In Pfaff v. Wells Electronics, 525 US 55 (1988), the Supreme Court attempted to focus the factors invoking the on-sale bar of s.102, by holding that the claimed invention must both be the subject of a “commercial sale”(including offers for sale) and “ready for patenting” prior to the critical date of one year prior to filing an application on the invention, e.g. a new drug or drug formulation. The AIA added a phrase to s. 102(a) that the bar applied if the invention was “…on sale, or otherwise available to the public prior to the effective filing date of the claimed invention”. The one year grace period was retained for disclosures of the invention by the inventor(s). s. 102(b).
Apart from the question of whether or not the “available to the public” phrase overruled Metalizing Engineering, a case that held that secret use of the invention started the one-year-to-filing clock, as opposed to public sales of the invention that did, the courts have struggled to define just what constitutes a commercial sale. If a drug company contracts with another company to buy commercial quantities of a drug it later patents, is this a commercial sale?”
In Helsinn Healthcare , S.A. v. Teva Pharmaceuticals. USA, Inc., Appeal no. 2016-1284, 2016-1787 (Fed. Cir., May 1, 2017), the Fed. Cir. held that a contract between Helsinn and MGI Pharma, Inc. in which MGI agreed to exclusively purchase palonosetron from Helsinn for distribution, contingent upon FDA approval of the dosage forms. The agreement looked a lot like a “commercial sale” under the UCC; apart from an up-front payment by MGI, it specified the price, method of payment, the method of delivery, and provided that title would pass to MGI. MGI agreed to place orders for the drug via purchase forecasts followed by firm orders that Helsinn had to accept in writing. Importantly, the parties publicized this agreement before the critical date.
Teva filed an ANDA and Hatch-Waxman litigation ensued. The D.C. found that the agreement was a contract for future sale, which would trigger the on-sale bar for the pre-AIA patents-in-suit, and the Fed. Cir agreed. However, one patent was found to be subject to the AIA by the D.C. because it found that, to be publicly on sale under the AIA, the sale must disclose all the details of the invention. The Fed. Cir. disagreed on the latter point, holding that the AIA did not change the statutory meaning of ‘”on sale’ in the circumstances involved here.”
To resolve the on sale factors, the Fed. Cir. relied heavily on its earlier en banc opinion in The Medicines Company. v. Hospira, Inc., Appeal No. 2014-1469 – 1504 (Fed. Cir., July 6, 2014). In that Hatch-Waxman case, there were arguably two commercial transactions. Medco purchased bulk drug from Ben Venue that was quarantined by Medco’s distributor, ICS. Medco and ICS signed a distribution agreement that title would pass to ICS when the drug was released from quarantine. As in the Helsinn case, ICS would then purchase the drug from Medco via purchase orders that Medco could accept or reject. The drug was not offered for sale to the public until the after the critical date, although the other activities occurred prior to the critical date.
Regarding the supply contract with Ben Venue, Hospira made a broad argument that any transaction, such as a supplier contract, that provides a “commercial benefit” to the inventor or amounts to commercial exploitation of the invention – such as the ability to stockpile the drug – should trigger the on sale bar. While affirming that there is no broad “supplier exception” to the on sale bar, (reversing Special Devices, Inc. v. OEA, Inc.), the Fed. Cir. carefully reviewed the factors associated with a commercial sale, and concluded that the Ben Venue transaction was not a sort of “commercial sale or offer to sell” that would meet the Pfaff requirement.
Unlike Helsinn, the facts of the supply agreement between Medco and Ben Venue did not support a determination that a commercial sale had taken place. The court held that a “mere sale of manufacturing services by a contract manufacturer to an inventor”—as opposed to sale of the invention at full price– does not constitute a “commercial sale” of the invention. Commercial benefit, such as stockpiling, was stated not to equal commercial marketing of the invention. “Not every activity that inures some commercial benefit to the inventor can be considered a commercial sale”.
