Federal Circuit Decision Clarifies Application of On-Sale Bar to Third-Party Manufacturers and Suppliers

Federal Circuit Decision Clarifies Application of On-Sale Bar to Third-Party Manufacturers and Suppliers

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.

Lawyer Contacts

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Gregory A. Castanias

Anthony M. Insogna
San Diego

Randy Kay
San Diego

Greg Lanier
Silicon Valley

David M. Maiorana

Sasha Mayergoyz

John J. Normile
New York

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