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 [...]

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