Zimmer Biomet Holdings Inc v. Mary N. Insall, Executrix in the Seventh Circuit Court of Appeals (No, 23-18880) dated July 12, 2024 provides a useful illustration of principles relevant to both patent licensing and arbitration.
In 1991, an inventor Dr Insall licensed patents involving knee replacement devices and “accoutrements” to Zimmer. for a royalty based on sales. The license agreement was amended twice more, the last time in 1998. This last amendment appeared to base the royalty on the sale of the NexGen Knee products without direct reference to the patents. When the patents expired in 2018, Zimmer refused to pay continuing royalties on the basis that to do so would violate public policy as enunciated in Brulotte v. Thys Co. , 379 U.S. 29 (1964) and Kimble v. Marvel Entertainment, LLC. 576 U.S. 446 (2015). .These cases had held that it was against public policy to require a license to continue to pay royalties based on an expired patent.
The contract contained an arbitration clause and pursuant to that, an arbitration panel held that the continued payment of royalties was not based on the rights that the patents bestowed but on “some non-patent right” that is “closely related to” the patents. Therefore, Zimmer was required to continue to pay royalties.
Both the District Court and the Seventh Circuit upheld the decision of the arbitration panel. Reviewing the limited grounds of review contained in the Federal Arbitration Act (FAA), the court noted that judicial review of arbitral awards is extremely limited and highly deferential. None of the limited grounds in the FAA applied. However Zimmer argued, and the Court agreed that the Court would nevertheless not enforce a contract that was against public policy and that this exception applied equally to arbitration awards.
However, the question of whether the contract was against public policy turned on the interpretation of the contract as found by the arbitral panel. That panel had concluded that the continued royalty payment, as amended, did not depend on the existence of the patents and that therefore Brulotte did not apply.
Takeaways:
- Be clear on what basis the royalties are to be paid. If the licensor wishes the royalties to extend past the life of the patent, there must be some other basis for the payment of the royalty other than the patents, perhaps knowhow, trade secrets, continuing marketing advice.
- Public policy applies to arbitral awards.
- Courts are deferential to arbitral awards and are bound by the interpretation of the contract given by the arbitral panel.