Kimble v. Marvel Enters. Inc.

• Decision Date: 16 July 2013
• Docket Number: No. 11–15605.,11–15605.
• Citation: 727 F.3d 856
• Parties: Stephen KIMBLE; Robert Michael Grabb, individuals, Plaintiffs–Appellants, v. MARVEL ENTERPRISES INC., Defendant–Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

727 F.3d 856

Stephen KIMBLE; Robert Michael Grabb, individuals, Plaintiffs–Appellants,

v.MARVEL ENTERPRISES INC., Defendant–Appellee.

No. 11–15605.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Dec. 5, 2012.

Submission vacated Dec. 14, 2012.

Resubmitted May 29, 2013.

Filed July 16, 2013.

Antonio R. Durando (argued), Tucson, AZ; Stephen Kimble, Tucson, AZ; and Robert Grabb, Tucson, AZ, for Plaintiffs–Appellants.

David Fleischer (argued), Haynes and Boone, LLP, New York, NY; Andrew M. Jacobs, Snell & Wilmer L.L.P., Tucson, AZ; and Jason T. Christiansen, Zuniga Christiansen PLLC, Houston, TX, for Defendant–Appellee.

Appeal from the United States District Court for the District of Arizona, David C. Bury, District Judge, Presiding. D.C. No. 4:08–cv–00372–DCB.

Before: DIARMUID F. O'SCANNLAIN, SIDNEY R. THOMAS, and CONSUELO M. CALLAHAN, Circuit Judges.

OPINION

CALLAHAN, Circuit Judge:

This appeal calls on us to again construe the Supreme Court's frequently-criticized decision in Brulotte v. Thys Co., 379 U.S. 29, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964). In Brulotte, the Court held that a patent licensing agreement requiring a licensee to make royalty payments beyond the expiration date of the underlying patent was unenforceable because it represented an improper attempt to extend the patent monopoly. Id. at 30–33, 85 S.Ct. 176. We have previously noted that Brulotte has been read to require that any contract requiring royalty payments for an invention either after a patent expires or when it fails to issue cannot be upheld unless the contract provides a discount from the alternative, patent-protected rate. Zila, Inc. v. Tinnell, 502 F.3d 1014, 1021 (9th Cir.2007). We acknowledged that the Brulotte rule is counterintuitive and its rationale is arguably unconvincing. Id. at 1019–20 & n. 4. Nonetheless, recognizing that we are bound by Supreme Court authority and the strong interest in maintaining national uniformity on patent law issues, we have reluctantly applied the rule. Id. at 1020, 1022. We are compelled to do so again. Accordingly, we join our sister circuits in holding that a so-called “hybrid” licensing agreement encompassing inseparable patent and non-patent rights is unenforceable beyond the expiration date of the underlying patent, unless the agreement provides a discounted rate for the non-patent rights or some other clear indication that the royalty at issue was in no way subject to patent leverage. See Meehan v. PPG Indus., Inc., 802 F.2d 881, 884–86 (7th Cir.1986); Boggild v. Kenner Prods., 776 F.2d 1315, 1319–20 & n. 5 (6th Cir.1985); Pitney Bowes, Inc. v. Mestre, 701 F.2d 1365, 1371–72 (11th Cir.1983).

I

A

Around 1990, Appellant Stephen Kimble ¹ invented a Spider–Man toy that allowed a child or other user to “role play” as Spider–Man by mimicking Spider–Man's web-shooting abilities with foam string. A user would operate the toy by activating a trigger attached to a valve in the palm of a glove. The valve was attached to a flexible line leading to a can of foam strapped to the user's wrist or waist. Kimble patented the idea under U.S. Patent No. 5,072,856 (the “'856 Patent”). The ' 856 Patent expired on or about May 25, 2010.

In December 1990, Kimble met with Lou Schwartz (the President of Appellee Marvel's predecessor ²) to discuss the idea covered by then-pending application for the ' 856 Patent and other “ideas and know-how.” Kimble contends that at the meeting, Schwartz verbally agreed that Marvel would compensate him if it used any of his ideas. Marvel subsequently told Kimble that it was not interested in his ideas. Despite its supposed lack of interest, Marvel thereafter began manufacturing a similar Spider–Man role-playing toy called the “Web Blaster.” The Web Blaster allowed that toy's user to shoot foam string from a can mounted on the user's wrist by activating a trigger in the user's hand. Like Kimble's toy, the Web Blaster was packaged with a glove, but unlike Kimble's toy, the Web Blaster glove was purely cosmetic—a Web Blaster user did not need the glove in order to shoot foam string.

B

In 1997, Kimble sued Marvel for patent infringement and breach of contract, claiming that it had used his ideas in developing the Web Blaster without compensating him. Kimble alleged that Marvel had breached the verbal agreement because the Web Blaster incorporated “many of the ideas” he disclosed at the meeting and Marvel had not compensated him for its use of those ideas.

