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Friday, 19 July 2013

Spider-Man Web-Blasts Away Patent Royalties

On Tuesday, the US Court of Appeals for the Ninth Circuit issued its ruling in a lawsuit between Marvel, the purveyor of Spider-Man comics, movies and related products, and inventor Stephen Kimble.  The ruling was the culmination of more than twenty years of legal wrangling between the parties. 

In 1990, Kimble created and patented a toy that mimicked Spider-Man’s web slinging ability by allowing the user to “activat[e] a trigger attached to a valve in the palm of a glove [which] was attached to a flexible line leading to a can of foam strapped to the user’s wrist or waist.”  Marvel rejected Kimble’s proposal to manufacture his invention under the Spider-Man brand, but later began producing and selling a similar product that Marvel called the “Web Blaster”.  Kimble sued Marvel in 1997 for patent infringement and breach of contract in respect of the Web Blaster product, and he was ultimately awarded 3.5% of past, present and future net sales of the Web Blaster on the basis of his breach of contract claims. 
In 2001, while the outcome of that trial was being appealed, Marvel and Kimble agreed on a settlement of their claims.  Under the settlement agreement, Marvel acquired Kimble’s patent in exchange for a flat fee of $516,214.62 plus an ongoing royalty 3% of net product sales, which was defined as "sales that would infringe the Patent but for the purchase and sale thereof pursuant to this Agreement as well as sales of the Web Blaster product....”  The settlement agreement had no expiration date upon which Marvel would be released from its obligation to pay Kimble royalties in connection with sales of the Web Blaster products. 

Beginning in 2006, Marvel expanded the Web Blaster line of products by packaging the Web Blaster toy with other products (like Spider-Man masks), and partnering with Hasbro to allow Hasbro to produce Spider-Man Web Blaster products with other functionalities (like the ability to shoot water and toy arrows, a specialty of Hasbro’s Nerf brand division).  Kimble believed that royalties were due in connection with sales of these new products, but Marvel and Hasbro disagreed.  Kimble sued and Marvel filed a counterclaim seeking a declaration that royalties would no longer due upon the expiration of the patent.  The District Court determined that the settlement agreement was a “hybrid” agreement that intertwined the transfer of both patent and non-patent rights in the Web Blaster toy because there was only a single royalty structure that did not distinguish between the value of the patent rights and the value of the non-patent rights.  As a result, the District Court was obliged to apply the Supreme Court’s 1964 ruling in Brulotte v. Thys Co. by agreeing with Marvel that royalties would no longer be payable to Kimble upon the 2010 expiration of the patent at issue. 

Kimble appealed to the Ninth Circuit, hoping for a better result.  Unfortunately for Kimble, the Ninth Circuit reluctantly upheld the District Court’s ruling, stating (citations omitted):

“In Brulotte, the Court held that a patent licensing agreement requiring a licensee to make royalty payments beyond the expiration date of the underlying patent was unenforceable because it represented an improper attempt to extend the patent monopoly.  […]  We acknowledged that the Brulotte rule is counterintuitive and its rationale is arguably unconvincing. Nonetheless, recognizing that we are bound by Supreme Court authority and the strong interest in maintaining national uniformity on patent law issues, we have reluctantly applied the rule. We are compelled to do so again.”

 The Ninth Circuit’s ruling exhibits a strong concern that the Brulotte precedent impedes contract law by invalidating significant portions of otherwise enforceable contracts: 

We acknowledge our application of the Brulotte rule in this case arguably deprives Kimble of part of the benefit of his bargain based upon a technical detail that both parties regarded as insignificant at the time of the agreement.  […]  The patent leverage in this case was vastly overshadowed by what were likely non-patent rights, and Kimble may have been able to obtain a higher royalty rate had the parties understood that the royalty payments would stop when the patent expired.

Kimble, exclaiming in an interview, "[a]ll this does is screw inventors who are trying to get as much of a royalty as they can from somebody who wants to make their product,” also says he plans to appeal the Ninth Circuit’s ruling to the Supreme Court in the hope that the high court will overturn Brulotte.  Kimble will likely have a lot of support for his position on appeal – if the Supreme Court agrees to hear the case.    

Link to ruling and commercial for the Web Blaster available here
Top 10 Controversial Supreme Court Cases here

4 comments:

Anonymous said...

I'm afraid I don't have a lot of sympathy for Mr Kimble. A patent is only supposed to last for a certain length of time and in trying to get royalties for products made later, you are in effect selling something you haven't got.

The current siuation does seem a bit strange, however. Suppose Marvel find that they are paying a lot of royalities but don't appear to have any potential competition, and so let the patent lapse? I think the take-home message must be - if you want to receive royalties under a patent, then don't sell the patent to someone else, especially not the person who will be paying the royalties.

Anonymous said...

I have a different take-away.

The language of a contract governs - unless it does not.

This was a contract signed as part of a patent litigation settlement. Supposedly, the attorneys involved in such endeavors would be aware of such things as patents do not last forever.

In the states, freedom to contract - especially as here between parties that are savvy enough to know better - was at one time held sacrosanct. If you made a bad deal, the government was not your Nanny and was not there to ehlp you out when you knowingly signed the deal.

Miri Frankel said...

@Anonymous 17:16:00, the problem in this case is that Kimble had valuable non-patent rights that he simultaneously licensed to Marvel. His compensation for those non-patent rights was now invalidated because the patent rights expired.

@Anonymous 20:22:00, this is exactly why the Brulotte case is so frequently criticized, including by the Ninth Circuit, which felt forced to uphold Brulotte despite disagreeing with the reasoning.

Both Marvel and Kimble acknowledged that, at the time they negotiated the settlement, they were unaware of the Brulotte case and the effect it would have on their settlement agreement.

Both parties felt they were getting a fair deal, and Marvel would likely have continued paying Kimble to this day had it not been for Hasbro's objection to the royalty payments. I agree that the freedom to contract should prevail. Perhaps the time is now right for a Supreme Court reconsideration of the Brulotte rule.

Anonymous said...

I don't understand. If the patent has already expired, then why does Marvel have exclusive rights to it? Shouldn't the invention now be available to everyone?

Maybe I don't understand patent law enough. Can somebody please explain this to me?

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