shutterstock_469823054From biotech and pharmaceutical startups to Big Pharma, companies would likely not engage in drug development without the potential to recoup their significant investment through patent protection.1 These industries rely heavily on patent licensing to achieve returns on investment and to spread the risk of drug development. Thus, Kimble v. Marvel Entertainment, LLC,2 where the Supreme Court reaffirmed their precedent, Brulotte,3 will significantly impact pharmaceutical companies as they design their licensing arrangements. While post-expiration royalties remain unlawful per se, the Court emphasized that there remains a multitude of ways “to accomplish payment deferral and risk-spreading” through both licensing and other business arrangements.4

The Court upheld the over 50-year old rule barring a patent owner from collecting royalties for use of the claimed invention after the expiration of the patent term and in doing so directly addressed the criticisms5 of this bright-line rule.6 The underlying facts of the case involved a “hybrid” settlement agreement in which both patent rights7 and non-patents rights8 were granted from Kimble to Marvel in exchange for a lump sum as well as royalties on future sales of the Spider-Man “Web Blaster” and similar products.9 However, the agreement set no expiration date for the royalties.10

In affirming a lower court’s holding, the Ninth Circuit on appeal made clear its reluctance in doing so by referring to the Brulotte rule as “counterintuitive and its rationale [as] arguably unconvincing.”11 Despite that non-patent rights were also granted in the agreement, the Ninth Circuit held that a “licensing agreement encompassing inseparable patent and non-patent rights is unenforceable beyond the expiration date of the underlying patent, unless the agreement provides a discounted rate for the non-patent rights or some other clear indication that the royalty at issue was in no way subject to patent leverage.”12

Kimble argued that Brulotte should be overruled by the Supreme Court “in favor of flexible, case-by-case analysis of post-expiration royalty clauses under the rule of reason.”13 As support for overruling Brulotte, Kimble claimed that Brulotte “rests on a mistaken view of the competitive effects of post-expiration royalties” and that Brulotte “suppresses technological innovation and so harms the nation’s economy” —both arguments that are particularly relevant to the pharmaceutical industry.14 The Court discarded these arguments by pointing to the alternatives that Brulotte leaves open.15

According to the Court, all of the following would be allowed under Brulotte: agreements extending payments for pre-expiration use of a patent into the post-expiration period;16 multi-patent agreements that extend royalties “until the latest-running patent covered in the parties’ agreement expires;”17 and “hybrid” agreements that tie post-expiration royalties to a non-patent right —“even when closely related to a patent.”18 For the “hybrid” agreements though, the contracting parties would need to demonstrate in some way that the post-expiration royalty is tied to a non-patent right in order for the patent and non-patent rights not to be viewed as “inseparable.”19 Typically this will be accomplished by having layered royalty provisions, where the royalty rate is reduced upon expiration of the patent.

The Court’s approach to the analysis also provides an indication of which side of the line patent licensing agreements may currently be reviewed under in the clash between the constitutional grant of patent rights and antitrust law.20 This distinction can be important as the Court in Kimble even went so far as to suggest that the case may have turned in Kimble’s favor if Brulotte were an antitrust rather than a patent case.21

Thus, “[p]atents endow their holders with certain superpowers,”22 but in licensing these “superpowers,” careful consideration must be given to the appropriate language needed to avoid falling into the web of Kimble and Brulotte. “With great power there must also come—great responsibility,”23 which for those drafting licenses and settlement agreements, means continuing to find mutually agreeable language that achieves the same end result. For example, making it explicit that any post-expiration royalties are not tied to use of the patented invention, but rather other intellectual property that is likely to extend well beyond the patent (e.g., trademark, trade secret), or finding other creative business arrangements to defer royalty payments and spread the risk between the parties.24

Given the current state of the law, biotech and pharmaceutical companies are well-advised to be creative in their licensing agreements to recoup their investments through patent and non-patent means. The daily revenue for a drug may be particularly significant at the end of a patent term (as opposed to technology companies, where the beginning of the patent term is most important). For example, life sciences companies should strenuously avoid applicant delays in the prosecution of their patent applications at the PTO, whichcan significantly eat into any patent term adjustment accrued as a result of PTO delay.

