Today, in The Medicines Co. v. Hospira, the Federal Circuit en banc unanimously ruled that “a contract manufacturer’s sale to the inventor of manufacturing services where neither title to the embodiments nor the right to market the same passes to the supplier does not constitute an invalidating sale under § 102(b).”

This case provides a good review of the on-sale bar and circumstances that may or may not constitute a sale that would trigger it.  The decision is based on § 102(b) as it existed before amendment in 2011 under the America Invents Act (AIA); but the decision may guide applying the on-sale bar under AIA § 102(a)(1) to patents that are subject to the amended provision–i.e., patents’ whose claims have an effective filing date on or after March 16, 2013.

Background

The Medicine Company (MedCo) owns patents directed to product and product-by-process claims for batches of an improved drug.  MedCo does not own facilities to make drugs itself, but contracts with  a third-party supplier Ben Venue Laboratories (Ben Venue) to make the drugs.  Prior to inventing the improved drug, MedCo had Ben Venue make batches over a period of time and tweaked the process along the way until coming up with the patented improved drug.

The patents-in-suit were filed on July 27, 2008, and, thus, have an on sale bar critical date of July 27, 2007–i.e., a sale of the invention prior to the critical date would invalidate the patent claims.  In 2006, before the critical date, MedCo had paid its supplier Ben Venue to make three batches of the improved drug.  The supplier completed making the three batches of the improved drug before the critical date.  MedCo paid the supplier $347,500 for making the three batches, which batches had a market value well over $20 million.  The batches were placed in quarantine with MedCo’s distributor Integrated Commercialization Solutions (ICS) pending FDA approval.  MedCo did not release the three batches from quarantine and make them available for sale until August 2007, which was after the July 2007 critical date.

The district court ruled that there was no commercial sale that would trigger the on-sale bar prior to the critical date, because the transaction between patent owner MedCo and its supplier Ben Venue were sales of contract manufacturing services, not the improved drug; rather, the title to the manufactured druges always resided with patent owner MedCo prior to the critical date.  On appeal to the Federal Circuit, the original three-judge panel held that the on sale bar did apply, because the patent owner commercially exploited the invention before the critical date even though no title was transferred.

En Banc Decision

The full en banc Federal Circuit reviewed the history of the on-sale bar, including the vague totality of the circumstances test that the Federal Circuit had applied before that test was rejected by the Supreme Court’s Pfaff decision.  The current Pfaff standard applies the on-sale bar when, before the critical date, the claimed invention (1) was the subject of a commercial offer for sale; and (2) was ready for patenting.  The Pfaff case itself focused on the second prong, ruling that an invention is “ready for patenting” in at least two ways: (1) the invention was reduced to practice or (2) drawings or other descriptions of the invention are sufficiently specific to enable a person of ordinary skill to practice the invention.

The instant case focuses on the first prong of the Pfaff inquiry: whether the invention was the subject of a commercial sale or offer for sale.  The Federal Circuit applies its own law to this inquiry using general contract law principles.  The Federal Circuit may look to the Uniform Commercial Code (UCC) in assessing whether communications rise to the level of a commercial offer for sale.  The activity must be a “sale” in the commercial law sense where 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.”

The en banc Court ruled that the transaction between patent owner MedCo and supplier Ben Venue was not a commercial sale that would trigger the on-sale bar.  The en banc Court summarized its rationale as follows:

[W]e first clarify that the mere sale of manufacturing services by a contract manufacturer to an inventor to create embodiments of a patented product for the inventor does not constitute a “commercial sale” of the invention.  We … clarify that “stockpiling” by the purchaser of manufacturing services is not improper commercialization under § 102(b). … [C]ommercial benefit–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.”  There are, broadly speaking, three reasons for our judgment in this case: (1) only manufacturing services were sold to the inventor–the invention was not; (2) the inventor maintained control of the invention, as shown by the retention of title to the embodiments and the absence of any authorization to [the supplier] Ben Venue to sell the product to others; and (3) “stockpiling,” standing alone, does not trigger the on-sale bar.

In this case, the patent claims were product claims or product-by-process claims where, for validity purposes, the “invention” is the product.  The supplier Ben Venue sold contract manufacturing services, not the patented products.  Factors that led the court to this conclusion include:

• The supplier acted more like “laboratory hands” to reduce the invention to practice for an inventor with no manufacturing capabilities itself.
• The suppliers invoices stated they were a “Charge to manufacture” the improved drug.
• The supplier was paid only 1% of the market value of the products made –i.e., about $350,000 for product worth well over $20 million.
• Title to the manufactured drugs did not change hands, but remained with the patent owner MedCo, and the supplier Ben Benue was not free to use or sell the product or deliver them to anyone other than MedCo.
• The confidential nature of the transaction.

The Court noted that it looks to the UCC for guidance and the UCC indicates that a “sale” involves “the passing of title from the seller to the buyer for a price.”  While this is not a bright line rule, the absence of a title transfer is significant “because, in most instances, that fact indicates an absence of commercial marketing of the product by the inventor.”  But there could be instances (not present in this case) where a product could be “on sale” without a transfer of title, such as “commercially exploit[ing] a newly invented machine by charging others a fee to use it without transferring title to it” such that “use of the invention is on-sale for a price.”

The Court also cautioned that there was no blanket “supplier exception” to the on-sale bar, stating:

While the fact that a transaction is between a supplier and inventor is an important indicator that the transaction is not a commercial sale, understood as such in the commercial marketplace, it is not alone determinative.  Where 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 the product to others, or the transaction is a sale of product at full market value, even a transfer of product to the inventor 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.

Because the Court found there was no commercial sale to trigger the on-sale bar, it declined to address whether the case would have come within the experimental use exception to the on-sale bar.  The Federal Circuit en banc court then remanded the case back to the original Federal Circuit three-judge panel to address other issues that remain on appeal.