On July 11, 2016, in The Medicines Company v. Hospira,
Inc., the Federal Circuit issued a rare unanimous en banc
opinion addressing the circumstances under which a patentee's
manufacturing and supply agreements with a third-party contractor
could trigger the on-sale bar under 35 U.S.C. § 102(b). The
court's analysis focused exclusively on the first prong of the
U.S. Supreme Court's on-sale bar test: "whether the
[claimed] invention was the subject of a commercial sale or offer
for sale" before the critical date of the patent claim. In an
opinion written by Judge O'Malley, the court explained that
activating the on-sale bar requires that "a product must be
the subject of a commercial sale or offer for sale, and that a
commercial sale is one that bears the general hallmarks of a sale
pursuant to Section 2-106 of the Uniform Commercial Code." The
court then set forth two guidelines for evaluating whether there
exists a commercial sale or offer for sale: (i) "a contract
manufacturer's sale to the inventor of manufacturing
services" does not constitute "an invalidating sale under
§ 102(b)" of a claimed product when "neither title
to the [product] nor the right to market the [product] passes
to" the manufacturer; and (ii) "'stockpiling' by
the purchaser of manufacturing services is not improper
commercialization under § 102(b)" absent actual
"commercial marketing."
The court's en banc decision focused upon the following facts:
The patentee MedCo is a pharmaceutical company that does not have
in-house manufacturing capabilities for producing drug batches.
MedCo therefore contracted with a third-party manufacturer, Ben
Venue Laboratories, to make drug batches. The challenged patent
claims are directed to the drug product bivalirudin. Before the
critical date of the patent claims, MedCo paid Ben Venue more than
$300,000 "to manufacture three batches of the drug bivalirudin
according to the patents-at-issue." The three drug batches
"had a market value of well over $20 million." MedCo did
not release the three batches for sale until after the critical
date of the challenged claims, and MedCo did not transfer title of
the drug batches to Ben Venue.
Against this background, the court reached two important holdings.
First, the court determined that "sale of
manufacturing services by a contract manufacturer
to an inventor to create embodiments of the patented
product for the inventor does not constitute a 'commercial
sale' of the invention." Starting from the statutory
language of Section 102(b), the court explained that the on-sale
bar "requires that 'the invention' be 'on
sale,'" and noted that the challenged claims covered drug
products. The court then rejected the argument that "by
manufacturing embodiments of the patented product for MedCo, Ben
Venue put the invention 'on sale.'" Emphasizing the
difference between product and process claims for purposes of
Section 102(b), the court then stated that its precedent
"never espoused the notion that, where the patent is to a
product, the performance of the unclaimed process of creating the
product, without any accompanying 'commercial sale' of the
product itself, triggers the on-sale bar." The court placed
prominent weight on the fact that "only manufacturing services
were sold to the inventor—the invention was not."
The court also explained that the "absence of title transfer
further underscores that the sale was only of Ben Venue's
manufacturing services. Because Ben Venue lacked title, it was not
free to use or sell the claimed products to anyone other than
MedCo." Thus, according to the court, there was no cognizable
sale under the Uniform Commercial Code ("UCC"), which
"describes a 'sale' as 'the passing of title from
the seller to the buyer for a price.'" While recognizing
that UCC standards "do[] not have 'talismanic
significance,'" the court nonetheless stressed "the
usefulness of the UCC in analyzing the on-sale bar."
Second, the court held that "'stockpiling' by the
purchaser of manufacturing services is not improper
commercialization under § 102(b)." Observing that a
fundamental objective of the on-sale bar is "preventing
inventors from filing for patents a year or more after the
invention has been commercially marketed, whether marketed by the
inventor himself or a third party," the court made clear that
"commercial benefit generally is not what triggers [the
on-sale bar]; there must be a commercial sale or offer for
sale." As the court put it, "commercial
benefit—even to both parties in a transaction—is not
enough ... the transaction must be one in which the product is
'on sale' in the sense that it is 'commercially
marketed."' Applying these principles, the court explained
that "[s]tockpiling—or building inventory—is, when
not accompanied by an actual sale or offer for sale, mere
pre-commercial activity in preparation for future sales." The
court concluded that the "on sale bar is triggered by actual
commercial marketing of the invention, not preparation for
potential or eventual marketing." Accordingly,
"stockpiling by an inventor with assistance of a contract
manufacturer is no more improper than is stockpiling by an inventor
in-house."
Recognizing that its prior decisions "expressly held that
there is no 'supplier exception' to the on-sale bar,"
the court distinguished those cases as not involving the
"facts and arguments considered" in the case before it.
After cataloging the different factual circumstances presented in
prior decisions, the court made clear that "to the extent
language in those cases might be viewed as dictating a different
result here, they are overruled with one important caveat: We still
do not recognize a blanket 'supplier exception' to the what
would otherwise constitute a commercial sale as we have
characterized it today." Rather, the "focus must be on
the commercial character of the transaction, not solely on the
identity of the participants." The court then provided
additional guidance, explaining that "[w]here 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 Federal Circuit's decision provides increased
predictability regarding the scope of the on-sale bar to
pharmaceutical, electrical, and other industries where a patented
invention is often manufactured or supplied by a third party,
especially in the early stages of development and testing.
Additionally, the court's opinion identifies key considerations
that patentees must consider and address in drafting their
manufacturing and supply agreements with third parties.
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.