108 F.4th 512
7th Cir.2024Background
- Dr. John Insall, an orthopedic surgeon, developed knee replacement devices and licensed patents to Zimmer Biomet Holdings, Inc. in exchange for royalty payments.
- The original 1991 agreement required Zimmer to pay royalties until the last patent expired or as long as Zimmer sold the products, whichever was later; the agreement was amended in 1994 and 1998.
- The 1998 amendment shifted the royalty basis from patented technology to sales of products under the "NexGen Knee" family, regardless of whether patents were involved.
- Insall’s last patent expired in 2018, after which Zimmer stopped paying royalties, citing Supreme Court precedent barring post-expiration patent royalties (Brulotte & Kimble).
- The parties went to arbitration, where the panel ruled in favor of Insall's Estate, concluding royalties were no longer tied to patents under the 1998 amendment.
- Zimmer sought to vacate the arbitration award in federal court, arguing public policy grounds; both the district court and Seventh Circuit affirmed the award.
Issues
| Issue | Plaintiff's Argument (Zimmer) | Defendant's Argument (Insall Estate) | Held |
|---|---|---|---|
| Whether ongoing royalties post-patent term violate public policy (Brulotte/Kimble) | Royalties after patent expiry violate public policy against collecting royalties on expired patents. | Royalties are now based on product sales, not patent rights, per 1998 agreement. | Arbitrators correctly found royalties are not patent-based; award enforced. |
| Scope of judicial review over arbitration award | Court should vacate award for violating public policy. | Judicial review is very limited; no public policy violation. | Review is highly deferential; no basis for vacatur found. |
| Applicability of public policy exception outside labor/context | Public policy exception should apply to this commercial arbitration. | Exception is typically limited to labor/collective bargaining cases. | Exception can apply in commercial contracts as a general matter. |
| Interpretation of post-1998 agreement | 1998 changes didn't alter basis; royalties remain for patents/tech. | 1998 change decoupled royalties from patents/tech. | Arbitrators' interpretation controls; contract is not patent-tied. |
Key Cases Cited
- Brulotte v. Thys Co., 379 U.S. 29 (public policy forbids royalties on expired patents)
- Kimble v. Marvel Entm't, LLC, 576 U.S. 446 (clarifies Brulotte; post-expiration royalties tied to non-patent rights are permitted)
- W.R. Grace & Co. v. Local Union 759, Int’l Union of United Rubber, Cork, Linoleum & Plastic Workers of Am., 461 U.S. 757 (courts may not enforce awards violative of explicit public policy)
- United Paperworkers Int’l Union, AFL-CIO v. Misco, Inc., 484 U.S. 29 (courts cannot review the merits of an arbitral award except for public policy)
- Hall Street Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (grounds for vacating arbitration awards are statutorily limited)