February 9, 2017

On-Sale Bar for Contractor and Supplier Activities

The Federal Circuit addressed the potential for contract manufacturing to create an “on sale” bar to patentability, in a decision that could affect how supplier relationships are managed.  Whether a sale or offer for sale of an invention bars a patent depends on whether a sale occurred in the commercial sense more than one year earlier under pre-AIA 102(b).  While this case pertains to interpretation of pre-AIA 102, the law remains unsettled as to whether the pre-AIA on-sale bar case law applies post-AIA.[1]  To assess whether a sale occurred in the commercial sense, the transaction can be evaluated under the Uniform Commercial Code to assess whether the parties had a contract to transfer title for consideration.  It is typically not a sale where a contractor or supplier provides manufacturing services to create the invention, but no title to the invention transfers.  Beware that there is no “supplier exception,” so if a supplier or contractor holds or transfers property rights/title, it may be deemed a sale.

Meds. Co. had no in-house manufacturing capabilities and used an outside contractor to manufacture its pharmaceutical active ingredient (bivalrudin) via a manufacturing services contract.  An impurity was found in the product at unacceptable levels.  Thus, Meds. Co. worked with the outside contractor and found a solution to reducing the impurity levels during manufacturing, which was eventually patented as product-by-process claims.

The question arose as to whether the contract manufacturing of the active ingredients by the new process amounted to a sale or offer for sale that would have been a bar to obtaining a patent.  To be “on sale” under § 102(b), a product must be the subject of a commercial sale or offer for sale, that bears the general hallmarks of a sale pursuant to Section 2-106 of the Uniform Commercial Code (a sale is the passing of title from the seller to the buyer for a price).  Therefore, a “sale” under §102(b) “occurs when the parties … give and pass rights of property for consideration.”  The mere sale of manufacturing services by a contract manufacturer to an inventor/company to create embodiments of a patented product does not constitute a “commercial sale” of the invention, where no title transferred.  Use of patented methods or processes, however, can trigger the on-sale bar despite no transfer of title.  There is also no blanket “supplier exception” to the on-sale bar that would exempt activities between a supplier and inventor/company.

If title transfers, the supplier receives blanket authority to market the product or disclose the process to others, or the transaction is a sale of product at full market value, a sale may have occurred despite occurring being between the supplier and inventor/company.

Takeaway: It may be appropriate to structure contract manufacturing agreements to be for services only, avoiding a transfer of title in the goods, and avoiding use of market prices/full market value with any compensation per unit.  Notably, method and process claims can still be offered for sale or sold, despite no transfer of title occurring.  Thus, the safest strategy may be to file a patent application prior to working with any outside party, including suppliers or contractors, particularly when the work may result in further technological development.  This is especially true in view of the uncertainty of the language in the post-AIA 102 and whether pre-AIA 102 case law regarding sales activities and on-sale bar applies to post-AIA 102.

[1] The ambiguous statutory language found in post-AIA 102 is yet to be interpreted by the courts, leaving open the question of whether pre-AIA case law regarding on-sale bar activities should apply to post-AIA 102. A conservative approach assumes that pre-AIA on-sale bar case law will still apply to post-AIA 102. See e.g., Helsinn v. Teva (pending before the Fed. Cir. as Appeal No. 2016-1284 from D. N. J. 2016) considering whether the bar against secret commercialization from pre-AIA case law applies post-AIA.

Citation: The Meds. Co. v. Hospira, Inc., 827 F. 3d 1363, 119 U.S.P.Q.2d 1329 (Fed. Cir. 2016) defining “on sale” activities under pre-AIA 35 U.S.C. 102(b).