Licensing International Patent Portfolios & Understanding National Laws – A Trap for the Unwary
Companies having portfolios of both domestic and international patents that consist of patents in both domestic and international jurisdictions need to account for variances between the laws of the different countries when contemplating licensing such portfolios. While it is possible to execute individual licenses for specific subsets of jurisdictions, a common approach is to execute a single, comprehensive license to an entire global portfolio. Since most licensing agreements select the laws and courts of a single jurisdiction for adjudication of disputes, it is important to understand limitations of the selected jurisdiction.
United States vs. Europe vs. Canada
One notable instance of differences in the laws of various countries is whether patent licenses can be structured to require royalties beyond the term of the licensed patents.
In the United States, under the “Brulotte rule”, a requirement in an agreement for a licensee to pay royalties to a licensor after the expiration of the licensed patents is “unlawful per se.” Brulotte v. Thys Co., 379 U. S. 29 (1964). In Brulotte, an inventor had licensed patents for a hop-picking machine to farmers, with royalties due prior to and after the expiration of the patents on the machine. The Supreme Court reasoned that, “contracts to pay royalties for such use continue the patent monopoly beyond the [patent] period.” [i]
The Brulotte rule was affirmed as recently as 2015, when the Supreme Court ruled in Kimble v. Marvel Entertainment, LLC, that post-expiration patent royalties are unlawful, and “when the patent expires, the patentee’s prerogatives expire too.” Kimble v. Marvel Entertainment, LLC 135 S. Ct. 2401 (2015). In Kimble, inventor Steven Kimble had obtained and licensed to Marvel the rights to his patent for a glove that shot “Web” via an attached can of spray foam. The license agreement in this case contained no end date for the royalty payment. Relying heavily on the doctrine of stare decisis, the Kimble Court affirmed the decision that Marvel could stop paying Kimble royalties on the expired patent.
The European Union treats extending royalty payments beyond the term of licensed patents differently than the US. In particular, Paragraph 187 of the Guidelines to the EU Technology Transfer Block Exemption Regulation states:
Notwithstanding the fact that the block exemption only applies as long as the technology rights are valid and in force, the parties can normally agree to extend royalty obligations beyond the period of validity of the licensed intellectual property rights without falling foul of Article 101(1) of the Treaty. Once these rights expire, third parties can legally exploit the technology in question and compete with parties to the agreement. Such actual and potential competition will normally be sufficient to ensure that the obligation in question does not have appreciable anti-competitive effects.
So unless one or more of the parties has such a dominant position in the market that the relevant license agreement has appreciable anti-competitive effects, an obligation to pay royalties post-expiry of a patent should be enforceable in the European Union.
In Canada, a patent license can validly require royalty payments extending beyond patent expiration. However, case law in Canada indicates, “In the absence of an express provision on the subject a license continues until the expiration of the original term of the patent, but not beyond. However, an express stipulation in the contract as to the duration of the license will control.” Therefore, even if the License Kimble had with Marvel was reviewed under Canadian law, it is likely that the obligation to pay royalties beyond the term of the licensed patent would not have been enforceable, as it left open the term of the license, which would have been a death blow to fees due post expiration of the patents.
Choice of Law
In light of the above with respect to the laws of the United States, European Union and Canada, it is easy to see that each could provide a different outcome for the same license agreement. This is complicated by the fact that most agreements, including such licensing agreements, have clauses in them that require the agreement to be reviewed under one set of controlling laws.
The Brulotte rule is not absolute. For example, courts have found that licenses can require payment of royalties on unexpired foreign patents even after U.S. licensed patents have expired. Licenses often require royalties to be paid until the latest-running patent expires.
However, how would a U.S. court interpret an obligation to pay royalties on European Union patents beyond their term? How would a European court deal with royalties associated with a Canadian patent portfolio where the agreement did not address royalties beyond the term of the patents?
While these questions may remain open, the better course is to address differences in the law of different jurisdictions on this issue specifically in the license agreement itself. Instead of relying on a single choice of law provision in the license agreement, parties could consider addressing choice of law separately for licensed patents of patents of different jurisdictions when seeking to structure a license to require royalties to be paid beyond the term. This is particularly important when using the U.S. as the choice of law and venue, as doing so may also require addressing royalty rates of the U.S. patents separately from foreign patents and other potential fees and payments.
When seeking to structure licensing agreements with obligations to pay royalties beyond the terms of the licensed patents, in many cases, parties license know-how or trade secrets in addition to patents so that royalties can be required to be paid on the trade secrets or know-how (typically at different royalty rates) after the patent rights expire.
The Kimble Court also noted that, “[P]arties can often find ways around Brulotte, enabling them to achieve those same ends.”[ii] Parties can: i) provide for license fees to accrue under the patent term and to be amortized over time; ii) include non-patents rights in the license (e.g., trade secrets, know-how); and iii) forming business arrangements, such as joint ventures.
Parties negotiating licensing fees associated with a global patent portfolio need to account for differences in national laws and how such fees are impacted by such laws. Considering these aspects early benefits the process and allow for the parties to have clarity on the long-term strategy for the portfolio. There are a multitude of options to structure these licensing arrangements to benefit all those involved.
[i] Kimble v. Marvel Entertainment, LLC 135 S. Ct. 2401