United States: Federal Circuit Helps Clarify What Constitutes a Commercial Sale under Pfaff

In The Medicines Co. v. Hospira Inc., Appeal No. 2014-1469 (Fed. Cir. July 11, 2016), the Federal Circuit issued a unanimous en banc decision ruling that the on-sale bar was not triggered by a supplier's sale of manufacturing services to an inventor largely because the title to the invention and the right to market the invention never passed from the inventor to the supplier.

BACKGROUND

The Medicines Company (MedCo) contracted with Ben Venue Laboratories (Ben Venue) to manufacture Angiomax, a drug product, which is covered by two of MedCo's patents (U.S. Patent Nos. 7,582,727 and 7,598,343).  Slip op. at 5.  Before the critical date from which the on-sale bar of § 102(b) must be measured, MedCo paid Ben Venue a fee to manufacture three batches of product according to the patents-at-issue.  Slip op. at 6-7.  The batches were provided by Ben Venue and placed in quarantine with MedCo's distributor, and only released and made available for sale after the critical on-sale bar date.  Slip op. at 7-8.

MedCo sued Hospira in district court alleging infringement of the '727 and '343 patents.  Slip op. at 8.  Hospira contended that MedCo failed to prove infringement and alleged several grounds of invalidity, including that the invention was sold or offered for sale before the critical date under § 102(b).  Slip op. at 8-9.  The district court found the patents not invalid and not infringed.  Id.  MedCo and Hospira both appealed.  Slip op. at 10-11.  A merits panel of the Federal Circuit agreed with Hospira and reversed the district court's ruling regarding the applicability of the on-sale bar, and found 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.  Slip op. at 11 (quoting Meds. Co. v. Hospira, Inc., 791 F.3d 1368, 1370-71 (Fed. Cir. 2015)).  Because the panel found the patents invalid, it did not reach other issues raised on appeal.

MedCo petitioned for rehearing en banc, which was granted on November 13, 2015.  Slip op. at 12-13.  The en banc Court ordered new briefing on (1) whether the circumstances presented constitute a commercial sale under the on-sale bar of 35 U.S.C. § 102(b), and (2) should this court overrule or revise the principle in Special Devices, Inc. v. OEA, Inc., 270 F.3d 1353 (Fed. Cir. 2001), that there is no "supplier exception" to the on-sale bar of 35 U.S.C. § 102(b)?  Slip op. at 13.

MedCo's position was "that the on-sale bar is not triggered by an inventor's retention of a third party to develop or manufacture the claimed invention confidentially and under the inventor's discretion and control," "that stockpiling does not constitute commercial activity under § 102(b)," and "that § 102(b) should not apply because no products were placed in the public domain prior to the critical date."  Slip op. at 13 (internal quotations omitted).

Hospira's position was that "MedCo's transactions with Ben Venue constitute a commercial sale under § 102(b) because this arrangement constituted commercial exploitation from the standpoint of both companies."  Id. (internal quotations omitted).

ON-SALE BAR

Under Pfaff, the on-sale bar under 35 U.S.C. § 102(b) applies when, before the critical date, the claimed invention (1) "was the subject of a commercial offer for sale" and (2) "was ready for patenting."  Slip op. at 17 (citing Pfaff v. Wells Electronics, Inc., 525 U.S. 55, 67 (1998)).

The Court focused on the first prong of the Pfaff test in determining that the on-sale bar did not apply, and discussed, broadly speaking, three reasons for their judgment.

First, only manufacturing services were sold by Ben Venue to MedCo, the invention (the formulated drug product itself) was not.  Slip op. at 19.  The Court considered several factors in coming to this conclusion, which included a review of the cases on which Hospira relied, the instructions provided by MedCo to Ben Venue, the invoices for the manufacturing services, and the amount MedCo paid for the batches of product.  Id.  Each factor led the Court to conclude that the transaction between MedCo and Ben Venue was for manufacturing services, and that Ben Venue acted as a pair of "laboratory hands" to reduce MedCo's invention to practice.  Id.  Therefore, under the plain text of § 102(b), there was no sale of the "invention."  Id.

Second, MedCo maintained control of the invention, as shown by the retention of title to the embodiments and the absence of any authorization to Ben Venue to sell the product to others.  Slip op. at 19.  In coming to this conclusion, the Court looked to the Uniform Commercial Code (UCC) for the definition of a "sale."  Slip op. at 23.  The UCC describes a "sale" as "passing of title from the seller to the buyer for a price."  Slip op. at 22 (quoting U.C.C. § 2-106(1)).  Although the Court didn't set a bright line rule, the Court mentioned that the passage of title is a helpful indicator of whether the inventor gives up its interest and control over the product, and conversely, that the retention of title indicates an absence of commercial marketing of the product.  Slip op. at 22-23.  Additionally, the Court considered the confidential nature of the transaction, and concluded that the scope and nature of the confidentiality imposed on Ben Venue favors the view that the transaction was not commercial in nature.  Slip op. at 23-24.  Therefore, since (1) MedCo maintained control of the invention, (2) the invention was not commercially marketed, and (3) the transaction was not commercial in nature, there was no "sale" of the invention.  Slip op. at 25-26.

Lastly, "stockpiling," standing alone, does not trigger the on-sale bar.  Slip op. at 19.  Hospira argued that stockpiling the invention would permit MedCo to commercially benefit from the manufacturing services.  Slip op. at 26.  However, the Court pointed out that commercial benefit is not what triggers § 102(b); there must be a commercial sale or offer for sale.  Id.  The mere preparation or eventual marketing of the invention is not enough to trigger § 102(b).  Id.

Also, the Court did not overrule Special Devices, which held that there is no "supplier exception" to the on-sale bar.  Instead, the Court noted that "the import of Special Devices is simply that the fact that a sale is made by a supplier is not, standing alone, sufficient grounds upon which to characterize a transaction having all of the hallmarks of a commercial sale under the UCC as something other than a commercial sale."  Slip op. at 30.

CONCLUSION

This en banc decision helps clarify what constitutes a commercial offer for sale in the manufacturing services context.  Although the Court did not set a bright-line rule, suppliers and inventors looking to engage in a manufacturing services agreement will now have more guidance as to what events may trigger an on-sale bar under § 102(b).

In the Pfaff decision, the Supreme Court focused on the second prong of the on-sale bar test, "ready for patenting," and said little about the first prong, "commercial offer for sale."  And precedent related to the commercial offer for sale of manufacturing services primarily focuses on performing a claimed method or process (e.g., Metallizing Engineering Co., D.L. Auld, Plumtree, and Scaltech).

Here, the invention was directed towards a drug product, Angiomax.   Therefore, to determine what constitutes a commercial offer for sale of a product, the Court laid out several factors, such as the nature of the transaction and the control over the invention, and discussed various indicators that help weigh each of the factors — factors that innovators should consider when contracting for manufacturing services.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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