C.R. Bard v. Atrium: The impact of FDA approval timelines on royalty payments

A case pending in the Ninth Circuit Court of Appeals highlights the importance of negotiating the term of royalty payments in the license of Food and Drug Administration (FDA)-regulated products. This is particularly notable when the timeline for FDA approval of the licensed product is unknown, and boilerplate language is used to extend royalty payments beyond patent expiry. Otherwise, patentees may be barred from post-expiration payments.

A long-standing patent misuse doctrine provides that “a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” Brulotte v. Thys Co., 379 U.S. 29, 32-33 (1964). Exceptions to the Brulotte doctrine were highlighted in a 2015 US Supreme Court case that allowed parties certain flexibility with the structure and timing of royalty payments in licensing agreements, including deferring payments for pre-expiration use of a patent into the post-expiration period. Based on the exceptions, if a licensor intends to extend royalty payments past the expiration of a patent, they are advised to take note of the recent decision in C.R. Bard, Inc. v. Atrium Med. Corp., and to be explicit about the extended royalty’s purpose. 21-cv-00284-PHX-DGC, 2023 U.S. Dist. LEXIS 113565 (D. Ariz. June 30, 2023). Otherwise, the licensor may run the risk of a court determining that such post-expiration payments are unlawful as patent misuse.

Settlement and license agreement

C.R. Bard v. Atrium involved a 2011 settlement and license agreement that the parties negotiated and executed to resolve a patent litigation. At issue was Bard’s US patent for expanded polyterafluoroethylene (ePTFE) vascular grafts, Atrium’s various ePTFE products approved for vascular use, and Atrium’s iCast product.

The iCast product – a metal stent coated with ePTFE – was only FDA approved for tracheobronchial use, but most often used off-label by doctors for vascular use. Atrium was awaiting FDA approval for vascular use of the iCast. Both parties had strong motivations to settle the lawsuit, and after extensive negotiations, the parties agreed on a royalty structure that included 1) a per-use royalty for the sale of Atrium’s products, excluding the iCast, and 2) a yearly $15 million minimum royalty payment.

The court found that the iCast was excluded from the per-use royalty, because Atrium was fearful that including it for off-label sales could jeopardize FDA’s pending approval of iCast’s new use. Bard indicated that its primary financial goal of the deal was the iCast, as the iCast’s off-label use represented a majority of Atrium’s sales. Thus, Bard accepted a minimum royalty payment to compensate it for sales of iCast. As Atrium had expected FDA to approve the iCast for the new use within one to two years of the 2011 agreement, they had agreed that FDA approval would trigger the termination of the minimum royalty payment, and to convert the iCast sales to the per-use royalty.

Although the parties’ negotiations revolved around Bard’s US patent, the ultimate agreement covered two patents: the US patent that expired in August 2019, and a related Canadian patent that expired January 2024 (together, the licensed patents). The agreement language was drafted so that the per-use royalty would cease upon expiration of the relevant licensed patent. In contrast, the minimum royalty provision was tied to the term of the agreement – ie, when the last of the licensed patents (the Canadian counterpart) expired.

FDA did not approve the iCast for the new use until March 2023 – over 10 years later than expected. As a result, the minimum royalty remained in effect beyond the 2019 expiration of the US patent. Atrium stopped making the minimum royalty payments in August 2019. Bard protested, arguing that the minimum royalty payments were not tied to the expiration of the US patent, but rather, the last-expiring patent – ie, the Canadian patent that did not expire until 2024.

Bard brought suit, asserting breach of contract claims based on Atrium’s failure to make minimum royalty payments. Bard argued that the minimum royalty payments were not compensation for use of the US patent post expiration, but rather deferred compensation for pre-expiration sales and a bundle of other rights, including the release from litigation and pre-agreement infringing sales. Atrium argued that the patent misuse doctrine excused it from paying the minimum royalties after August 2019, because those royalties include the sale of products in the US after the US patent had expired.

The district court’s opinion

After a two-day bench trial, the district court sided with Atrium. The court found that the parties never discussed, let alone agreed to, deferred compensation in negotiating the agreement. Further, the parties never discussed how long the agreement, or the minimum payments, would last. Instead, Bard used “boilerplate language” (ie, industry-standard provisions) for the term of the agreement and definition of licensed patents. The term of the agreement was defined to endure until the last of the licensed patents expired. The definition of the licensed patents included the US patent, and all other patents issued worldwide that rely on it for priority. The court found that these standard provisions had the effect of extending the agreement and minimum royalty payments to 2024 (ie, the expiration date of the related Canadian patent), “without any discussion of the issue” during negotiations.

Bard argued that the agreement was intended to compensate for infringement that preceded the 2011 agreement date – more specifically, that the parties expected that damages and sales of iCast products between 2011 and 2019 would be deferred to payments made after 2019. However, as the court noted, the parties never calculated the approximate pre-expiration value of the per-use iCast royalties, and never apportioned that approximation over the period of the agreement (through 2024). Therefore, the court rejected Bard’s arguments, and found that the purpose of the minimum royalty payments – to compensate Bard for iCast sales – remained the same before and after the US patent expired. The court held that “[c]harging Atrium a minimum royalty for U.S. sales of iCast products after the [U.S.] Patent expired is patent misuse.”

In July 2023, Bard appealed the district court’s findings to the Ninth Circuit Court of Appeals. The parties’ briefing was filed in early 2024, and oral arguments were heard on July 9, 2024.

Key takeaways

The case serves as a reminder of the unpredictability of the timing of FDA approval, and the perils of using approval as a trigger in an agreement. Without considering alternative timelines, unintentional consequences – such as post-expiration payments – may occur as the agreement matures.

There may be legitimate reasons (such as delayed FDA approval) to spread out payments for a patent license beyond the date of the expiration of a particular patent. However, this strategy runs the risk of any post-expiration payments to be deemed as unlawful patent misuse under Brulotte. Moreover, although not at issue in C.R. Bard v. Atrium, there are cases finding that patent misuse under Brulotte renders the entire agreement unenforceable. See Sanford Redmond Inc. v. Mid-America Dairymen, Inc., 85-cv-4575-RJW, 1992 U.S. Dist LEXIS 2376, *17-18 (S.D.N.Y. March 3, 1992). Thus, post-expiration royalty provisions could put an entire agreement at risk.

C.R. Bard v. Atrium stands as a warning to contract drafters regarding the impact that boilerplate language may have on royalty obligations. Importantly, the district court reviewed an agreement with standard boilerplate “term” and “licensed patents” language that extended royalty obligations, rather than a contract provision indicating that the parties explicitly negotiated post-expiry payments as compensation for pre-agreement use and infringement, as Bard had understood it. It remains to be seen whether the Ninth Circuit will provide guidance as to permissible post-expiration license structures.

While it was not decided, the district court’s opinion may strongly imply that a provision explicit in its intent to confer deferred compensation for pre-expiration sales or use would heavily weigh against a finding of patent misuse. Thus, licensors are advised to discuss these issues and implement language that avoids unjustified extensions.

For more information, please contact the authors.