In a decision issued June 22, 2015 — Kimble v. Marvel Entertainment, LLC — the United States Supreme Court reaffirmed and declined to overrule long-standing precedent holding that a patent holder cannot charge royalties for the use of an invention after its patent term has expired.

The invention: a Spider-Man type web-blaster!

Not all patent cases feature inventions that are easy to understand.  Take, for example, patent cases in the mid/late 2000s featuring orthogonal frequency-division multiplexing (a method of encoding digital data on multiple carrier frequencies).

This case, in contrast, features an invention to which almost all of us can relate.  In 1990, inventor Stephen Kimble obtained a patent on a toy that allowed children to role-play as a “spider person” by shooting “webs” (pressurized foam string) from the palm of their hand.  Kimble met with Marvel Entertainment, the manufacturer of various Spider-Man products, seeking to sell or license his patent.

Marvel apparently liked Kimble’s invention.  Sometime after their meeting, Marvel began marketing a “Web Blaster” — a toy mimicking Kimble’s invention, using a polyester glove and a canister of foam.  But Marvel did not sign any agreement with Kimble, and made no payments to him.

The patent infringement case and settlement

Kimble sued Marvel for patent infringement in 1997.  That case settled, and the settlement agreement provided that Marvel would purchase Kimble’s patent in exchange for a lump sum of approximately $500,000 and a 3% royalty on Marvel’s future sales of the Web Blaster and similar products.  The settlement agreement set no end date for the royalty payments.

In negotiating the settlement, neither party appeared to be aware of a 1967 decision by the United States Supreme Court — Brulotte v. Thys Co. — holding that a patent holder cannot receive royalties for sales made after the patent’s expiration.

The sequel lawsuit

When Marvel finally “stumbled across” (the Court’s words) the Brulotte decision, it filed a new lawsuit for declaratory relief confirming that Marvel could cease paying royalties under the settlement in 2010 — 20 years after the patent issued, which is the duration for most patents.

The District Court sided with Marvel, and the Ninth Circuit affirmed.  The Supreme Court granted certiorari “to decide whether, as some courts and commentators have suggested, we should overrule Brulotte.”

The Supreme Court’s holding

In a 6-3 decision, the Supreme Court affirmed, holding that Brulotte remains good law unless and until Congress  determines otherwise.

The Court observed that in crafting patent laws, Congress struck a balance between fostering innovation and ensuring public access to discoveries.  Patents, the Court held, “endow their holders with certain superpowers, but only for a limited time.”  During the patent’s lifespan, the holder has exclusive rights to the invention, and may sell or license those rights.  But upon expiration, the rights to the invention pass to the public.

The Court rejected Kimble’s invitation to overrule Brulotte and replace it with a “flexible, case-by-case analysis” of post-expiration royalty clauses, noting: “Overruling precedent is never a small matter.”  Brulotte’s “statutory and doctrinal underpinnings,” the Court held, “have not eroded over time.”  Kimble also argued that Brulotte suppressed technological innovation and was based on a mistaken view of the competitive effects of post-expiration royalties.  But the Court essentially told Kimble, and others critical of the Brulotte decision, to direct their concerns to Congress.

Perhaps most noteworthy was the Court’s explanation that parties “can often find ways around Brulotte” in permissible ways, given some creativity in transaction structuring.  For example:

• a licensee can defer payments for pre-expiration use of a patent into the post-expiration period
• licensing agreements covering multiple patents can provide for royalties “until the latest-running patent covered in the parties’ agreement expires”
• licensing agreements covering both patents and closely related non-patent rights (like trade secrets) can provide for continuing royalties after patent expiration as long as the royalties are tied to the non-patent right
• parties may structure their relationship as a joint venture in which the parties share risks and rewards of commercializing inventions but without a royalty component

Takeaway

After a patent expires, patent holders can’t continue charging royalties for use of the invention.  To secure post-expiration revenue streams, patent holders must look to other transaction structures.

Debate over the most influential band from the 1960s will generally include names like the Beatles, the Rolling Stones, and Led Zeppelin, but a lesser-known act from one of music’s greatest eras, the Turtles, may have just changed all of that. Flo & Eddie Inc., a corporation owned by the two founding members of the Turtles, just prevailed in a lawsuit against SiriusXM sure to rock the music industry and, perhaps, take a lot of music out of circulation.

The Turtles, while not as big as the Beatles, did have some hits that many will recognize, including “Happy Together,” which have been played frequently on SiriusXM, broadcast radio, and other sources for music-listening. Because federal copyright laws apply only to recordings “fixed” starting in 1972, the Turtles are not protected or entitled to royalties under these laws. Last week, however, United States District Court Judge  Philip Gutierrez granted summary judgment in favor of Flo & Eddie, holding that pre-1972 recordings may be protected under state copyright laws and are protected by California copyright law.

The SiriusXM Suit, Pandora and SoundExchange

The suit against SiriusXM is similar to one recently filed against Pandora in New York state court. The SiriusXM and Pandora suits involve a challenge encountered in integrating the music industry’s royalty system: millions of people listening to music using media that did not exist even 15 to 20 years ago, let alone in 1972. Yet, when copyrighted songs are played on SiriusXM radio, Pandora, or streaming webcasts, the holders of the copyrights are still entitled to royalties.

Many companies that broadcast or provide access to digital recordings, including SiriusXM and Pandora, use a company called SoundExchange to track usage, collect digital royalties, and distribute them to copyright holders. Problem solved, right?  Unfortunately, there’s a catch. SoundExchange may not track usage of material recorded or “fixed” before 1972, meaning that it would not collect or distribute royalties on such recordings.

Assuming that the SiriusXM ruling stands and that other state courts follow its lead, those who want to provide access to pre-1972 recordings online or via satellite radio will have to find a way to efficiently track usage for the purposes of calculating royalty payments. And, of course, they will have to pay royalties to artists whom they were not previously paying. These expenses, in turn, will likely mean greater cost, more commercials, or even loss of access to certain works.

Federal Copyright Law Does Not Apply to Pre-1972 Recordings

The issue in both the SiriusXM and Pandora cases is a loophole of sorts in federal copyright law. On February 15, 1972, Congress brought sound recordings under federal copyright law. Prior to 1972, however, musical recordings were protected only be state copyright laws, many of which are based in common law, court-made rules that are not codified in statutes and, at least in many instances, do not require registration in order to protect recorded material. The suit against Pandora is based on New York common law. Works that are copyright protected by state common law are harder to track than those protected by a registered federal copyright.

The artists and record companies in both suits have contended that they have not been paid for usage of their pre-1972 recordings. Pandora, at least, appears to tacitly acknowledge as much. According to the complaint against the company, Pandora told the SEC that if it were required to obtain licenses for the reproduction and public performance of pre-1972 sound recordings, the expense of compliance may be so prohibitive that Pandora would simply remove all pre-1972 recordings from its service.

We have yet to hear the final word in either the SiriusXM or Pandora cases.  Barring an out-of-court settlement, SiriusXM will almost certainly appeal the trial court’s ruling to the Ninth Circuit Court of Appeals. Given the substantial financial interests at stake, even a trip to the Supreme Court is not out of the question. These cases could end up significantly diminishing both services and adding cost to consumers, or they could make it easier for new media companies such as Pandora and SiriusXM to climb the charts, while leaving artists like the Turtles continue to receive no royalties for use of their performances.