Summary

In Ares Trading S.A. v. Dyax Corp.,1 the Third Circuit recently held that royalty obligations in patent license agreements that extend beyond the expiration of the licensed patents are not automatically unenforceable as patent misuse under the Supreme Court’s ruling in Brulotte v. Thys Company.2 The Third Circuit clarified that royalty obligations remain enforceable as long as they are not based on activities requiring the use of the invention after the patent expires.

Case Background

Ares Trading S.A. and Dyax Corporation disputed Ares’s royalty obligations to Dyax in connection with Ares’s cancer drug, Bavencio. 3 In creating Bavencio, Ares used antibody fragments that Dyax had developed. 4 In developing the fragments, Dyax used its own patented phage display technology as well as phage technology patented by a third party, Cambridge Antibody Technology (“CAT”). 5 Under their collaboration and license agreement, Ares owed royalties to Dyax based on a percentage of Bavencio’s net sales, and this obligation continued beyond the expiration of the CAT patents. 6 The primary issue in the case was whether Ares’s obligation to pay royalties beyond the expiration of certain the CAT patents, violated the rule of Brulotte, which bars the collection of royalties on expired patents. 7

The District Court of Delaware ruled that Ares’s royalty obligation was enforceable under Brulotte, categorizing it as deferred compensation for Dyax’s pre-expiration research related to phage display. 8

Third Circuit’s Decision

The Third Circuit upheld the district court’s decision in favor of Dyax. Ares’s royalty obligation extended beyond expiration of the CAT patents, but the Third Circuit held that Brulotte did not apply because that obligation did not depend on post-expiration use of inventions covered by the CAT patents. 9 (Although the inventions covered by the CAT patents were used to discover Ares’s drug, they were not implicated by the ongoing manufacture or use of that drug. 10)

The Third Circuit emphasized that the Brulotte rule is relevant only when royalties are explicitly tied to post-expiration patent use. 11 It therefore made a significant distinction between royalties related to post-expiration activities and those stemming from pre-expiration research. 12 Thus, the court pointed out that the royalty payments were calculated based on commercialization of products resulting from Dyax’s prior research—that is, sales of Bavencio—rather than on ongoing use of any invention covered by the CAT patents. 13 Sale and use of Bavencio did not rely on the inventions claimed in the CAT Patents; Dyax’s usage of the CAT patents, as detailed in the license Agreement, occurred prior to the patents’ expiration. 14 The Third Circuit therefore concluded that these payments did not violate the Brulotte rule because Brulotte prohibits only royalties that unlawfully extend a patent’s monopoly beyond its expiration date. 15

Implications for Future Patent Licensing

The Third Circuit embraced a nuanced interpretation of Brulotte. The ruling in Ares rejects a blunt application of the Brulotte rule to invalidate any royalty obligations extending beyond the life of a related patent. Instead, the court embraced careful analysis of the specific basis for the royalty payments to ensure they are not automatically deemed unenforceable because they are due after expiration of a related patent.

This ruling provides essential guidance for companies engaged in patent licensing negotiations, particularly in industries such as pharmaceuticals, where lengthy research and development cycles are the norm. It reassures licensors that they can structure royalty payments extending beyond the life of a patent, provided those payments are not directly tied to post-expiration use of the patented invention.

1Ares Trading S.A. v. Dyax Corp., No. 23-1487 (3d Cir. Aug. 14, 2024).
2Brulotte v. Thys Co., 379 U.S. 29 (1964).
3Ares, No. 23-1487 at 4.
4Id.
5Id.
6Id. at 9.
7Id. at 9-10.
8Id. at 12.
9Id. at 23-24.
10Id.
11Id. at 26-27.
12Id. at 12.
13Id. at 39.
14Id. at 39-40.
15Id. at 23-24.



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