SPIDERMAN TO RESCUE PATENT ROYALTIES?

Each morning as I gargle with Listerine, I am reminded that simple is sometimes best when drafting agreements. 

In 1881, Dr. J. J. Lawrence developed his now-famous antiseptic formula and agreed to make it available to Jordan Lambert. The simple two-sentence agreement used to transfer the Listerine formula reads as follows:

Know all men by these presents, that for and in consideration of the fact, that Dr. J. J. Lawrence of the City of St. Louis Missouri has furnished me with the formula of a medicine called Listerine to be manufactured by me, that I Jordan W. Lambert, also of the City of St. Louis Missouri, hereby agree for myself, my heirs, executors and assigns to pay monthly to the said Dr. J. J. Lawrence his heirs, executors or assigns, the sum of $20.00 for each and every gross of said Listerine hereafter sold by myself, my heirs, my executors or assigns. 

In testimony whereof, I hereunto set my hand and seal, Done at St. Louis, Missouri this the twentieth day of April 1881 Jordan W. Lambert.

Over almost 75 years, more than $22 million in royalties were paid to Dr. Lawrence and his heirs. The formula remained essentially the same. In 1959, Warner Lambert initiated litigation to void the agreement and end the royalty obligations. 

Warner Lambert argued that the formula was no longer a secret and the contract was unclear and indefinite as to duration. The court found in favor of Dr. Lawrence and his heirs: “There is nothing which compels the plaintiff to continue such manufacture and sale. The plain meaning of the language used in the agreement is simply that Lambert’s obligation to pay is co-extensive with the manufacture or sale of Listerine by him and his successors.”

Seventy-five years is fine with trade secret agreements, like the one covering Listerine, but you had better be careful when negotiating an agreement that includes patents. Royalties cannot exceed the 20-year patent term. 

Freedom to contract? Not so with patents. Just ask Peter Scheiber, the inventor of Surround Sound audio technology. Scheiber agreed in a patent license with Dolby to a lower royalty rate that went beyond the patent term. When Scheiber’s patent expired, Dolby stopped paying royalties. Even though the parties agreed to the extended payment period (at the request of Dolby!), the court determined that Dolby was not responsible for royalties after the patent expired. The court relied upon a United States Supreme Court case, Brulotte v. Thys. Co., 379 U.S 29 (1964). In Brulotte, the Supreme Court found that “a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.”

Brulotte has been viewed by many as discouraging flexible licensing practices. Some have even suggested that this long standing rule has had a negative impact on licensing in the pharma and life sciences industries and is an impediment to new medical treatments being brought to market. 

Though heavily criticized, Brulotte has remained the rule followed for patent licensing for over 50 years. But a recent Supreme Court case may finally put an end to Brulotte. 

On March 31, 2015, the United States Supreme Court heard oral arguments in Kimble v. Marvel Enterprises, 727 F.3d 856,863 (9th Cir. 2013). Stephen Kimble, the inventor of a toy that shoots foam string from a glove, settled a patent dispute with Marvel that resulted in an agreement that provided Kimble royalties for web-blaster products. When the Kimble patent expired in 2010, Marvel—like Dolby—cited Brulotte and stopped making royalty payments to Kimble. The Kimble case has made its way up to the Supremes. 

Will Stephen Kimble suffer the same fate as Peter Scheiber, or will Spiderman prevail and save the poor inventor from lost royalty payments? 

Will parties finally be given the freedom to negotiate and structure payment streams for patents that are relevant and meaningful to the transaction at hand?

Will Brulotte survive the Spiderman challenge? 

Entrepreneurs should stay tuned and pay very close attention to the Supreme Court’s forthcoming decision in Kimble v. Marvel Enterprises, as it may have a significant impact on how they can structure payment provisions in intellectual property agreements. 

Tip: To extend royalty payments, consider a hybrid agreement that includes both patents and trade secrets/know-how. And remember Listerine.