The recent case, Zimmer Biomet Holding v Insall, resulted in a judgment requiring the licensee to continue paying royalties after patent expiration. The holding conflicts with Supreme Court precedent, but was upheld based on the arbitrator’s unreviewable interpretation of the agreements.
Supreme Court Precedent on Post-Expiration Patent Royalties
There are two key precedents at issue in the Zimmer dispute: Brulotte v Thys, and Kimble v Marvel.
In Brulotte, the Supreme Court held that it is unlawful per se to have a royalty agreement extending beyond the expiration date of the patent. This was called the Brulotte rule. The rule was widely criticized at the time (1964), and the rule continued to receive criticism through the years. In Kimble, the Court provided a carve out: “post-expiration royalties are allowable so long as tied to a non-patent right”.
The Zimmer–Insall Patent License Agreement
The dispute between Zimmer and Insall centered around a license to a knee replacement technology. The original 1991 agreement defined specifically that Zimmer would pay royalties to Insall on the sale of products covered by Insall’s patents. But in 1998, the agreement was updated. The update stipulated that 1% of royalties would be calculated on sales of Zimmer’s NexGen Knee family of products. Those weren’t necessarily covered by the patents.
Royalty Payments After Patent Expiration
After the Insall patents expired in 2018, Zimmer stopped royalty payments but continued to sell the products. When challenged, Zimmer argued that Brulotte rendered any post-expiration royalties unenforceable.
The parties went to arbitration in 2019, and the arbitration panel sided with Insall. The amendments to the royalty agreement effectively divorced royalties from Insall’s patents and instead married them to NexGen marketing.
District Court Upholds Arbitration Award
The issue was brought to the district court when Zimmer tried to get the arbitration award vacated on the basis that it violated the public policy established in Brulotte. The Insall estate motioned to dismiss and asked the court to uphold the arbitration’s decision. The district court agreed with the Insall estate and confirmed the arbitration award.
Federal Arbitration Act Limits Judicial Review
Zimmer then appealed this to the Seventh Circuit court. The Circuit court stressed that “arbitration awards are largely immune from…scrutiny in court” under the Federal Arbitration Act.
Under that act, arbitration awards can generally only be appealed on very narrow grounds. Those grounds were where the award violates some well-defined and dominant, explicit public policy. Then an arbitral award can be vacated. And even then, a court is bound by the arbitrator’s interpretation of the underlying contract in such an evaluation.
Key Legal Question: Patent Rights or Non-Patent Rights?
The essential question was what the royalties were based on. If they were based on Insall’s patent rights, as the original 1991 royalty agreement stipulated, then the agreement was unenforceable under Brulotte. If they were based on non-patent rights, as the 1998 amendment stipulated, they would be permissible under Kimble.
The Circuit court decided the 1998 amendments were within the arbitrator’s unreviewable authority.
Zimmer tried arguing that the amendment changed how the royalties were calculated, not why they were paid in the first place. But the court noted an “arbitration clause delegates interpretive power to the arbitrators. We don’t ask whether they read the language correctly, it is enough that they tried to apply the contract that the parties signed.”
Other articles related to Patent litigation that may be of interest: Cellect v. Vidal and the future of Patent Term Adjustment