The US Court of Appeals for the Ninth Circuit reversed a district court’s finding that a contract impermissibly allowed for patent royalties after the patent expired because the post-termination royalty payments were allocated to non-US patents. C.R. Bard, Inc. v. Atrium Med. Corp., Case No. 23-16020 (9th Cir. Aug. 23, 2024) (Friedland, Mendoza, Desai, JJ.) (per curiam).

C.R. Bard held one US and one Canadian patent covering a type of vascular graft. In 2011, Bard and Atrium entered a licensing agreement to settle a patent dispute. Under the terms of the agreement, Atrium agreed to pay Bard a 15% royalty on covered US sales until 2019 (when the US patent expired) and a 15% royalty on covered Canadian sales until 2024 (when the Canadian patent expired). The contract also included a quarterly royalty minimum. Through 2019, as the contract contemplated, Atrium paid royalties on its US and Canadian sales. Because of a US Food and Drug Administration delay, Atrium had lower than expected sales and never exceeded the quarterly minimum royalty.

Atrium eventually refused to continue making royalty payments, which after 2019 covered only Canadian sales (likewise never exceeding the quarterly minimum). Bard sued for breach of contract in 2021. Atrium argued that the royalty provision was unenforceable under Brulotte v. Thys, a 1964 US Supreme Court decision holding that collecting royalties for patent use after a patent’s expiration constitutes patent misuse. The district court determined that the “clear and primary purpose” of the parties’ contractual minimum royalty was to compensate Bard for US sales of the patented product. The district court therefore agreed with Atrium. Bard appealed.

The Ninth Circuit undertook to determine whether the terms of the parties’ contract constituted patent misuse under Brulotte. The Ninth Circuit first explained that in Brulotte, the Supreme Court considered a contract between the owner of multiple patents related to picking hops and farmers who made seasonal license payments to use machines incorporating those patents. The Supreme Court found patent misuse because the license amount did not decrease as patents incorporated into the machines expired, which indicated that the farmers were paying to use expired patents.

Despite pushback, the Supreme Court refused to overturn Brulotte in 2015 when it decided Kimble v. Marvel. That case involved a patent holder’s license allowing Marvel to incorporate patented web-shooting technology into a Spiderman toy. In Kimble, the Ninth Circuit had ruled that the license agreement was invalid under Brulotte because it required Marvel to continue to pay a royalty fee after the patent expired. The Ninth Circuit noted, however, that an ongoing license after the expiration of a patent may be permissible if the license contemplates both patented and non-patented features, as long as the terms of the royalty adjust when the patent expires. For instance, a license covering both a patented invention and a trade secret may continue past the life of the patent, as long as the royalty rate diminishes after the patent expires. This reflects that the royalty is thereafter just for use of the trade secret. The Supreme Court agreed and affirmed Kimble while upholding its Brulotte rule, writing that Brulotte “is simplicity itself to apply,” requiring courts merely to ask whether a licensing agreement continues to provide for royalties past the life of a patent. The Supreme Court also agreed that parties can contract around Brulotte as in the Ninth Circuit’s trade secret example or by spreading payments for use of a patent past its life (e.g., a 10% royalty for the remaining five-year-life of a patent could be paid as a 5% royalty over 10 years without violating Brulotte).

The Ninth Circuit next clarified that whether the parties’ contract violated Brulotte was a question of law, not fact. Brulotte is not concerned with factual inquiries regarding “the parties’ motivations” or “the course of their negotiation.” Rather, Brulotte requires a court to determine only whether the contract’s terms constitute patent misuse. In the instant case, the terms of the contract were not in dispute. The appeal here concerned only the question of law, requiring no deference to the lower court’s determination.

Reviewing de novo, the Ninth Circuit found that the royalty structure between Bard and Atrium was not patent misuse under Brulotte. The contract unambiguously required royalty payments on US sales during the life of the US patent, and royalty payments on Canadian sales during the life of the Canadian patent. The Court was unpersuaded by Atrium’s argument that the royalty structure violated Brulotte because the minimum amount did not decrease when the US patent expired. The Court explained that this particular nuance of Brulotte concerns only royalties on sales of products reflecting “inseparable patent and non-patent rights,” as the Kimble Court explained in terms of the patent-plus-trade-secret example. Since the agreement was clear that from 2019 onwards all royalties related to Atrium’s Canadian sales only, the contract was not improper just because the minimum royalty remained the same for sales in both the United States and Canada, versus in Canada alone. The Ninth Circuit noted that Brulotte does not require or allow courts to weigh the “reasonableness” of a contract provision. Rather, its only task is to determine whether the royalties after 2019 referred to only Canadian sales or to Canadian and US sales.