The district court granted Marvel's motion for summary judgment on the patent infringement claim, but found that there were genuine issues of material fact precluding summary judgment on the contract claim. A jury later found for Kimble on the contract claim, and the court entered a judgment awarding him 3.5% of past, present, and future Web Blaster “net product sales” (excluding sales of foam string refills). Kimble appealed the court's decision on the patent infringement claim, and Marvel appealed the verdict on the contract claim. Throughout all stages of the case, Kimble maintained that the Web Blaster infringed the '856 Patent while Marvel contended that it did not.

C

In 2001, the parties agreed to settle the case while the appeals were still pending. They accordingly executed a written agreement (the “Settlement Agreement”) memorializing their agreement to: (a) withdraw their appeals; (b) stipulate to vacating the district court judgment; and (c) stipulate to dismissing the case with prejudice. Marvel also agreed to purchase the '856 Patent. The relevant section provided that:

The purchase price for the Patent shall be payable to the Patent Holders as follows:

a. $516,214.62 upon execution and delivery of this Agreement; and

b. 3% of “net product sales” (as such term is used in the Judgment) excluding refill royalties made after December 31, 2000. For purposesof this paragraph 3.b, “net product sales” shall be deemed to include product sales that would infringe the Patent but for the purchase and sale thereof pursuant to this Agreement as well as sales of the Web Blaster product that was the subject of the Action and to which the Judgment refers.

The parties also agreed to a release, under which Kimble released Marvel except for Marvel's obligations under the Settlement Agreement itself, “and except for those obligations under the alleged verbal agreement that was the subject of the Action.” The agreement has no expiration date and does not include any specific time limit on Marvel's obligation to pay “3% of ‘net product sales.’ ” At the parties' request, the district court entered an order vacating the judgment and dismissing the action with prejudice.

D

Thereafter, the parties coexisted for several years without any significant disagreements. Web Blaster sales—and as a consequence, royalty payments over the life of the Settlement Agreement—were substantial. All together, Marvel paid Kimble more than $6 million in royalties.

But the peace did not last. In 2006, Marvel entered into a licensing agreement with Hasbro giving it the right to produce certain toys related to Marvel characters, including the Web Blaster. A number of disagreements subsequently arose between Marvel and Kimble concerning the royalty payments. ³ These disputes revolved around the calculation of royalties for subsequent iterations of the Web Blaster that included additional functions (in addition to shooting foam string) or Web Blasters that were packaged with other role play items (such as Spider–Man masks). In their discussions, Kimble initially took the position that royalties were due for these products under the Settlement Agreement because they “would infringe the Patent.”

Kimble filed suit in Arizona state court for breach of contract and related claims. Marvel removed based on diversity of citizenship. Marvel then counterclaimed seeking, among other things, a declaration that it was no longer obligated to pay Kimble under the Settlement Agreement “based on the sales of products after the expiration of the '856 patent.” In discovery, Marvel reaffirmed its view that the Web Blaster never infringed the '856 Patent.

The parties filed summary judgment motions, which the district court referred to the magistrate judge for a report and recommendation. Kimble v. Marvel Enters., Inc., 692 F.Supp.2d 1156, 1164 (D.Ariz.2010). The magistrate judge found that under Brulotte, Kimble could not recover royalties under the Settlement Agreement beyond the expiration date of the '856 Patent.Id. at 1167–69 (discussing Brulotte v. Thys Co., 379 U.S. 29, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964)). He reasoned that the Settlement Agreement transferred patent rights, and that it was less clear that it transferred any non-patent rights. Id. at 1167–68. He observed that the release clause “more reasonably suggests that Plaintiffs reserved the non-patent rights from the verbal agreement and did not transfer them to Marvel.” Id. at 1168. Alternatively, he found that Brulotte applied because the Settlement Agreement was a “hybrid” agreement transferring inseparable patent and non-patent rights, and because the patent rights were used as leverage to negotiate the agreement. Id. at 1168–69.

Kimble objected, arguing “that the Agreement transferred both patented and non-patented rights and while the royalties for the patent rights end with the patent, they do not end for the non-patented rights which cover the Web Blaster.” Id. at 1159. The district court nonetheless adopted the recommendation over Kimble's objection. Id. at 1159–63. It noted that the Settlement Agreement could be read as transferring both patent rights and “the rights to the toy idea(s) verbally exchanged” between the parties in 1990, but rejected Kimble's argument that it created “separable” patent and non-patent rights because it made “no distinction between the royalties for these two” categories. Id. at 1160. Accordingly, the district court agreed that the Settlement Agreement was a “hybri...