W.D. Tex. Court Finds Kimble Inapplicable to Royalties Based on a Foreign Patent; Enforces License

Jan 30, 2018

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The parties, Nautilus, Inc. (“Nautilus”) and Icon Health & Fitness, Inc. (“Icon”), are both exercise-equipment companies. Nautilus gave Icon a license to use its U.S. and foreign patented technology in Icon’s elliptical machines. In the agreement, Icon received a nonexclusive license in exchange for a five-percent royalty on gross sales of “Products” (elliptical machines that fall within the scope of one or more licensed patents). On January 25, 2015, all of the patents licensed under the license had expired except for one—Nautilus’s Chinese patent. Icon made some payments after the January 2015 expiration date, but ultimately took the position that its devices that were manufactured and partially assembled in China were not “Products” under the license. Nautilus sued to enforce the license. This teed up the issue that touched on the Supreme Court’s 2015 decision in Kimble v. Marvel Entm’t. LLC, 135 S. Ct. 2401, 2415 (2015): Could the court enforce royalties owed on “Products” that were imported into the United States after the expiration of a U.S. patent, but made in China under a nonexpired Chinese patent?

Before analyzing royalties, the court had to determine whether the products actually infringed the Chinese patent under Chinese law, as was required by the license agreement. The Chinese patent covered the final assembled product— the individual components and the structural relationships between them—but, Icon manufactured unassembled machines that were subsequently assembled in the United States by customers using a provided instruction manual. The court ruled that, under Chinese law providing the instruction manual was equivalent to providing the structural relationship between the parts. This meant that the devices infringed under Chinese law and, accordingly, were “Products” covered by the parties’ license.

Turning to the royalty issue, the court examined whether the royalty provision was enforceable when only the Chinese patent remained in effect. Brulotte v. Thys Co., which was recently upheld in Kimble, holds that contracts requiring the payment of royalties after the expiration of a U.S. patent are unenforceable. 379 U.S. 29, 32 (1964). Although the court observed that the Brulotte rule was a “bad rule,” the court acknowledged that it was bound to apply it and that the rule had recently been affirmed by Kimble on stare decisis grounds. As the court observed, however, Brulotte and Kimble still allow a licensor to contract for royalties post-expiration of its U.S. patents if the post-expiration royalties are tied to some separate right that exists independently of the expired patent. According to the court’s reasoning, such a separate, independent right could be provided by another unexpired patent.

The court looked to the 9th Circuit’s analysis in Zila, Inc. v. Tinnell, which the court found to be a “substantially similar” case. 502 F.3d 1014 (9th Cir. 2007). The Zila court found enforceable a royalty provision after the expiration of the licensed U.S. patents where a licensed Canadian patent was still in effect. It reasoned that Brulotte does not “[E]xtend its royalty-canceling powers to contracts for foreign patents . . . . Even if the principle announced in Brulotte were to obviate Zila’s obligation to pay royalties on the [American] patent once it expired, . . . it [does not] displace[] Zila’s obligation to pay royalties on the valid Canadian patent.” Id. at 1023-24.

Judge Lamberth “wholly agreed” with the Zila decision, and, accordingly, Nautilus prevailed. The court proceeded to find that the total damages owed was “at least $1,782,508,” including interest. Finally, the court found that, under the license, Nautilus was entitled to attorney’s fees.

Nautilus, Inc. v. Icon Health & Fitness, Inc., No. SA-16-CV-00080-RCL, 2018 U.S. Dist. LEXIS 9828 (W.D. Tex. Jan. 19, 2018)

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