How does the expiration of the patents in one jurisdiction impact global royalty payments? This question was addressed by the United States Court of Appeal’s Ninth Circuit in C.R. Bard Inc v Atrium Medical Corporation, Case No. 23-16020 (9th Cir. Aug. 23, 2024).
Case overview: C.R. Bard Inc v Atrium Medical Corporation
After settling an infringement lawsuit, C.R. Bard Inc, a medical device firm based in the United States, had licensed its Canadian and U.S. vascular graft patents to Atrium Medical Corporation. The terms of the license agreement included royalty payments of 15% of U.S. sales until the U.S. patent expired in 2019, and 15% of Canadian sales until the Canadian patent expired in 2024. Crucially, the agreement stipulated a minimum royalty payment of $3.75 million per quarter, to continue until the expiry of the last licensed patent (i.e. 2024 when the Canadian patent expired).
Late approval of the vascular graft by the U.S. Food and Drug Administration (FDA) meant that Atrium’s sales never exceeded the minimum royalty amount. When the U.S. patent expired in 2019, Atrium began paying royalties for just the 15% of Canadian sales. These amounts were far less than the quarterly minimum payments required by the license agreement. Atrium argued that continuing to pay the minimum royalties after the U.S. patent had expired would amount to patent misuse as set out by the Supreme Court of the United States decision, Brulotte v Thys Co, 379 U.S. 29 (Nov. 16, 1964).
The Brulotte rule and its application in the Bard decision
In Brulotte, the U.S. Supreme Court found that patent royalties may only continue until the last-to-expire patent incorporated into the device subject to the patent license agreement had expired. The Court reasoned that continuing to charge patent royalty payments after expiry of all relevant patents is an unlawful projecting of a patent holder’s monopoly. This rule was clarified by the U.S. Supreme Court in Kimble v Marvel Entertainment, 576 U.S. 446 (June 22, 2015). Specifically, the Court explained that the Brulotte rule permits deferring payment of royalty payments to a time after patent expiration, provided the royalties relate to pre-expiration use. The Brulotte rule also permits post-expiration royalties related to non-patent rights so long as there is a reduction of the royalty upon expiration (i.e. to account for the end of the patent portion of the royalty).
Returning to the Bard decision, the Ninth Circuit concluded that the license agreement terms did not violate Brulotte. Specifically, the Court acknowledged that the 15% royalty payments on the U.S. and Canadian patents were only required until the expiration of the respective patent and confirmed that this form of arrangement complied with the Brulotte rule. As for the $3.75M minimum royalty which was the provision in dispute, the Court found that the license agreement was effectively creating a minimum royalty payment for the period that at least one of the U.S. and Canadian patents was in force. The provisions of the license agreement read in this way did not violate Brulotte, as there was no charge for post-expiration use of patents. The Court explained that the Brulotte rule only concerns royalties for post-expiration use of a U.S. patent. The rule does not prohibit royalties that are for “something other than the use of the expired U.S. patent”. In this case, the “something other” was the Canadian patent that was still in force after the expiry of the U.S. patent.
Canada’s approach to patent royalties
The Canadian approach to patent royalties emphasizes the intent of the parties as documented in the license agreement rather than applying a Brulotte type bright line rule against post-expiration royalties.
The Quebec Court of Appeal addressed a similar license arrangement to Bard in Kirchmeier c P.M. Wright Ltd, 64 A.C.W.S. (3d) 73, 73 C.P.R. (3d) 428. In that case, Kirchmeier had granted P.M. Wright an exclusive license to manufacture, distribute and sell patented heating equipment in Canada, and the U.S. The license included a minimum fee which would continue until the final expiration of the licensed U.S. and Canadian patents. The agreement also included a provision that required payment of additional royalties only in territories where a licensed patent was in force. When the Canadian patent expired leaving only U.S. patents under the license, P.M. Wright took the position that the above provision gave it the right to also stop paying the minimum fees. The Quebec Court of Appeal held that the express provisions of the license agreement were of primary importance. The existence of the provision that eliminated additional royalties for a territory where the patent had expired did not lead to an inference that the minimum fees were no longer payable.
This preference for giving effect to the commercial bargain reached by the parties (as documented by the license agreement) over the public policy considerations of undue extension of the patent monopoly has been echoed in several Canadian decisions. In Coyle v Sproule, [1942] O.R. 307-313, the then Ontario High Court of Justice reaffirmed the 1914 decision of Duryea v Kaufman, which states that, when assessing license agreements, “unless there be an express or implied warranty of the validity of the patent, or fraud is alleged, it is obvious that the validity of the patent is wholly immaterial”. More recently, in Culzean Inventions Ltd v Midwestern Broom Co, [1984] 3 W.W.R. 11, 82 C.P.R. (2d) 175 the Saskatchewan Court of Queen’s Bench held that “the obligation to pay royalties arises by virtue of the agreement, not the patent, and may extend beyond the subsistence of the patent”.1 If there are no express provisions on the subject in the license agreement, a presumption does exist that the royalty obligation terminates upon expiry of the licensed patent.2 However, absent any provisions which are restraints on trade, unreasonable, unconscionable, or contrary to the public interest, the express contract provisions as to royalty payment term will prevail.3
Implications for patent licensing agreements
There is always a tension between the monopoly rights granted by the patent regime and the public policy benefits of free market competition. As can be seen in this article, various jurisdictions balance these considerations in different ways. Canada’s approach to patent licensing places significant emphasis on the freedom to contract as compared to the U.S. approach, which emphasizes the public policy consideration of ensuring that patent owners do not attempt to extend their monopoly beyond the scope of the patent regime. These differing approaches highlight the importance of selection of governing law and venue for patent license agreements.
References
[View source.]
