The court’s decision provides insight into which activities trigger the on-sale bar provision.

On July 11, in The Medicines Co. v. Hospira, Inc., No. 14-1469 (Fed. Cir. July 11, 2016), the U.S. Court of Appeals for the Federal Circuit narrowed the reach of the “on-sale bar” under 35 U.S.C. § 102(b) as it applies to both product and product-by-process claims. Applying the two-part test established by the U.S. Supreme Court in Pfaff v. Wells Electronics, Inc., 525 U.S. 55 (1998), the Federal Circuit concluded that The Medicines Company’s (MedCo’s) patents were not invalid under the on-sale bar. In its unanimous decision, the en banc court reached the opposite conclusion of the earlier three-judge panel, which found MedCo’s activities prior to filing its patent applications violated the on-sale bar provision. After agreeing to hear the case en banc, the Federal Circuit concluded that MedCo’s use of a contract manufacturer to stockpile the patented product prior to filing for patent protection did not trigger the on-sale bar under § 102(b).

Although the decision does not represent a major shift in the analysis governing the on-sale bar, it provides significant guidance on the issue of what constitutes a commercial sale in the context of the on-sale bar provision and provides welcome relief to patent holders, especially those in the biotechnology and pharmaceutical industries who often utilize third-party contract manufacturers. Several organizations representing the views of the biotechnology and pharmaceutical industries, including the Pharmaceutical Research and Manufacturers of America, the Biotechnology Innovation Organization, the American Intellectual Property Law Association, and the Intellectual Property Owners Association, submitted amici briefs in support of MedCo’s position that the on-sale bar provision should not extend to a patentee’s use of a contract manufacturer.

Background

The patent claims at issue in the case are directed to MedCo’s improved anticoagulation medication used in coronary surgery, Angiomax. Hospira, No 14-1469, slip op. at 4. Approximately 18 months before filing its patent application, MedCo contracted with a third-party supplier, Ben Venue Laboratories, to manufacture several large batches of Angiomax. Id. at 5-8. After its patents issued, MedCo sued competitor Hospira, alleging that Hospira’s generic version of Angiomax infringed MedCo’s patents. Id. at 8. Hospira countered that the asserted patents were invalid under § 102(b), which states that the commercial sale or offer for sale of an invention occurring more than one year before the filing of a patent application (i.e., the patent’s “critical date”) creates a “statutory bar” invalidating the patent. Id.; 35 U.S.C. § 102(b). Hospira cited MedCo’s manufacturing and stockpiling activities in support of its position. Hospira, No 14-1469, slip op. at 8.

The district court rejected Hospira’s arguments, holding that the activities undertaken pursuant to the MedCo/Ben Venue contract did not constitute a commercial sale of the patented product. Id. at 9-10. On appeal, the original Federal Circuit panel reversed, holding that the activities were sufficient to trigger the on-sale bar. The court explained that, “where the evidence clearly demonstrate[s] 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. Id. at 11.

MedCo petitioned for rehearing en banc, arguing that its contract to have Ben Venue manufacture the claimed product under MedCo’s direction and control did not trigger the on-sale bar because Ben Venue never “sold” the product to MedCo and because the product was never placed in the public domain prior to the critical date. Id. at 13. Hospira defended the panel’s decision, arguing that MedCo’s arrangement with Ben Venue unquestionably constituted the commercial exploitation of the patented product because both MedCo and Ben Venue received commercial benefits from the transaction. Hospira also contended that the fact that title of the patented product did not transfer from Ben Venue to MedCo was of no moment because any commercialization of the product conferring a commercial benefit triggers the on-sale bar.

The Holding

The en banc Federal Circuit rejected Hospira’s argument that MedCo’s contract for manufacturing services and stockpiling of product constituted a commercial sale in violation of the on-sale bar provision. Focusing on Pfaff’s requirement that the invention be the subject of a commercial sale (or offer for sale), the court concluded that no sale or offer for sale had taken place based on the record of the case.

