According to settled Supreme Court case law, the holder of a patent may not require a licensee to pay royalties after the patent expires—the Supreme Court termed that practice “patent misuse” in Brulotte v. Thys Co. (1964) and Kimble v. Marvel Entertainment (2015). While frequently debated, the logic behind the principle is that a patent holder should not wield the leverage of a patent to extract payment from a licensee for conducting activities that other parties could do for free. As a result of Brulotte/Marvel, in life sciences deals, where it is common to have licenses of both patents and know-how, it is customary to have a reduction (known as a “step-down”) in royalties upon expiration of the licensed patents. The rationale for continuing to pay royalties at the lower rate is that the royalty represents consideration for both a patent license and a know-how license, so royalties can continue to be paid for the know-how license without running afoul of Brulotte/Marvel. Against this backdrop, the Third Circuit issued its opinion in Ares Trading S.A. v. Dyax Corp. on September 4, 2024, applying the historic Brulotte/Marvel doctrine to a set of facts that, while complex, are not uncommon in drug discovery research collaborations, and ultimately finding that a provision permitting licensee’s payment of post-expiration royalties without a step-down was permissible.
The facts giving rise to the case are as follows. Plaintiff Dyax Corp. (“Dyax”) had a “phage display” antibody fragment discovery platform for identifying potential drugs based on antibody fragments. In 2006, Defendant Ares Trading S.A. (“Ares”) entered into a collaboration agreement with Dyax under which Dyax agreed to use its antibody fragment discovery platform to identify potential antibody fragments targeting a protein referred to as “PD-L1” for Ares. As part of the deal, Dyax granted Ares a license to the patents covering the Dyax platform. In return, Ares agreed to pay royalties on net sales of the licensed products (antibodies developed from a Dyax-discovered antibody fragment) until the later of the expiration of the licensed patents and ten years after the first commercial sale of any such licensed product. The contract did not include a royalty step-down when the licensed patents expired.
Ares commercially launched one such product, Bavencio, in 2017. The licensed patents expired in 2018—but the ten-year prong of the royalty term extended the obligation to pay royalties out to 2027. So, Ares sued Dyax, arguing that the royalty provision was unenforceable under Brulotte.
In applying Brulotte/Marvel, the Third Circuit questioned whether the licensing agreement “provides royalties for post-expiration use of a patent.” Under the Third Circuit’s interpretation of Brulotte/Marvel, “post-expiration use” refers to practicing inventions after their patents expire, i.e., acts that would have infringed the patents pre-expiration.
Based on this analysis, the Third Circuit held that, even though Bavencio was discovered by Dyax using the licensed platform technology, because the manufacture and sale of Bavencio by Ares undisputedly would not have infringed the licensed patents (assuming they were still in effect), the Brulotte/Marvel rule was inapplicable.
Although the application of the Third Circuit’s decision is fact-specific, its analysis and rules should be considered in the drafting and interpretation of any license agreement in which a royalty is payable on sales of a licensed product—particularly in platform drug discovery deals, in which it is common for the end-product not to infringe patents covering the platform.
Freshfields will continue to closely monitor the status of this ever-evolving area of law and develop best practices for mitigating resultant risk to contracting parties.
