United States: Supplier's Agreement To Manufacture Product Invalidates Patent

It is not intuitive that an offer to manufacture a product made by a patent owner's own supplier could be a commercial offer for sale that would start the clock ticking on the one-year deadline for filing a patent application on an invention embodied in the product. Yet, this was precisely the U.S. Court of Appeals for the Federal Circuit's conclusion in Hamilton Beach Brands v. Sunbeam Products, 2013 U.S. App. LEXIS 16797 (Fed. Cir. Aug. 14, 2013).

Hamilton Beach Brands Inc. has successfully marketed its Stay or Go slow cooker, increasing its market share by 30 percent. The company's success was met by its competitor Sunbeam Products Inc.'s introduction of a competing product, the Cook & Carry. The Stay or Go is the commercial embodiment of the invention claimed in Hamilton Beach's U.S. Patent 7,485,831 (the '831 patent), which was pending at the time of the introduction of Sunbeam's Cook & Carry slow cooker. The description in Hamilton Beach's pending patent application also covered Sunbeam's Cook & Carry product so Hamilton Beach filed a continuation of its application covering its competitor's product. When the resulting U.S. Patent 7,947,928 (the '928 patent) duly issued, Hamilton Beach brought a patent infringement suit against Sunbeam in the U.S. District Court for the Eastern District of Virginia.

The court granted Sunbeam's motion for summary judgment and invalidated the '928 patent because Hamilton Beach failed to file the underlying '831 patent application within one year of its purchase order to its foreign supplier and the latter's offer to manufacture the slow cooker, thereby violating the on-sale bar under 35 U.S.C §102(b) in effect at the time. The on-sale bar prohibits patent protection where a claimed invention was commercially offered for sale more than one year prior to the effective filing date of the patent application and that it was ready for patenting at that time, as in Pfaff v. Wells Electronics, 525 U.S. 55, 67 (1998). Hamilton Beach appealed to the Federal Circuit.

The district court's analysis focused on the communications between Hamilton Beach and its supplier. Hamilton Beach sent a purchase order to its supplier for manufacture of the Stay or Go slow cooker, identifying the quantity, price and delivery date. The supplier confirmed it had received the purchase order, stating that it would begin production of the slow cookers upon Hamilton Beach's release. The court held that the supplier's response was a manifestation of assent that created a binding contract. The Federal Circuit found that there was no need for the district court to require a binding contract. Instead, the Federal Circuit held that the supplier's response was a commercial offer for sale that satisfied the first prong of the on-sale bar inquiry.

The court also emphasized that there is no supplier exception to the on-sale bar, and held that "it is of no consequence that the 'commercial offer for sale' at issue in this case was made by Hamilton Beach's own supplier and was made to Hamilton Beach itself."

The Federal Circuit found no error in the district court's determination that the product was ready for patenting under the second prong of the analysis. "An invention is 'ready for patenting' when one of the following two conditions are met prior to the critical date: the invention is reduced to practice or the invention is depicted in drawings or described in writing of sufficient nature to enable a person of ordinary skill in the art to practice the invention." The district court found that Hamilton Beach held pre-critical date meetings where it provided its suppliers and retail customers' buying agents with descriptions, drawings and specifications that would enable one of ordinary skill in the art to manufacture the invention, thus evidencing it was ready for patenting. Hamilton Beach had also admitted that it possessed a workable sample of the product in question prior to the critical date, providing additional support to conclude the invention was ready for patenting at the time of the commercial offer for sale. Accordingly, the Federal Circuit affirmed.

The holding is a reminder that a commercial offer for sale triggering the on-sale bar can be initiated by someone other than the patentholder.

The case creates an additional concern for small businesses or entities that outsource their manufacturing. Had Hamilton Beach manufactured its own slow cookers, the company would have geared up to manufacture the product without contacting an outside supplier. No commercial offer for sale would have taken place. Companies with no manufacturing or prototyping capabilities must be especially careful. Even limited production, such as outsourcing creation of a single prototype, could trigger the on-sale bar.

It is important to note that the Hamilton Beach case was decided under the version of 35 U.S.C. §102(b) that existed prior to the implementation of the analogous provision in the America Invents Act. The AIA's amendments to Section 102 raise uncertainties about the application of the on-sale bar to patentability. The new 35 U.S.C. §102, effective March 16, provides in part as follows:

"A person shall be entitled to a patent unless (1) 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." Exceptions include "a disclosure made one year or less before the effective filing date of a claimed invention shall not be prior art to the claimed invention under Subsection (a)(1)."

The amendment raises two issues: (1) whether there is a one-year grace period after an offer for sale under the AIA; and (2) whether a secret sale, such as one where both parties are under a confidential agreement, would qualify as prior art to trigger the grace period.

Examination guidelines issued by the U.S. Patent and Trademark Office address the first issue explicitly:

"The office is treating the term 'disclosure' as a generic expression intended to encompass the documents and activities enumerated in AIA 35 U.S.C. 102(a) (i.e., being patented, described in a printed publication, in public use, on sale, or otherwise available to the public, or being described in a U.S. patent, U.S. patent application publication, or WIPO published application)."

Accordingly, the USPTO will interpret the activities of an inventor, including any sales activities, as a disclosure. It follows then that the one-year grace period provisions under 36 U.S.C. 102(b) would apply to the sale activities.

The second issue has generated more uncertainty. Under pre-AIA case law, an entity that engages in a confidential or secret sale, or uses an invention in secret, for over a year forfeits the right to then seek patent protection. See, for example, Metallizing Engineering Co. v. Kenyon Bearing and Auto Parts, 153 F.2d 516 (2d Cir. 1946). The AIA has turned this forfeiture doctrine on its head. The addition of the residual clause "otherwise available to the public" in §102(a)(1) has been interpreted by the USPTO as repealing the forfeiture doctrine. In the examination guidelines, the USPTO states that "the phrase 'on sale' in AIA 35 U.S.C. 102(a)(1) is treated as having the same meaning as 'on sale' in pre-AIA 35 U.S.C. 102(b), except that the sale must make the invention available to the public." The USPTO has thus stated clearly that secret sales will not qualify as prior art that would defeat patentability. Some practitioners, including the American Bar Association's IP Law Section and the AIPLA, agree.

Other practitioners are skeptical of the USPTO's view, based on the belief that Congress would have been more explicit had it intended to overrule the forfeiture doctrine. Regardless of the added residual clause, many believe that Congress, by continuing to use the same terms like "on sale" in the new statute, intended for the existing law to apply to future patentability analyses under the AIA. Many criticize the exemption of confidential or secret sales as contravening the public policies behind the patent system because it allows entities to exploit an invention as a trade secret, potentially for a long time, and then apply for patent protection just as the trade secret is about to be disclosed. This will remain a hotly contested issue until it is addressed by the courts in litigation.

Inventors should take a cautious approach when evaluating deadlines for filing patent applications in light of the Hamilton Beach outcome and ambiguities in the on-sale bar under the AIA, and should educate others in their organizations of the pitfalls so on-sale bars are avoided.

Originally published in The Legal Intelligencer.

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