Getting the Most Out of a Patent: Law on Post Expiration Royalties

2015-12-22

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GETTINGTHEMOSTOUTOFAPATENT:LAWONPOSTEXPIRATION
ROYALTIES

JUSTINFREEDIN*
ROBIC,
LLP
L
AWYERS,PATENTANDTRADE-MARKAGENTS

Whennegotiatingalicensingagreement,animportantaspecttoaddressisthe
durationoftheagreement;bothpartieshaveaninterestinknowingpreciselywhen
theirbusinessarrangementbeginsandwhenitends.Inapatentlicense,licensors
maywanttocollectroyaltiesforthelongestperiodpossibleinordertogetthemost
outoftheirpatent.Unfortunatelyforthelicensor,themonopolygrantedbyapatentis
limitedintime.
However,althoughthedurationofapatentislimitedbythegovernment,alicensor
andlicenseehavecontractuallibertytodefinethedurationoftheirlicensing
agreementinmanydifferentways.Whetherintentionalornot,theduration
negotiatedbythepartiescanpotentiallyextendbeyondthelifeofapatent.IntheUS,
suchpracticeisforbidden,andthelicensorcannotcollectroyaltiesforexploitation
occurringaftertheexpirationorinvalidityofapatent.InCanada,however,these
typesofagreementsareallowed.Thelicensorcaneffectivelycontinuetobenefitfrom
anexpiredorinvalidpatentuntilthelicensingagreementcomestoanend.

U.S.Law

IntheUS,ithaslongbeenestablishedthatanagreementforroyaltypayments
coveringtheexploitationofapatentafterithasexpiredisunlawful.Thoughthiswas
madeclearinthe1964USSupremeCourtdecisionBrulottevThysCo[379US29
(1964),](Brulotte),a
morerecentdecisionKimblevMarvelEntertainmentLLC[135S.Ct.2401(2015),
])highlightsthe
importanceofhavingagoodknowledgeofintellectualpropertylawwhennegotiating
apatentlicense.Oddlyenough,bothpartiesinKimbleadmittedtonothaving
knowledgeoftheBrulottedecisionwhenenteringintotheirlicensingagreement.The
licensewasthereforenegotiatedundertheimpressionthatMarvelwouldcontinueto
payroyaltiesuntilsalesofthelicensedarticlesceased,withnospecificenddatefor

©CIPS,2015.*FromROBIC,LLP,amultidisciplinaryfirmofLawyers,andPatentandTrade-markAgents.Published
intheFall2015(Vol.19,no.1)Newsletterofthefirm.Publication068.197E.

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royaltypayments,andnostipulationsrelatingtotheexpirationorinvalidityofthe
patent.Asaresult,thetermofthelicenseendedupoutlivingthepatent.

ThecourtfollowedtheBrulottedecisionandheldthatKimblecouldnotcollect
royaltiesforsaleswhichoccurredduringthepost-expirationperiod.Although
acknowledgingthattheBrulotterulemaypreventpartiesfromenteringdealsthey
desire,thecourtnotedthatpartiescanfindwaysaroundBrulottewhileachievingthe
sameends.Forexample,thepartiescan:(1)deferpaymentsforpre-expirationuse
ofapatentintothepost-expirationperiod,(2)requirepaymentofroyaltiesformultiple
patentsuntilthelastofthosepatentsexpires,(3)tieroyaltiestonon-patentrights,or
(4)makebusinessarrangementsotherthanroyaltiestosharerisksandrewards.

CanadianLaw

InCanada,therulesareverydifferent;alicensorcanreceiveroyaltiesforthe
exploitationofapatentevenafterthepatenthasexpired.Thelanguageofthe
licensingagreementisthecontrollingfactor.Iftheagreementprovidesforaterm
whichisnottiedtothevalidityofapatent,thelicensewillremaininforceevenifthe
patentexpiresorisotherwiseinvalidated.Absentanyexpressprovision,however,
thereisapresumptionthatthelicensecontinuesuntiltheexpirationofthepatent,but
not[CulzeanInventionsLtd.v.MidwesternBroomCompanyLtd.,Midwestern
MarketingCanadaLtd,1984CanLII2276(SKQB;1984-01-13),
].

Inthe1941caseCoylevSproule[1941CanLII69(ONSC;1941-05-07),
](Coyle),
theOntarioHighCourtreiteratedaprincipleestablishedseveralyearspriorinDuryea
v.Kaufman[(1910),21OLR161]inthatitisthelicensingagreementwhichgoverns
thepaymentofroyalties.Thevalidityofapatentisthereforeimmaterialtoan
obligationtopayroyalties,unlessthelicensingagreementincludesanexpressor
impliedwarrantyofthevalidityofthepatent,orunlessthereisfraud.Thisprinciple
wasfurtherappliedinthe1943caseTrubenizingProcessCorpvJohnForsythLtd
[1943CanLII10(SCC;1943-06-09),
],whereit
washeldthattheobligationtopayroyaltiesarisesfromthelicense.Unlessotherwise
provided,thepaymentofroyaltiesis“anindependentcovenantunconnectedwiththe
validityofthepatentcoveredbythelicense.”Moreover,ithasalsobeenheldthat
attackingthevalidityofapatentisnotapermissibledefenceforalicenseeinan
infringementaction.InCoyle,thecourtdidnotallowalicenseetoarguetheinvalidity
ofapatenttojustifythenon-paymentofroyalties.Accordingtothecourt,when
enteringintothelicensingagreement,thelicenseeacknowledgedthatthepatentin
questionwasvalid.Thelicenseewasthereforeestoppedfromarguingthecontrary
duringthetermofthelicensingagreement.

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Inthemorerecent1984caseCulzeanInventionsLtd.v.MidwesternBroom
CompanyLtd.(Culzean),thecourtstatedthatabsentanyexpressprovisiononthe
subject,thereinapresumptionthatalicensecontinuesuntiltheexpirationofthe
originaltermofapatent,butnotbeyond.However,anexpressstipulationastothe
durationofthelicensecontrols.InCulzean,thelicensingagreementinquestion
providedthatitwouldremaininforceuntilMarch31,1980,i.e.fiveyearsafterthe
March25,1975expirationofthepatent.Thelicensingagreementthereforeexpressly
providedforatermwhichwasnottiedtotheexpirationofthepatent.Sincetherewas
noevidencethatthelicensewascontrarytopublicinterest,thecourtheldthatthe
licensewasvalidandremainedineffectevenafterthepatentexpired.

Conclusion

ItisclearthatthelawgoverningpatentlicensesisquitedifferentintheUSand
Canada.Toavoidanysurprises,itisimportantthatbothlicensorandlicenseeagree
onwhichjurisdictiongovernstheiragreement.InCanada,thepartieswillhavemore
libertyinnegotiatingthedurationoftheiragreement.Althoughthepartiescanagree
onroyaltypaymentscoveringuseaftertheexpirationofapatent,cautionshouldbe
exercisedwhendoingso.ThecourtdemonstratedinCulzeanthatitcouldpotentially
invokeequitableprinciplestoholdsuchclausesunenforceableiftheyarecontraryto
thepublicinterest,forexamplebybeingunreasonable,unconscionableorinrestraint
offreetrade.