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Are Royalties Payable after a Patent has Expired?

Michael McDonald | September 1st, 2015

mdp special counsel Sarah Verstak compares the differing legal positions on this issue in Australia and the United States. The differences highlight why caution should be exercised when entering into patent licence agreements in different regions.

The Supreme Court of Victoria in ARB Corporation v Robert & Ors  recently found that royalties were payable beyond the life of a patent. Interestingly, the Australian position takes a much more commercial approach, compared to courts in the U.S, in relation to conducting businesses that are underpinned by patents.

By contrast, a U.S. court’s decision in Kimble v. Marvel Enterprises Inc in fact disadvantaged a licensor who had a patent in place.  The court held that, if a patent owner has an agreement that exceeds the term of the patent, the agreement will be unenforceable unless a discounted royalty rate applies after the expiration of the patent.

THE AUSTRALIAN POSITION

Background

Mr Roberts developed a differential locking system, which was the subject of patent applications in Australia, Europe, Japan and the U.S. (the Technology).

In 1987, Mr and Mrs Roberts and their company Altair Aviation Pty Ltd (the Vendors) entered into a sale agreement under which the rights to the Technology were sold to ARB Corporation Ltd (ARB).

The sale price was paid by way of an up-front payment and royalty payments were calculated by reference to the sale of products made by ARB (the Royalty Payments). In the Sale Agreement, the definition of the products referred to the four pending patent applications.

The patents did eventually proceed to grant.  However, the Sale Agreement did not specify an end date for the payment of royalties.

Consequently, after the patents had expired, ARB asked the Supreme Court of Victoria to consider the preliminary question of whether royalties were still payable under the Sale Agreement.

The contentions of the parties

ARB argued that under the Sale Agreement, its obligation was to pay royalties only for the duration of the life of the patents.  ARB submitted that the royalty obligations were intended to be limited to the term of the patents because otherwise, royalties would be payable forever.

The Vendors argued it was intended that the Royalty Payments would be payable:

  • for as long as ARB continued to manufacture dirrential locks using the Technology; and
  • the obligation to pay royalties was not confined to or limited by a length of time that related to the patent applications proceeding to grant and thereafter remaining registered.

The Supreme Court of Victoria’s findings

Justice Vickery found in favour of the Vendors that there was still an obligation on ARB to pay royalties even after the expiration of the patents.

His Honour noted that at the time of entering into the Sales Agreement, ‘it was entirely possible that none of the patents which were the subject of the patent applications would be granted’, and according to ARB’s construction, no royalties would be payable to the Vendors whatsoever.  His Honour did not consider that was the contractual intention of the parties.

To the contrary, it was found that the obligation to pay royalties was not contingent upon the grant of the patents.

Justice Vickery also noted that the royalties were directly linked to the volume of sales of the product made by ARB, and if at any time, it became unprofitable for ARB to continue to manufacture the products, it had the option to cease manufacture and sales.

It was found that the construction of the contract put forward by the Vendors produced a businesslike result that was consistent with the commercial context and purpose of the Sale Agreement.

THE POSITION IN THE UNITED STATES

In the case of Kimble v. Marvel Enterprises Inc, the 9th Circuit Court held that, where an agreement extended beyond the life of a patent, because the agreement contained inseparable patent and non-patent rights, it was unenforceable beyond the expiration date of the underlying patent unless there was a discounted rate or a clear indication that the royalty is in no way subject to patent leverage.

Background

In 1990, Kimble invented a Spiderman toy (called the Web Blaster) that was protected by a patent that expired in 2010.  Kimble issued proceedings against Marvel for patent infringement and breach of contract and the parties resolved the dispute by entering into a settlement agreement in 2001 whereby Marvel agreed to pay a royalty on products sold without an expiration date.  The agreement stated the royalty was for:

  • product sales that would otherwise infringe the patent; and
  • sales of Marvel’s Web Blaster product, without differentiating the product from the patent.

After further disputes between the parties regarding payment of royalties, Kimble again sued Marvel for breach of contract, and Marvel counter-claimed that it was not required to make payments after the patent expired.

The District Court initially found the settlement agreement was a ‘hybrid’ for the patent rights and the rights to the toy because there was no distinction between the royalties for the two categories and found in favour of Marvel.  Kimble appealed.

The 9th Circuit Court’s findings

The 9th Circuit Court upheld the District Court’s decision, and found that a patent licence that requires a licensee to make royalty payments beyond the expiration date of the underlying patent is unenforceable as an improper attempt to extend the patent monopoly.

The Court held that a ‘license for inseparable patent and non-patent rights involving royalty payments that extends beyond a patent term is unenforceable for the post-expiration period unless the agreement provides a discount for the non-patent rights from the patent-protected rate.  This is because – in the absence of a discount or other clear indication that the license was in no way subject to patent leverage – we presume that the post-expiration royalty payments are for the then-current patent use, which is an improper extension of the patent monopoly under Brulotte (Brulotte is a U.S. case from 1964).

Implications for licence agreements in the United States

Be careful when entering into licence agreements in the United States because, where an agreement extends royalty rates beyond the term of the patent and the agreement does not include a discounted rate after expiration, there must be some other clear indication that the royalty was in no way subject to patent leverage in order for it to be enforceable.

Other implications

You should have your licence agreement reviewed by lawyers in the country in which it will operate, because your entitlement to pay or receive royalties beyond the expiry of the relevant patents will depend on the way in which this issue is determined in each jurisdiction.

In particular, when the patent is nearing expiry, this would be a good opportunity to negotiate the terms of any potential renewal of the patent licence, particularly in jurisdictions such as the United States where royalties are not likely to be payable after the expiry of the patent, unless a discounted royalty rate is applied.

Which is the better legal position?

The Australian position is much more commercial in nature than that reflected in the Kimble case.

The view espoused by the U.S. court in fact disadvantages a licensor who has a patent in place.  This is because parties can enter into agreements to licence technology which is not the subject of a patent and still require royalties to be paid for as long as the parties agree.  Such an agreement could well exceed the duration of the term of a patent.   However, in the U.S., if a patent owner has an agreement which exceeds the term of the patent, the agreement will be unenforceable unless a discounted royalty rate applies after the expiration of the patent.

In the writer’s opinion, the Australian position is much more in line with the nature of commercial transactions, particularly in the technology space.

If you would like any further information or have any queries relating to the content of this article, please contact mdp Law on 03 9620 9660 or via  info@mdplaw.com.au

Michael McDonald

Michael McDonald

Director, BA LL.B at mdp
Michael is a highly respected and pre-eminent lawyer, commercial advisor and businessman with a career spanning more than 35 years across corporate, commercial and intellectual property law. He has specialist expertise in, and passion for, commercialising and growing Australian businesses both in Australia and internationally.
Michael McDonald

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