Support IPWatchdog with an individual sponsorship: Click here
“The SCOTUS denial leaves in place lower rulings finding that the arbitration award was not against public policy because modifications to the licensing agreement separated the royalty provisions from Insall’s patent rights.”
Yesterday, the U.S. Supreme Court (SCOTUS) denied the petition for writ of certiorari filed in Zimmer Biomet Holdings, Inc. v. Insall, which challenged an arbitration award ordering Zimmer Biomet to continue paying royalties on knee replacement technologies following the expiration of associated patent rights. The Supreme Court’s denial leaves in place lower rulings finding that the arbitration award was not against public policy because modifications to the licensing agreement separated the royalty provisions from Insall’s patent rights to those knee replacement technologies.
Changes to License Agreement Separated Royalties from Patent Rights
Zimmer Biomet’s petition for writ, filed in October, noted that the present appeal stems from a license agreement between the medical device company and Dr. John Insall, an orthopedic surgeon and inventor. Dr. Insall held patents covering knee systems with cruciate retaining and sacrificing features and granted Zimmer Biomet a worldwide license in 1991 in exchange for 1% of gross sales. The license agreement was modified twice, with changes in 1998 that retained the 1% royalty rate for “all subsequently developed articles, devices or components marketed by Zimmer as part of the NextGen family of knee components,” while “future knee systems” developed by Zimmer Biomet based on Dr. Insall’s designs qualified for a lower 0.5% royalty rate.
Following Dr. Insall’s passing in 2000, Zimmer Biomet no longer owed the 0.5% royalty on future knee systems, but continued to pay the 1% royalty on NextGen sales until the expiration of Dr. Insall’s patents in March 2018. The estate of Dr. Insall began arbitration proceedings pursuant to the agreement when Zimmer Biomet ended royalty payments. Although the arbitration panel found that earlier versions of the license agreement were against public policy for creating a perpetual license post-patent expiration, it ruled that the 1998 changes tied royalties to products “marketed by Zimmer” under the NextGen line whether or not they practiced Dr. Insall’s patented technology.
Zimmer Biomet filed suit in the Northern District of Illinois asking the district court to vacate the arbitration award as against public policy. Confirming the arbitration award, the district court distinguished Zimmer Biomet’s case from Brulotte v. Thys Co. (1964), in which the Supreme Court established that patent license agreements are unenforceable once the patents underpinning those agreements have expired. Zimmer Biomet appealed to the Seventh Circuit, which affirmed after agreeing that the licensing agreement’s royalty basis was no longer grounded in Dr. Insall’s patents following the 1998 amendments.
Decisions by Third and Seventh Circuits Provide Roadmap to Evade Brulotte
Seeking review by the Supreme Court, Zimmer Biomet argued that the Seventh Circuit’s decision flouts Supreme Court precedent in Brulotte and Kimble v. Marvel Enterprises (2015). In its lower ruling, the Seventh Circuit noted that Kimble clarified Brulotte’s scope by explaining that royalty agreements are enforceable following patent expiration “so long as tied to a non-patent right – even when closely related to a patent.” Zimmer Biomet had argued that, under Kimble, attempts “to limit a licensee’s post-expiration use of the invention, ‘whatever the legal device employed,’” were against public policy.
Both the Seventh and Third Circuits have provided a roadmap for evading public policy, Zimmer Biomet’s petition contended. In Ares Trading v. Dyax Corp. (2024), the Third Circuit found that cancer drug royalties were still payable following patent expiration because those royalties were not expressly calculated based on post-expiration use of the patents. Both circuit courts rejected arguments that Brulotte applies whenever royalty obligations under a patent license remain undiminished after the licensed patents expire. Zimmer Biomet argued that these decisions misconstrue Kimble, in which the Court declared a royalty obligation unenforceable following patent expiration despite the inclusion of non-infringing products in royalty calculations.
Several Supreme Court decisions have upheld the calculation of patent royalties based on total sales rather than actual use if the contracting parties find it convenient, Zimmer Biomet’s petition noted. These rulings run contrary to the narrow interpretation by the Third and Seventh Circuits such that common licensing arrangements in those circuits are capable of escaping the Court’s precedent from Brulotte, the petition argued.
The Ninth and Tenth Circuits have also recently issued decisions on the applicability of Brulotte and Kimble, which showed the recurring nature of the issue presented according to Zimmer Biomet. The petition also cited a District of Utah decision from this June that, contrary to the present case, found that a post-expiration patent royalty could not be maintained simply by basing the royalty on sales of a branded line including products that did not practice the patented technology. Not only does the perpetual license increase consumer costs for medical devices, Zimmer Biomet argued, but the circuit split stated by the petition undermines the predictability required for intellectual property law to function well.
Image Source: Deposit Photos
Author: hafid007
Image ID: 453186314