While recognizing that the Supreme Court had cited Metallizing Engineering with approval, the court noted that the invention in that case was a secret process, not a tangible item, and the court noted that “we have never espoused the notion that, where the patent is to a product, the performance of the unclaimed process of creating the product, without a ‘commercial sale’ of the product itself, triggers the on-sale bar….[in other cases] we found that offering to perform the steps of a patented method for customers in exchange for payment triggers the on-sale bar.”
Another factor, although not per se dispositive, was that title did not pass to the supplier. A further consideration was that the transaction was confidential, which the court also did not find per se dispositive. In this case, the court found that “Ben Venue acted as a pair of ‘laboratory hands’” and worked under the direction of Medco. The work was invoiced as manufacturing services, and Medco paid much less than the value of the “ultimate product” it sold.
This intensive analysis dictated the outcome of Helsinn, in which the distribution contract with MGI triggered the on sale bar. The contract provided that title would pass to MGI for an upfront payment and a percent of sales. The contract was also publicized prior to the critical date, as was Helsinn’s prior attempts to market the drug. The court stated, “Our en banc decision in [Hospira] also made clear that the offer or contract for sale must unambiguously place the invention on sale, as defined by the patent claims” and that that condition had been met.
With respect to the post-AIA patent, the court rejected the argument that the on-sale bar now does not encompass secret sales and requires that a sale make the invention available to the public in order to trigger application of the on-sale bar. The court rejected the argument that the sale must disclose the invention to the public before the critical date. Rather, the court held that, “under our cases, an invention is made available to the public when there is a commercial offer or contract to sell a product embodying the invention and that sale is made public. Our cases explicitly rejected a requirement that the details of the invention be disclosed in the terms of sale.” [Note that the sale is considered to place the invention in the public domain, e.g., to be “made public” when the first sale is finalized, e.g. when the Distribution Agreement was signed. Slip op. at 18, 24]
The court went further, holding that
“publicly offering a product for sale that embodies the claimed invention places it in the public domain, regardless of when or whether actual delivery occurs….We have also not required that members of the public be aware that the product sold actually embodies the claimed invention….We conclude that, after the AIA, if the existence of the sale is public, the details of the invention need not be publicly disclosed in the terms of sale….We do not find that distribution agreements will always be invalidating under s. 102(b). We simply find that this particular Supply and Purchase Agreement is.”
Whether or not you find that any or all of the court’s analysis leads to “simple” resolution of the on-sale bar, the court may soon be called upon to resolve the fate of the distribution agreement in Hospira, a “second sale” that was not addressed in the decision. Page 7 of the Slip Opinion described the distribution agreement between MedCo and its distributor, ICS.
After manufacture by Ben Venue, the batches of drug were placed “in quarantine” until MedCo obtained FDA approval. The Distribution Agreement made ICS the exclusive distributor of the drug and provided that the title would pass to ICS after MedCo released the drug from quarantine. ICS would place individual purchase orders with MedCo weekly, which MedCo could accept—if the drug was approved—or reject. After the critical date, MedCo released three batches and made them available for sale.
Was this a commercial sale under pre-AIA standards, which the court found were unchanged post-AIA? MedCo placed the drug with ICS, apparently so it could sell quickly after FDA approval. The distribution agreement passed title to ICS once MedCo provided approved drug to ICS and MedCo agreed to pay for ICS’ services in selling the drug. Although actual sales to the public were not made until after the critical date, was the distribution agreement a commercial sale? The distribution agreement involved the conditions precedent for ICS to take title to the invention, to buy it from MedCo and to sell it to the public. While the sale was not made public, as in Helsinn, the sale itself would legally place the product in the public domain, now both pre- and post- AIA.
No wonder, Prof. Janice Mueller, in her textbook “Patent Law” (5th ed.) began her discussion of section 102(b) by stating that “[t]he on sale bar is probably the greatest source of litigation involving [102(b)] challenges to patent validity.”