With great patents, there must come great restraint (but a bit less in the EU than the US)

05.12.2014

In a first superhero-related post on this blog, we note with interest that the US per se rule against post-term patent royalties is under challenge, courtesy of a Spiderman toy. The US Supreme Court is set to rule in Kimble v. Marvel Enterprises Inc. on an attempt by the petitioner to obtain patent royalties from a company behind Spiderman even though the patent expired in 2010. While the case remains to be decided, a notableamicus brief has recently been filed on behalf of the US government, which argues in favour of the status quo.

Perhaps surprisingly this is an area where the EU is currently more lenient than the US. The Technology Transfer Guidelines countenance that in some cases it may be appropriate to structure royalties to be payable after patent expiry (see paragraph 187, which 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”). This has some logic – in agreements where the licensed technology is an input into a larger, more complex product, or where significant development is necessary before a marketable product is ready, it makes a lot of sense not to over-burden the licensee at a time before the product has generated much income. It also arguably makes sense to reward the licensor for an appropriate portion of the licensee’s income if pre-patent expiry royalties have been low. The rationale given in the Technology Transfer Guidelines is, however, rather different, focussing on the fact that once rights expire, “third parties can legally exploit the technology in question and compete with the 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”.

The approach to this issue in the Technology Transfer Guidelines has always seemed something of an outlier compared with other aspects of the treatment of pricing agreements in the Commission’s Guidelines: pricing restrictions are usually assumed to have effects on the market. The fact that the effects of a pricing provision are felt only by a particular competitor is not usually enough for them to escape the rule in Article 101: the same could also be said of some (many?) minimum resale price obligations, yet these are still regarded as ‘hardcore’ restrictions in the EU (it is the US which is more lenient in this case, following Trinko). Perhaps it is more pertinent to focus on the fact that – in the absence of unusually restrictive termination provisions – there will be nothing to stop the licensee from terminating the agreement once the licensed technology has expired. This is in fact in line with the US government’s amicus brief in Kimble, which proceeds purely on the basis of patent law, arguing that it is unnecessary to have any regard to antitrust principles in this context.

However, it may not be easy in practice for a licensor to provide for post-term royalties in reliance on paragraph 187. For one thing, if the geographic scope of the agreement includes the US, the current rules on post-term royalties will apply unless Kimble changes the position. The agreement could be structured so that only non-US sales count for the post-term royalties, but this would be a rather artificial approach. Secondly, unless the agreement prohibits licensee termination, or unless there is some allied know-how (which must, according to the TTBE, be secret, substantial and identified) which is also licensed, there will be nothing to stop the licensee from simply ending the agreement after patent expiry. If the licensee is contractually locked in, then there will be a question as to the compliance of the post-term royalty provisions with competition law. If know-how is also licensed, there could be questions over the relative value of the different parts of the licensed technology. Given the lack of clear guidance on when post-term royalties may be charged (how much, for how long?), an agreement which provides for them is likely to be at risk of unenforceability. Evidence as to the parties’ intentions when the agreement was signed, and the period over which investments were expected to be recouped, could be critical to the outcome, were this issue to be litigated. In practice, the shorter the period over which post-term royalties are payable, the greater the prospect of the provision being enforceable. Sadly, superheros – Spiderman or otherwise – are unlikely to assist.

Sophie Lawrance

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