For the second time in less than two weeks, a circuit court decided an appeal hinging on the Brulotte rule, which holds that patent royalties are impermissible when based on payments for the use of expired patents. Like the US Court of Appeals for the Ninth Circuit, the Fourth Circuit upheld a royalty agreement that purported to require payments after patent expiration. Ares Trading S.A. v. Dyax Corp., Case No. 23-1487 (4th Cir. Aug. 14, 2024) (Krauser, Porter, Chung, JJ.)

Dyax is a biotechnology company engaged in “phage display” research – a laboratory process used to identify antibody fragments for use in developing medications. Dyax holds multiple patents related to phage display, including licenses to patents owned by Cambridge Antibody Technology (CAT). Dyax and Ares entered a licensing agreement. Dyax’s main obligation was to use its phage display technology to identify antibody fragments and then provide those fragments to Ares so that Ares could incorporate them into commercial medications, including one called Bavencio. In exchange, Ares agreed to pay Dyax at various research milestones and pay royalties for identified products, including Bavencio. Although Bavencio was first sold in 2017, the last CAT patent expired in 2018.

After learning of the Brulotte rule, Ares tried to renegotiate its contract obligations. When renegotiation attempts failed, Ares sued Dyax, seeking multiple related declaratory judgments revolving around its argument that its royalty obligations to Dyax were unenforceable under Brulotte. Dyax countersued on six claims, including for declaratory judgment that Brulotte did not apply. The district court found the royalty obligation enforceable and not in violation of Brulotte. Ares appealed.

Ares asked the Fourth Circuit to reconsider the applicability of the Brulotte rule and to relatedly find that Dyax had breached the covenant of good faith and fair dealing. The Fourth Circuit first examined its own jurisdiction in the context of the Federal Circuit’s exclusive jurisdiction over patent appeals. Of the 10 total claims and counterclaims, nine arose under Massachusetts contract law. According to the Fourth Circuit, these were not “substantial” patent law claims and thus regional circuit appellate jurisdiction was appropriate.

The Fourth Circuit next turned to the Brulotte prohibition on post-termination royalties and found no violation because “Ares’ royalty obligation is not calculated based on activity requiring post-expiration use of inventions” covered by Dyax or CAT patents. The Court emphasized the policies underpinning the federal patent regime and the Brulotte rule, particularly the importance of inventions entering the public space once a patent expires to allow continued innovation and general use of the once-patented invention. The Court also explained its understanding of the nuances of Brulotte, as informed by the Supreme Court’s 2015 decision in Kimble v. Marvel. For instance, a court’s inquiry must focus on post-expiration use, so where “royalties are not calculated based on activity requiring post-expiration use, they do not hinder post-expiration use ‘on their face’ and Brulotte is not implicated.” In the present case, this was a key delineation because the Fourth Circuit found that Ares’ [...]

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