For the second time in less than two weeks, a circuit court decided an appeal hinging on the Brulotte rule, which holds that patent royalties are impermissible when based on payments for the use of expired patents. Like the US Court of Appeals for the Ninth Circuit, the Fourth Circuit upheld a royalty agreement that purported to require payments after patent expiration. Ares Trading S.A. v. Dyax Corp., Case No. 23-1487 (4th Cir. Aug. 14, 2024) (Krauser, Porter, Chung, JJ.)

Dyax is a biotechnology company engaged in “phage display” research – a laboratory process used to identify antibody fragments for use in developing medications. Dyax holds multiple patents related to phage display, including licenses to patents owned by Cambridge Antibody Technology (CAT). Dyax and Ares entered a licensing agreement. Dyax’s main obligation was to use its phage display technology to identify antibody fragments and then provide those fragments to Ares so that Ares could incorporate them into commercial medications, including one called Bavencio. In exchange, Ares agreed to pay Dyax at various research milestones and pay royalties for identified products, including Bavencio. Although Bavencio was first sold in 2017, the last CAT patent expired in 2018.

After learning of the Brulotte rule, Ares tried to renegotiate its contract obligations. When renegotiation attempts failed, Ares sued Dyax, seeking multiple related declaratory judgments revolving around its argument that its royalty obligations to Dyax were unenforceable under Brulotte. Dyax countersued on six claims, including for declaratory judgment that Brulotte did not apply. The district court found the royalty obligation enforceable and not in violation of Brulotte. Ares appealed.

Ares asked the Fourth Circuit to reconsider the applicability of the Brulotte rule and to relatedly find that Dyax had breached the covenant of good faith and fair dealing. The Fourth Circuit first examined its own jurisdiction in the context of the Federal Circuit’s exclusive jurisdiction over patent appeals. Of the 10 total claims and counterclaims, nine arose under Massachusetts contract law. According to the Fourth Circuit, these were not “substantial” patent law claims and thus regional circuit appellate jurisdiction was appropriate.

The Fourth Circuit next turned to the Brulotte prohibition on post-termination royalties and found no violation because “Ares’ royalty obligation is not calculated based on activity requiring post-expiration use of inventions” covered by Dyax or CAT patents. The Court emphasized the policies underpinning the federal patent regime and the Brulotte rule, particularly the importance of inventions entering the public space once a patent expires to allow continued innovation and general use of the once-patented invention. The Court also explained its understanding of the nuances of Brulotte, as informed by the Supreme Court’s 2015 decision in Kimble v. Marvel. For instance, a court’s inquiry must focus on post-expiration use, so where “royalties are not calculated based on activity requiring post-expiration use, they do not hinder post-expiration use ‘on their face’ and Brulotte is not implicated.” In the present case, this was a key delineation because the Fourth Circuit found that Ares’ royalty obligations did not amount to payment for post-expiration use of inventions covered by the CAT patents. Instead, Ares owed royalties based on sales of certain products. The covered products were those that used an antibody or fragment that Dyax delivered to Ares. Thus, Ares paid to use what Dyax discovered using Dyax’s patented technology, not the patented technology itself. Under the circumstances, the Court found Brulotte was not implicated in the parties’ royalty arrangement.

The Fourth Circuit also briefly disposed of Ares’ counterarguments. First, Ares argued that because its royalty obligations did not change after expiration of the CAT patents, this constituted an impermissible royalty for “use” of the expired patents under Brulotte and Kimble. The Court disagreed for the reasons explained above, and also because this “expansive” definition of “use” was inconsistent with public policy and the facts of Brulotte. Second, Ares argued for a different understanding of the Ninth Circuit’s factual findings in Kimble. The Fourth Circuit explained that it wasn’t bound by another circuit court’s findings, since the Supreme Court’s Kimble decision did not mention those same facts. Further, the Fourth Circuit stated that its interpretation of Kimble was actually consistent with the Ninth Circuit’s, so Ares’ argument failed anyway. Finally, Ares put forth “several policy disagreements,” which the Court said were “better addressed to Congress or the Supreme Court,” but were nonetheless unpersuasive.

Having found no violation of Brulotte, the Court upheld the lower court’s finding that Dyax had not violated the implied covenant of good faith and fair dealing. The Fourth Circuit affirmed the entirety of the lower court’s ruling.

Practical Note: Defendants trying to avoid royalty payments on the basis of Brulotte should carefully craft arguments to fit within the “simple” but narrow scope of the rule. In both this case and a recent Ninth Circuit case, the defendants’ losing argument was that the Brulotte rule was implicated because their royalty obligations did not change after the patents’ expiration. Both courts found that the royalty payments at issue were permissible under Brulotte because the payments covered something other than, or in addition to, post-expiration patent use.