When is a sale not a sale?

December 21, 2016
Patterson Thuente IP

Federal Circuit narrow on-sale bar to patents

The full panel of the Federal Circuit Court of Appeals, which hears all patent-related appeals, has delivered a ruling in The Medicines Co. v. Hospira, Inc. that’s sure to be welcomed by patent holders. In a unanimous decision, the court provided guidance on what constitutes a sale for purposes of the on-sale bar to patent validity.

Drug companies duke it out

The Medicines Company (MedCo) held product and product-by-process patents that covered Angiomax, a drug used to prevent blood clotting. The company didn’t have its own manufacturing facilities. So, in 1997, it contracted with Ben Venue Laboratories to manufacture commercial quantities of the original formula of Angiomax. The two patents at issue covered a new compounding process for the drug and the applications for the patents were filed July 27, 2008.bloodcells

In late 2006, MedCo paid Ben Venue Laboratories (Ben Venue) to manufacture three batches according to the patents. The commercial-sized batches were completed October 31, November 21 and December 14. They were placed in quarantine pending approval by the Food and Drug Administration. The batches were released and made available for sale in August 2007.

In 2010, MedCo sued drug manufacturer Hospira, Inc., for patent infringement. Hospira argued that the patents were invalid under the on-sale bar, but the trial court disagreed. A three-judge panel of the Federal Circuit reversed. It held that the on-sale bar did apply because MedCo had “commercially exploited” the invention before the critical date (one year before the application filing date), even though the company hadn’t transferred title to the commercial embodiment of the invention. The case then came up for review before the full Federal Circuit.

Court focuses on first prong

The on-sale bar applies when an invention has been “on sale” before the critical date. According to the U.S. Supreme Court, the bar applies if the invention was:

  1. The subject of a commercial offer for sale, and
  2. Ready for patenting.

The Federal Circuit in this case focused on the first prong of the test, concluding that transactions between MedCo and Ben Venue didn’t constitute commercial sales of the patented product. Citing the Uniform Commercial Code, the court found that a commercial sale must be a sale in a commercial sense — that is, it requires a contract between parties for consideration the buyer pays or promises to pay the seller for the thing bought or sold. The mere sale of manufacturing services by a contract manufacturer to an inventor to create embodiments of a patented product for the inventor didn’t rise to that level. And in this case, only manufacturing services were sold, not the invention itself.

Moreover, the court said, MedCo maintained control of the invention by keeping title to it. The passage of title is a “helpful indicator” of whether a product is on sale because it suggests when the inventor gives up its interest and control over the product. Ben Venue didn’t have title to the products, nor was it free to use or sell the products or deliver them to anyone other than MedCo.

Further, stockpiling (building inventory prior to a commercial sale) by inventors that outsource manufacturing, in and of itself, doesn’t trigger the on-sale bar. When stockpiling isn’t accompanied by an actual sale or offer for sale, it’s merely precommercial activity in preparation for future sale. The court reasoned that penalizing a company that uses third-party manufacturers would be unfair. After all, companies with in-house manufacturing capabilities aren’t punished for their manufacturing activities or stockpiling.

The appellate court therefore affirmed the trial court’s holding that the arrangements between MedCo and Ben Venue didn’t trigger the on-sale bar. The court also sent the case back to the three-judge panel to consider issues on appeal that the panel didn’t need to address due to its finding that the patents were invalid under the bar.

What happens next?

This decision effectively exempts common manufacturing and supply arrangements from the on-sale bar. Biotechnology and pharmaceutical companies that use third-party manufacturers are likely to be the biggest beneficiaries.

One important side note: Medicines Co. was considered before the 2011 passage of the America Invents Act (AIA), which made significant amendments to U.S. patent law. In its decision, the court stated that it wasn’t addressing whether or to what extent its analysis might differ post-AIA.

The Medicines Co. v. Hospira, Inc., No. 2014-1469, -1504, July 11, 2016 (Fed. Cir.)

Court rejects “supplier exception”

In its ruling in The Medicines Co. v. Hospira, Inc. (see main article), the Federal Circuit Court of Appeals made an important clarification regarding suppliers in relation to the on-sale bar. Even though it decided that transfers between suppliers and inventors or manufacturers don’t trigger the on-sale bar, the court was not recognizing a “supplier exception” to the bar. Such an exception would mean that a commercial sale could never occur if the inventor purchased the patented product from its supplier.

The court conceded that, when a transaction is between a supplier and inventor, it’s “an important indicator that the transaction is not a commercial sale.” However, the transaction isn’t determinative on its own. The court explained that a transfer of product to the inventor from a supplier could constitute a commercial sale if:

  • The supplier has title to the patented product or process,
  • The supplier receives blanket authority to market the product or disclose the process for manufacturing it to others, or
  • The transaction is a sale of product at full market value.

The focus, the Federal Circuit emphasized, must be on the commercial character of the transaction, not solely on the participants’ identity.