For Purposes of an On-Sale Bar, Sale of Manufacturing Services by a Contract Manufacturer Does Not Necessarily Constitute a "Commercial Sale" of the Invention

On July 11, 2016, the United States Court of Appeals for the Federal Circuit issued a decision in The Medicines Co. v. Hospira, Inc., No. 2014-1469. The decision was by the Federal Circuit sitting en banc (the entire court), overturning a prior panel decision by three judges of the Federal Circuit. To review a copy of the en banc opinion, please click here.

The en banc Federal Circuit unanimously held that the particular commercial transaction at issue was not enough to trigger the "on sale" bar under pre-AIA 35 USC § 102(b). The decision is focused on the pre-AIA version of 35 USC § 102. We discuss implication for the AIA version of 35 USC § 102 at the end of this article.

In the commercial transaction, prior to the critical date, the patentee (MedCo) contracted with a third-party supplier (Ben Venue) for the third-party supplier to manufacture commercial quantities of a product for a drug that was covered by the subsequently issued patent at issue. The en banc Court found that the particular transaction was essentially a contract for manufacturing services – not a contract for sale of the patented product.

The product was found to not be "on sale" under § 102(b) because the product was not the subject of a commercial sale or offer for sale. The en banc Court held that merely obtaining some commercial benefit from a transaction by itself does not trigger the on-sale bar. Instead, each transaction must be studied with a focus on those characteristics that make a sale “commercial” in order to comply with the language of § 102(b) and the Supreme Court’s guidance in Pfaff v. Wells Electronics, Inc., 525 U.S. 55 (1998).

The contract between the patentee and the third-party supplier included language which may be in a typical sales contract. For example, the contract stated "filled for commercial use," and each batch received a commercial product code and a customer lot number. However, despite the language of the contract, the en banc Court focused on the overall nature of the contract. For example, the patentee held title at all times to the product being manufactured by the supplier. As the en banc Court held, the most natural conclusion is that the supplier sold contract manufacturing services—not the patented invention— to the patentee. Under the patentee’s instructions and using an active ingredient supplied by patentee, the supplier acted as a pair of "laboratory hands" to reduce the patentee’s invention to practice.

In "on sale" jurisprudence, courts are bound by the Supreme Court decision in Pfaff v. Wells Electronics, Inc. Pfaff presents a two-step framework to determine if a transaction triggers the on-sale bar. Pfaff’s two-step framework requires, to trigger the on-sale bar, that the claimed invention was: (1) the subject of a commercial offer for sale; and (2) ready for patenting.

At the trial, the District Court held that the claimed invention was ready for patenting under the second prong of Pfaff. However, the District Court concluded that the first prong of Pfaff was not met because the claimed invention was not commercially offered for sale prior to the critical date.

The District Court decision was overturned on appeal by a three-person panel of the Federal Circuit. The panel explained that, "where the evidence clearly demonstrated that the inventor commercially exploited the invention before the critical date, even if the inventor did not transfer title to the commercial embodiment of the invention," the on-sale bar applies. The panel reasoned that because the patentee paid the third-party supplier for services that resulted in the patented product, the transactions were commercial sales.

On November 13, 2015, the Federal Circuit granted rehearing en banc, vacated the panel’s decision, reinstated the appeal and ordered new briefing. In overturning the panel decision, the en banc Court held the three reasons for the decision in this case are:

1. Only manufacturing services were sold to the patentee—the patented product was not;
2. The patentee maintained control of the patented product, as shown by the retention of title to the embodiments and the absence of any authorization to the supplier to sell the product to others; and
3. "Stockpiling," standing alone, does not trigger the on-sale bar.

With regards to reasons (1) and (2), the en banc Court focused on those activities that would be understood to be commercial sales and offers for sale "in the commercial community." Group One, Ltd. v. Hallmark Cards, Inc., 254 F.3d 1041, 1047 (Fed. Cir.2001). This focus involves looking to the Uniform Commercial Code (UCC) to define whether a communication rises to the level of a commercial offer for sale. The en banc Court recognized that, post-Pfaff, that the transaction must be a sale in a commercial law sense and that a sale is a contract between parties to give and to pass rights of property for consideration which the buyer pays or promises to pay the seller for the thing bought or sold. Trading Technologies International, Inc. v. eSpeed, Inc., 595 F.3d 1340, 1361 (Fed. Cir. 2010).

In the decision, the en banc Court clarified and held that the mere sale of manufacturing services by a contract manufacturer to a patentee to create embodiments of a patented product for the patentee does not constitute a "commercial sale" of the invention. Significant to this analysis, the en banc Court explained that commercial benefit by itself—even to both parties in a transaction—is not enough to trigger the on-sale bar of § 102(b); the transaction must be one in which the product is "on sale" in the sense that it is "commercially marketed."

With regard to reason (3), the en banc Court discussed that stockpiling—or building inventory—is mere pre-commercial activity in preparation for future sale. This is true regardless of how the stockpiled material is packaged. The on-sale bar is triggered by actual commercial marketing of the invention, not preparation for potential or eventual marketing.

The en banc Court was unwilling to broadly apply the on-sale bar to a patentee without manufacturing capabilities, when a substantially similar result can be achieved by a patentee with in-house manufacturing capabilities. However, there is not a blanket "supplier exception" to what would otherwise constitute a commercial sale. The fact that a transaction is between a supplier and patentee is an important indicator that the transaction is not a commercial sale. However, this is not alone determinative. For example, where the supplier has title to the patented product and the transaction is a sale of product at full market value, even a transfer of product to the patentee may constitute a commercial sale under § 102(b). The focus must be on the commercial character of the transaction, not solely on the identity of the participants.

Thus, the focus must be on those characteristics that make a sale "commercial" in the most well-understood sense of that term, as distinct from merely obtaining some commercial benefit from a transaction.

A key takeaway from this decision for when a patent applicant is working with a third-party supplier, is for the patent applicant to keep title (at all times) in the product, and structure the contract in a manner to avoid a "commercial sale" of the invention in view of UCC principles.

Moreover, another takeaway is to remember that the decision was focused on pre-AIA 35 USC § 102(b). 35 USC § 102 was changed by the America Invents Act to recite, now in AIA 35 USC § 102(a), that a person shall be entitled to a patent unless "the claimed invention was patented, described in a printed publication or in public use, on sale or otherwise available to the public before the effective filing date of the claimed invention." There is debate as to whether the "otherwise available to the public" language in AIA 35 USC § 102(a) modifies “on sale” to only capture public sales. In a District Court decision in Helsinn Healthcare SA et al. v. Teva Pharmaceuticals USA Inc., the Court held that private sales do not trigger the on sale bar. However, this issue has not been addressed by the Court of Appeals for the Federal Circuit. For more information on the Helsinn decision, please click here.