Clarifying the enforceability of post-patent expiration royalties under Brulotte

The August 2024 Third Circuit decision in Ares Trading S.A. v. Dyax Corporation contributes to the discussion of Brulotte and its progeny. Similar to C.R. Bard v. Atrium, Ares addresses royalty obligations that extend beyond the life of the licensed patent. However, unlike C.R. Bard, the court in Ares held the royalty obligations at issue were not unenforceable under Brulotte.

The Ares court’s holding hinged on the finding that Ares’ royalty obligation is not calculated based on post-expiration use of the patented processes for phage display research. Rather, the royalty rate is determined by the sales of the commercialized drug that was developed using the results of the phage display research.

Bavencio® and the royalty provisions of the Collaboration and License Agreement

The Ares case involved the cancer drug Bavencio® and the research preceding it. Ares identified a target molecule known as PD-L1, which binds to cancer cells and shields them from immune system attack. Ares sought the services of Dyax to perform phage display on PD-L1 in search of an antibody that would bind with, and inhibit, PD-L1. Ares and Dyax entered into a Collaboration and License Agreement (CLA) in 2006, whereby Dyax granted Ares a license and sublicense to certain patents it had licensed from Cambridge Antibody Technology (CAT) covering phage display and their use for research. In exchange for the benefits under the CLA, Ares agreed to compensate Dyax in a variety of ways, including the payment of royalties based on a percentage of net sales of any “Therapeutic Antibody Products” developed using a “Dyax Antibody.” Dyax, in turn, agreed to pay a portion of these profits upstream to CAT.

Ares’ royalty obligation was calculated based on sales of drugs (Therapeutic Antibody Products) developed from antibodies discovered by Dyax using phage display. Under the CLA, “Therapeutic Antibody Products” was defined as “any preparation which is intended…for the treatment or prevention of disease, infection, or other condition in humans, which contains, comprises, or the process of development or manufacture of which utilizes a Dyax Antibody.” In turn, “Dyax Antibody” was defined as “any Antibody or [fragment] that is delivered by Dyax to [Ares] in connection with the Research Program.”

Pursuant to the CLA, Dyax performed the phage display and identified 167 antibody fragments that bind to PD-L1. Ares used one of these fragments to develop Bavencio®, which classified it as a Therapeutic Antibody Product under the CLA. The first commercial sale of Bavencio was in 2017. The last licensed patent under the CLA expired in 2018. However, the duration of Ares’ royalty obligation under the CLA extends 10 years after the first commercial sale of Bavencio®, ending in 2027.

The district court’s and appellate court’s opinions on the Bavencio® royalty dispute

Ares brought suit in December 2019 in the Delaware District Court, seeking inter alia: a declaratory judgement that the royalty obligation in the CLA is unenforceable under Brulotte. A bench trial was held in July 2022. In a February 2023, opinion the district court held that that Ares’ royalty obligation was not unenforceable under Brulotte, as it did not implicate Brulotte’s prohibition on “royalties . . . for practicing . . . licensed patents after they have expired.” The district court characterized Ares’ royalty obligation as deferred compensation for Dyax’s pre-expiration research involving phage display, not for a license to the patents. The court noted that the royalties were a means for the parties to share the risk and reward of their collaboration.

The Third Circuit affirmed in an August 2024 opinion, finding that Ares’ royalty obligation based on the sale of Bavencio® (as a Therapeutic Antibody Product) does not require post-expiration use of the inventions covered by the licensed patents. The court found that the CLA’s definition of Therapeutic Antibody Product did not refer to, or in any way depend on, the licensed research patents.

Ares never practiced the licensed patents to develop Bavencio®, and the manufacture and sale of Bavencio® does not practice the phage display inventions covered by the licensed patents. Thus, “[s]ales of Therapeutic Antibody Products” do not require post-expiration use of the inventions covered by the CAT patents for phage display technologies. As Ares’ obligation is not calculated based on activity that requires the use of the inventions covered by the licensed patents after their expiration, the agreement does not improperly prolong the licensed patents’ duration, nor implicate Brulotte.

Key considerations for deferred compensation cases

As the district court noted, “[i]n the pharmaceutical and biotechnology industries, parties typically combine expertise and share risk via collaborations.” Deferred compensation agreements must be carefully evaluated under Brulotte and its progeny. As the Supreme Court stated in 2015, “[a] court need only ask whether a licensing agreement provides royalties for post-expiration use of a patent. If not, no problem; if so, no dice.”

As Ares demonstrates, parties are encouraged to carefully consider whether royalties are calculated based on activity requiring the use of the patents at issue, or another activity. Where the patented invention is research-oriented, covering only early activities of drug development as in Ares, deferred compensation may be calculated based on drug sales without violating Brulotte. In other cases, a royalty might be calculated based on activity requiring the use of the patents, and could be subject to challenge.

For more information, please contact the authors.