a 3% royalty on the Web Blaster. Neither party contemplated any end to the payment of royalties and their agreement seemed to suggest that the royalties would continue for as long as the product was sold by Marvel.
Marvel subsequently “stumbled across” an old Supreme Court case called Brulotte (1964), in which the Court had held that “a patent holder cannot charge royalties for the use of his invention after its patent term has expired.” Kimble slip op. at 1. And Kimble’s patent expired in 2010! (The term of a U.S. utility patent is 20 years from its filing date.)
Seizing on the Brulotte loophole, Marvel sued Kimble for a declaratory judgment to exonerate Marvel from paying royalties after 2010. The District Court ruled for Marvel, letting it off the hook from further royalty payments, and the Ninth Circuit reluctantly affirmed on the basis of the Brulotte rule.
Now in Kimble v. Marvel, the Supreme Court has affirmed the lower courts’ decisions in favor of Marvel, based on the doctrine of stare decisis (to stand by that which is decided) under Brulotte.
The Kimble holding may seem straightforward, but there were good practical arguments for letting the parties make their own deal (as they did) and allowing for royalties to be paid beyond the term of the patent (as the agreement seemed to contemplate), and three of the Justices dissented on those grounds.
IV. The Five-Part Outcome
The contest is over between Mr. Kimble and Marvel. Here’s a summary of the outcome for the parties:
- Mr. Kimble’s royalty stream expired with his patent;
- The Court gave Marvel a “get out of deal free” card;
- Both parties made costly mistakes that could have been avoided or rectified;
- They both made money in spite of themselves; and
- Both endured years of litigation as a result of their mistakes.
Most students of the Supreme Court’s patent jurisprudence will be tempted to file Kimble v. Marvel with their dusty old Spider-Man comic books and action toys. But we’re going to dig deeper and look for nuggets in the opinion.
V. Four Court-Approved Safe Harbors for IP Deals
The Court has set out safe harbors for agreements between patent owners and assignees/licensees to “find ways around Brulotte” and “achieve [their] ends,” see Kimble slip op. at 6. The Court tells us that the smarter-than-average deal-maker may wish to:
- Amortize pre-expiration royalties to be paid after expiration, stating as an example that a 10% royalty over a 20 year term could be amortized (payments stretched out) over 40 years;
- In situations of multiple patents, run the royalty until the end of term of the last-to-expire patent;
- Provide for payments on the basis of other legal rights, such as trade secrets, even if closely related to the patent (logically dropping the royalty rate from, say, 5% to 4%, upon expiration of the patent); or
- Set up a “business arrangement” such as a joint venture “to share the risks and rewards of commercializing an invention.”
VI. Seven Take-Aways on How to Profit in IP Deals
Here are seven take-aways from Kimble for inventors and companies—here’s how to make money in your IP deals:
- File patent applications to protect your inventions and work fast to get the new products on the market;
- Insist on a Non-Disclosure Agreement (NDA) before disclosing your invention to a potential buyer;
- Recognize that patent royalty payments as such will stop upon expiration of the patent;
- Be aware that when a “patent expires…the right to make or use the article, free from all restriction, passes to the public” (Kimble slip op. at 3);
- To stay a step ahead of the competition, make improvements and patent them to extend your period of exclusive use, at least for the improved technology;
- Structure business deals to take advantage of the teachings of Kimble, such as the four safe harbors listed above; and
- Consider all the things that went wrong in Kimble—and next time confer with counsel before entering a deal.
It’s easy to be an “armchair quarterback”—to sit back and criticize Mr. Kimble and Marvel for the things they did wrong or less than perfectly. But as stated at the beginning of this post, at least they did something—together they invented, launched, patented, manufactured and profited from a Web Blaster toy that is still selling today! One good season in the toy industry is a success, two seasons are remarkable, and anything beyond that is of historic proportions.
As the Supreme Court says, a patent endows you with “certain superpowers.” Be like Spider-Man: Be an action figure—that is, take action—and use your powers responsibly.