Hardware Bolts
'Close-up of lug nuts on the ground' by Ivan Radic is licensed under CC BY 2.0.

No Contract Breach for Failing to Pay Royalties after Patent Expires

Contract isn’t breached
If licensee stops paying
When patent expires

The Tenth Circuit has affirmed a lower court’s judgment dismissing an action claiming breach of a patent settlement agreement. The court agreed that the patent owner failed to establish damages for unpaid royalties, given that patent owners can’t charge royalties after the patent term expires.

In 1998, plaintiff Hildebrand patented a device for removing damaged threaded fasteners, such as lug nuts.

In 2009, Hildebrand sued Wilmar for patent infringement. The parties settled via a written agreement that said “Wilmar agree[d] to compensate Hildebrand with $25,000.00 for past and current infringing acts.” Wilmar also agreed to pay Hildebrand an ongoing royalty in the amount of 15% of the Gross Selling Price of Products sold and covered by Hildebrand’s patent, and this “15% royalty” was to “continue until the expiration date of the” patent in 2015.

Wilmar also agreed to continue paying Hildebrand an ongoing reduced royalty/fee of 5% following the expiration of the patent.

In 2018, Hildebrand sued, claiming that Wilmar had breached the settlement agreement in several ways, including by failing to pay royalties for sales that occurred after the patent expired in 2015.

The magistrate judge recommended that Hildebrand “be barred from seeking damages for unpaid royalties after . . . the date the [patent] expired,” reasoning that the settlement agreement’s provision requiring these payments was unenforceable under Brulotte v. Thys Co., 379 U.S. 29 (1964) and Kimble v. Marvel Entertainment, LLC, 576 U.S. 446 (2015), which bar royalty payments on expired patents.

The district court agreed. It found that Hildebrand waived an argument that the parties had intended the 5% post-expiration payments to compensate Hildebrand for past infringements by failing to raise that argument with the magistrate judge.

The district court also found that even if Hildebrand hadn’t waived this argument, it lacked merit because the parties’ “`intent must be determined from [the] contract language itself,’” and the plain language of the agreement undermined this argument.

The district court then held a bench trial on Hildebrand’s remaining claims and found that Wilmar had fully paid the 15% royalties due to Hildebrand during the relevant period before the patent expired.

The Tenth Circuit agreed with the district court, noting

In Brulotte . . ., [the Supreme] Court held that a patent holder cannot charge royalties for the use of his invention after its patent term has expired.” Kimble, 576 U.S. at 449. Kimble observed that “[a] court need only ask whether a licensing agreement provides royalties for post-expiration use of a patent. If not, no problem; if so, no dice.”  But Kimble also clarified Brulotte‘s rule does not bar parties from charging fees for non-patent rights or from deferring compensation owed “for pre-expiration use of a patent into the post-expiration period.”

Again, Hildebrand argued that Brulotte and Kimble didn’t apply because the 5% payments weren’t royalties on the expired patent but were instead deferred compensation for Wilmar’s prior infringement.

This argument turned on the agreement’s distinction between the 15% pre-expiration payments (called “royalties”) and the 5% post-expiration payments (called a “reduced royalty/fee”).

The Tenth Circuit was unimpressed with this line of reasoning:

The agreement expressly states that the compensation being paid “for past and current infringing acts” was a $25,000 lump sum payment. … Nothing in the agreement suggests the 5% post-expiration payments were for anything other than the ongoing license to sell products covered by the expired patent. And Hildebrand does not challenge the district court’s conclusion that it could not consult extrinsic evidence to reach a different result.

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