Pfaff established a two-part inquiry to determine whether a sale had occurred within the meaning of § 102(b): first, whether the invention was the subject of a commercial offer for sale before the critical date and, second, whether the invention was ready for patenting. Id. at 17 (citing Pfaff, 525 U.S. at 67-68). Relying on post-Pfaff Federal Circuit precedent, the court explained that the determination of what constitutes a commercial sale should be guided by the relevant provisions of the Uniform Commercial Code and that a commercial sale typically is “a contract between parties to give and to pass rights of property for consideration.” Id. at 19. The court also explained the importance of defining the invention by the claims of the patent in the on-sale bar analysis, noting that the analysis may differ for product claims as opposed to method or process claims.

Turning to the facts surrounding the MedCo/Ben Venue transaction, the court relied on several key facts to conclude that no commercial sale of the claimed product had occurred. First, the court explained that the agreement between MedCo and Ben Venue was for manufacturing services rather than a sale of the patented product. Id. at 21-23. The court noted that the cases primarily relied on by Hospira involved patent claims directed to processes and methods, whereas the patents at issue in this case were directed to products, namely “pharmaceutical batches.” Id. at 20-21. Had MedCo’s claims been directed to the method for manufacturing Angiomax, it is likely that the contract between MedCo and Ben Venue would have triggered the on-sale bar. Second, the court observed that “[t]he absence of title transfer further underscores that the sale was only of Ben Venue’s manufacturing services.” Id. at 22. While passage of title is not dispositive in the analysis of whether a sale occurred, “the absence of title transfer [is] significant.” Id. at 23. Third, the court explained that the confidential nature of a transaction is also a significant, but not dispositive, factor in determining whether a commercial sale occurred, and that, in this case, the scope and nature of the confidentiality imposed on Ben Venue supported the conclusion that no commercial sale occurred. Id. at 24-25.

The court also addressed Hospira’s argument that the significant commercial benefit that MedCo obtained from stockpiling its drug prior to filing its patent application compelled a finding that a commercial sale occurred. Id. at 26-29. The court explained that the statute requires that the patented invention be “on sale” and that stockpiling is “mere pre-commercial activity in preparation for future sale,” which is insufficient to trigger the on-sale bar. Id. at 26. Indeed, stockpiling by inventors in house prior to the critical date has never been found to trigger the on-sale bar, and the court refused to draw a significant distinction between in-house manufacturing and the use of a third-party manufacturer to stockpile a patented product prior to the critical date. Id. at 27-29.

Rejecting Hospira’s argument that expanding the on-sale bar provision to encompass outsourced manufacturing would encourage the earlier filing of patents, the court concluded that applying the on-sale bar to the MedCo/Ben Venue transaction would arbitrarily treat various companies making the same pre-commercial preparations differently, would be ineffective to discourage stockpiling as a general practice, and would unnecessarily include an activity not contemplated by Congress in its drafting of § 102(b). Id. at 29.

Finally, the court addressed Hospira’s argument that Ben-Venue’s manufacture of the patented product for MedCo constituted an on-sale bar because Federal Circuit precedent established that there is no “supplier exception” to the statutory bar of § 102(b). Id. 29-30. The court distinguished each of the cases relied on by Hospira, explaining that the arguments and undisputed facts of those cases established that commercial sales had occurred and that the holdings of those cases were not inconsistent with the analysis and conclusions reached in the instant case. Id. at 31. The cases relied on by Hospira simply did not establish that all inventor-supplier transactions are sufficient to trigger the on-sale bar; instead “[t]he focus must be on the commercial character of the transaction, not solely on the identity of the participants.” Id.

Conclusion

The Federal Circuit’s en banc decision in The Medicines Co. v. Hospira, Inc. is important because it provides new guidance regarding how to analyze what activities may or may not qualify as an on-sale bar. The case is also significant because it puts companies that choose or need to use outside contract manufacturers on a more equal footing with those companies that are able to manufacture in-house.