Archives for July 2015 | Intellectual property and business law blog

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Steve O'Donnell, Ph.D. Registered Patent Attorney

Unlimited patent licensing

A quick math question for you. Even better, it’s a word problem.

Lets say you have 10 years left on your patent and you find someone that desperately wants to license it from you. They agree to pay you 10% of their gross sales for the life of your patent, and then 5% of gross sales for an additional 10 years. Gross sales for each of the 20 years is $1 million. How much do they have to pay you?

Easy, right? Ten years of 10% of a million is . . . a million, and ten years of 5% of a million is $500,000. Total payments over 20 years is $1.5 million. That’s what the contract says. That’s what they offered and what they put into the contract. But the question isn’t “how much ‘should’ they pay you,” but “how much do they have to pay you?”

This may surprise you, but they can stop paying you after your patent expires, even if they agreed to pay you for longer.

Recently, the Supreme Court addressed this in Kimble v. Marvel.

Stephen Kimble patented a Web Blaster toy that mimicked Spider-Man’s web shooters. Of course, these were the mechanical web shooters most Spider-Man readers are familiar with—the ones that are constantly running out of web-fluid at the worst times or getting clogged, not the more logical organic web shooters that Peter had for a year or two before One More Day went and screwed up the first really interesting Spider-man storyline since the symbiote suit, but I digress.

After some back and forth, Kimble assigned his patent to Marvel for the odd sum of $516,214.62 and 3% royalty on net sales.

The toy was a hit. And like everything that makes a lot of money, it led to problems about that money. Kimble sued, Marvel counterclaimed they didn’t have to pay royalties after the patent expired. The judge relied on an earlier Supreme Court case, Brulotte v Thys Co. and ruled for Marvel, because to allow a patent owner to enforce what are essentially patent rights beyond the term of the patent is an antitrust violation.

How can this be? The parties presumably negotiated at arm’s length, why aren’t they bound by the deal?

Well, there are a few ways to think about it. First, the point of the patent system is to get useful inventions out to the public so we generally don’t like anything that would extend the legal patent monopoly. Still though, extending the royalty here beyond the patent life wouldn’t have prevented other toy manufacturers from making their own similar toys (although they wouldn’t have been able to call them Spider-Man shooters for trademark licensing reasons). But, another manufacturer could come out with Captain Radial Artery’s Aerosol String Sprayers.

Perhaps the largest possible harm is that patentees might not license their inventions unless they could negotiate long-reaching deals that extend their rights. That would contravene the public policy behind granting patents, which is to encourage people to get their inventions out to the public.
Now, compare that to Warner-Lambert. v. J.J. Reynolds. In that case, which is taught in every IP law class, Lambert licensed the secret formula of Listerine from it’s inventor (Lambert later became Warner-Lambert and Dr Lawrence, the Listerine inventor, later sold part of the agreement with J.J. Reynolds, which explains the parties’ names). The license agreement said that Lambert would pay $20 per gross of Listerine sold to Dr. Lawrence. The royalty was adjusted a few times, but that doesn’t matter here. What does matter is that the secret recipe for Listerine became public knowledge. When that happened, Lambert thought it should be relieved of its contractual obligations since, after all, they no longer had an exclusive right to the product. Indeed, the recipe had been published so anyone could home-brew their own version and sell it. Makes sense, doesn’t it? They were paying for secret information, so if it’s not a secret, they shouldn’t have to pay anything, right?

Wrong, they’re stuck paying for their bad contract. If the recipe hasn’t become public, Lambert’s exclusivity would have gone on forever. In other words, they can’t get out of their agreement just because they want to.

So, what’s the difference? Patents have a finite lifespan, secrets don’t. Does this mean inventors should protect their inventions as trade secrets instead of patents? Not really, most inventions simply can’t be kept secret. The public might not be able to tell what’s in Listerine, but they can reverse engineer a wide range of other products. Also, you’re probably never going to find a contract like the Listerine contract again, all trade secret agreements I’ve seen contain a clase that says the agreement ends if the secret becomes widely known.

Keep this is mind when you’re negotiation a patent license. If you’re going to try to make more money by forcing a licensor to agree to pay after the patent expires, don’t count on it working, because a court won’t help you. Also, if a licensor tries to push an extending payment period as a carrot to get you to sign or to agree to a lower up-front payment, be careful because they might be trying to play games with you. In any instance, find an attorney that works with these types of issues to negotiate the deal.