1 See, e.g., Henry Grabowski, Patents, Innovation and Access to new Pharmaceuticals, 5 J. INT’L. ECON. L. 849, 851 (2002); BRUCE LEHMAN, INT’L. INTELL. PROP. INST., THE PHARMACEUTICAL INDUSTRY AND THE PATENT SYSTEM 2 (2003), http://users.wfu.edu/mcfallta/DIR0/pharma_patents.pdf; Edwin Mansfield, Patents and Innovation: An Empirical Study, 32 MGMT. SCI. 173, 175 (1986) (estimating that 65% of pharmaceutical products would not be introduced in the absence of patent protection, compared to a reduction of 8% or less across some other industries). The estimates for the total cost of bringing a new drug to market—including research, development, and clinical testing—range from around $800 million to more than $10 billion. See Joseph A. DiMasi et al., The Price of Innovation: New Estimates of Drug Development Costs, 22 J. HEALTH ECON. 151, 151 (2003); Matthew Herper, The Truly Staggering Cost of Inventing New Drugs, FORBES (Feb. 10, 2012, 7:41 AM), http://www.forbes.com/sites/matthewherper/2012/02/10/the-truly-staggering-cost-of-inventing-new-drugs/
2 No. 13-720, 2015 WL 2473380 (U.S. June 22, 2015).
3 Brulotte v. Thys Co., 379 U.S. 29 (1964).
4 Kimble, 2015 WL 2473380, at *11.
5 Id. at *3 n. 3. (citing Scheiber v. Dolby Labs., Inc., 293 F.3d 1014, 1017–1018 (C.A.7 2002) (Posner, J.) (Brulotte has been “severely, and as it seems to us, with all due respect, justly criticized…. However, we have no authority to overrule a Supreme Court decision no matter how dubious its reasoning strikes us, or even how out of touch with the Supreme Court’s current thinking the decision seems”); Ayres & Klemperer, Limiting Patentees’ Market Power Without Reducing Innovation Incentives: The Perverse Benefits of Uncertainty and Non–Injunctive Remedies, 97 MICH. L. REV. 985, 1027 (1999)).
6 Id. at *3 (directing the critics that their relief also must be sought from Congress and not the Court).
7 U.S. Patent No. 5,072,856 (filed May 25, 1990) (Owned by Kimble for a toy that allows children to role-play as “a spider-person” by shooting webs “from the palm of [the] hand.”).
8 The agreement specified the “net product sales” were “deemed to include product sales that would infringe the Patent . . . as well as sales of the Web Blaster product that was the subject of the Action and to which the Judgment refers.” Kimble v. Marvel Enters., Inc., 692 F. Supp. 2d 1156, 1159 (D. Ariz. 2010).
9 See id. at 1159-60.
10 See id. at 1158.
11 Kimble v. Marvel Enters., Inc., 727 F.3d 856, 857 (9th Cir. 2013
12 Id.
13 Kimble v. Marvel Entm’t, LLC, No. 13-720, 2015 WL 2473380, at *5 (U.S. June 22, 2015).
14 Id. at *9, 11 (reasoning that parties’ may reach no agreement at all if their ideal agreement is barred, which “may discourage invention in the first instance” and “breakthrough technologies will never see the light of day”).
15 Id. at *11
16 Id. at *5 (citing Brulotte v. Thys Co., 379 U.S. 29, 31 (1964); Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 136 (1969)).
17 Kimble, 2015 WL 2473380, at *5 (citing Brulotte., 379 U.S. at 30).
18 Kimble, 2015 WL 2473380, at *5 (citing 3 MILGRIM ON LICENSING § 18.07, at 18–16 to 18–17).
19 Kimble v. Marvel Enters., Inc., 727 F.3d 856, 857 (9th Cir. 2013).
20 At various points one discipline or the other has been dominant. See E. Bement & Sons v. National Harrow Co., 186 U.S. 70 (1902) (stating that the “general rule [was] absolute freedom in the use or sale of rights under the patent laws” and “very object of these laws [was] monopoly”). The antitrust laws gained dominance in the 1970s. See Remarks by Bruce Wilson, Dep’t of Justice Luncheon Speech, Law on Licensing Practices: Myth or Reality? (Jan. 21, 1975) (articulating what became known as the “nine No-No’s” that were per se anticompetitive); see also Sherman Antitrust Act, 15 U.S.C. §§1-38 (2006) (Sections 1 and 2 are most relevant to licensing transactions); Clayton Act, 15 U.S.C. §§12-27 (2006) (Sections 3 and 7 are most relevant to intellectual property transactions).
21 Kimble, 2015 WL 2473380, at *8, 10 (reasoning that a “superpowered form of stare decisis” was applicable here because Brulotte involved the statutory interpretation of 35 U.S.C. § 154 as well as in the context of property (patents) and contracts (licensing agreements) favorable stare decisis considerations are “at their acme,” whereas stare decisis has “less-than-usual force in cases involving the Sherman Act”).
22 Id. at *4
23 Id. at *12 (citing S. Lee & S. Ditko, Amazing Fantasy No. 15: “Spider–Man,” p. 13 (1962)).
24 Kimble, 2015 WL 2473380, at *11.