ContractsProf Blog

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Valparaiso University Law School

Monday, June 29, 2015

SCOTUS decision on the Spiderman Contract

Given the major U.S. Supreme Court opinions that were released last week, it's no surprise that the one involving contracts, Kimble v. Marvel Entertainment, LLC, didn't make the headlines.  The case involved an agreement for the sale of a patent to a toy glove which allowed Spidey-wannabes to role play by shooting webs (pressurized foam) from the palm of their hands.  Kimble had a patent on the invention and met with an affiliate of Marvel Entertainment to discuss his idea --in Justice Elena Kagan's words--for "web-slinging fun."  Marvel rebuffed him but then later, started to sell its own toy called the "Web Blaster" which, as the name suggests, was similar to Kimble's.  Kimble sued and the parties settled.  As part of the settlement, the parties entered into an agreement that required Marvel to pay Mr. Kimble a lump sum and a 3% royalty from sales of the toy.  As Justice Kagan notes:

"The parties set no end date for royalties, apparently contemplating that they would continue for as long as kids want to imitate Spider-Man (by doing whatever a spider can)*."

It wasn't until after the agreement was signed that Marvel discovered another Supreme Court case, Brulotte v. Thys Co. 379 U.S. 29 (1964) which held that a patent license agreement that charges royalties for the use of a patented invention after the expiration of its patent term is "unlawful per se."  Neither party was aware of the case when it entered into the settlement agreement.  Marvel, presumably gleeful with its discovery, sought a declaratory judgment to stop paying royalties when Kimble's patent term expired in 2010.

In a 6-to-3 opinion written by Justice Kagan (which Ronald Mann dubs the "funnest opinion" of the year), the Court declined to overrule Brulotte v. Thys, even though it acknowledged that there are several reasons to disagree with the case.  Of interest to readers of this blog, the Court stated:

"The Brulotte rule, like others making contract provisions unenforceable, prevents some parties from entering into deals they desire."

In other words, the intent of the parties doesn't matter when it runs afoul of federal law.  Yes, we already knew that, but in cases like this - where the little guy gets the short end - it might hurt just the same to hear it.  In the end, the Court viewed the case as more about stare decisis than contract law and it was it's unwillingness to overrule precedent that resulted in the ruling.

Yet, I wonder whether this might not be a little more about contract law after all.  The Court observed in a footnote that the patent holder in Brulotte retained ownership while Kimble sold his whole patent.  In other words, Brulotte was a licensing agreement, while Kimble was a sale with part of the consideration made in royalties. This made me wonder whether another argument could have been made by Kimble. If Kimble sold his patent rights in exchange for royalty payments, and those royalty payments are unenforceable, could he rescind the agreement?  If the consideration for the sale turns out to be void ("invalid per se"), was the agreement even valid?  The question is probably moot now given the patent has expired....or is it?  Although Kimble did receive royalty payments during the patent term, he presumably agreed to a smaller upfront payment and smaller royalty payments in exchange for the sale of the patent because he thought he would receive the royalty payment in perpetuity.  So could a restitution argument be made given that he won't be receiving those royalty payments and the consideration for the sale of the patent has turned out to be invalid?

 

 *Yes, I made an unnecessary reference to the Spiderman theme song so that it would run through your head as you read this - and maybe even throughout the day.

 

 

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Comments

Interesting, thanks for the excellent summary. I wonder how someone can overcome this danger during the patent sale process? Is there any way to draft a patent sale with an ongoing royalty after patent expiry in light of this S.C. this decision?

Posted by: David Orozco | Jun 29, 2015 10:23:27 AM

Hi David,
Thanks for your comment. I don't think there is a way to do it (something which might surprise contracts profs). Given that, it would be a good idea to get all of the $ upfront or else take a certain portion upfront and take royalties during the term, with a certain minimum amount of royalties that should be collected or paid as a lump sum at the end of the term. That way, the patent owner has the possibility of sharing in the upside but, if sales aren't so robust during the term, still gets a minimum amount.

Posted by: Nancy Kim | Jun 29, 2015 11:25:36 AM