On February 11, 2016, the Federal Circuit, sitting en banc, issued a precedential opinion in The Medicines Company v. Hospira, Inc., in which it clarified the meaning of “on sale” for purposes of 102(b). According to the Federal Circuit, to be “on sale,” 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.”1

The Dispute

Hospira had submitted two Abbreviated New Drug Applications (“ANDAs”) seeking FDA approval to sell bivalirudin – the generic form of Angiomax – before the expiration of two patents owned by The Medicines Company (“MedCo”). MedCo sued Hospira, alleging that Hospira’s two ANDA filings infringed its patents. In response, Hospira asserted several grounds of invalidity. In one of these arguments, Hospira argued that the invention had been sold or offered for sale more than one year before MedCo had filed for patent protection. Hospira contended that the on-sale bar was triggered when MedCo paid Ben Venue Laboratories (“Ben Venue”) to manufacture Angiomax before the critical date.2 Hospira also contended that the on-sale bar was triggered because MedCo offered to sell Angiomax produced according to the patents to its distributor, ICS, before the critical date.3

The District Court Decision

Applying the two-step framework of Pfaff v. Wells Electronics, Inc., 525 U.S. 55 (1998), the district court found that the Angiomax Ben Venue had manufactured for MedCo did not trigger the on-sale bar. Pfaff’s two-step framework requires that the claimed invention was (1) the subject of a commercial offer for sale; and (2) ready for patenting.4 While the district court concluded that the claimed invention was ready for patenting under the second prong of Pfaff – because MedCo had developed two enabling disclosures prior to the critical date, or, alternatively, reduced the invention to practice before the critical date – the court found that the first prong of Pfaff was not met because the claimed invention was not commercially offered for sale prior to the critical date. The district court agreed with MedCo that the transactions between MedCo and Ben Venue were sales of contract manufacturing services in which “title to the Angiomax always resided with MedCo.”5 Because the Angiomax made by Ben Venue were for “validation purposes,” the court held that they were not made for commercial profit, thereby avoiding the on-sale bar. The court also held that MedCo’s distribution agreement with ICS did not constitute an invalidating sale as the agreement was merely “an agreement for ICS to be the sole U.S. distributor of Angiomax.”6

The Appellate Decision

On appeal, Hospira’s argument concerning the application of the on-sale bar focused on whether the invention was the subject of a commercial offer for sale. Hospira took issue with the district court’s conclusion that no commercial sale or offer for sale had occurred. According to Hospira, “any transaction that provides a commercial benefit to the inventor is enough to trigger the on-sale bar.”7 In agreeing with Hospira, a three-judge panel of the Federal Circuit reversed the district court’s ruling regarding the applicability of the on-sale bar. Although the panel acknowledged that Ben Venue had invoiced the sale as manufacturing services and title to the pharmaceutical batches did not change hands, it disagreed with the district court’s conclusion that Ben Venue’s sale of services did not constitute a commercial sale of the claimed product. According to the panel, “where the evidence clearly demonstrated 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.8

En Banc Rehearing

On rehearing en banc, the Federal Circuit began by tracing the history of the on-sale bar. For many years the Federal Circuit had used a “totality of circumstances” standard in applying the on-sale bar. Under that test “no single finding or conclusion of law [was] a sine qua non” to a holding that the statutory bar arose.9 Rather, courts were to consider all the facts and circumstances surrounding any particular transaction in light of the policies underlying section § 102(b). Although a “definite offer for sale” was required, the Federal Circuit had found that this did not necessarily require commercial activity that rose to the level of a formal “offer” under contract law principles.10 This changed with Pfaff, when the Supreme Court replaced the “totality of the circumstances” test – which the Court noted had been criticized as “unnecessarily vague” – with a two-pronged test: § 102(b) applies when, before the critical date, the claimed invention (1) was the subject of a commercial offer for sale; and (2) was ready for patenting.11 Since Pfaff, the Federal Circuit has applied this two-part test without balancing the various underlying policies according to the totality of the circumstances.

The Federal Circuit has previously stated that “the question of whether an invention was the subject of a commercial sale or offer for sale … [should] be analyzed under the law of contracts as generally understood.12 In doing so, the Federal Circuit has said that a court should focus on those activities that would be understood to be commercial sales and offers for sale “in the commercial community.”13 And, as a general proposition, “we will look to the Uniform Commercial Code (‘UCC’) to define whether . . . a communication or series of communications rises to the level of a commercial offer for sale.”14 After Pfaff, “[t]he transaction at issue must be a ‘sale’ in a commercial law sense,” and that “[a] sale is a contract between parties to give and to pass rights of property for consideration which the buyer pays or promises to pay the seller for the thing bought or sold.”15

Applying § 102(b) in light of Pfaff, the Federal Circuit concluded that the transactions at issue between MedCo and Ben Venue did not constitute commercial sales of the patented product. According to the court, “the mere sale of manufacturing services by a contract manufacturer to an inventor to create embodiments of a patented product for the inventor does not constitute a ‘commercial sale’ of the invention.”16 Rather, the transaction must be one in which the product is “on sale” in the sense that it is “commercially marketed.”17 Further, the Federal Circuit explained that “stockpiling” by the purchaser of manufacturing services is not improper commercialization under § 102(b).18

The Federal Circuit offered three reasons for its conclusion: “(1) only manufacturing services were sold to the inventor – the invention was not; (2) the inventor maintained control of the invention; and (3) ‘stockpiling,’ standing alone, does not trigger the on-sale bar.”19 According to the court, Ben Venue acted as a pair of “laboratory hands” to reduce MedCo’s invention to practice in accordance with its instructions.20 The court noted that Ben Venue’s invoices for the manufacturing service stated, “Charge to manufacture Bivalirudin lot.”21 Moreover, the absence of title transfer further underscored that the sale was only of Ben Venue’s manufacturing services. Because Ben Venue never held title, “it was not free to use or sell the claimed products or to deliver the patented products to anyone other than MedCo, nor did it do so.”22 The Federal Circuit found the absence of title transfer significant “because, in most instances, that fact indicates an absence of commercial marketing of the product by the inventor.”23

Like the absence of title transfer, the Federal Circuit also considered the confidential nature of the transactions a factor weighing against the conclusion that the transactions were commercial in nature. In this case, the Federal Circuit found that the scope and nature of the confidentiality imposed on Ben Venue “supports the view that the sale was not for commercial marketing purposes.”24 Further, the Federal Circuit explained that stockpiling, “when not accompanied by an actual sale or an offer for sale of the invention, [is] mere pre-commercial activity in preparation for future sale.”25 According to the court, “the on-sale bar is triggered by actual commercial marketing of the invention, not by preparation for potential or eventual marketing.”26

In expressly overruling inconsistent language in prior decisions, the Federal Circuit took pains to note that it still does not recognize a blanket “supplier exception” to what would otherwise constitute a commercial sale.27 Although the fact that a transaction is between a supplier and inventor “is an important indicator that the transaction is not a commercial sale, it is not alone determinative.”28 According to the court, “the focus must be on the commercial character of the transaction, not solely on the identity of the participants.”29 In concluding its opinion, the Federal Circuit concisely restated its holding: “a contract manufacturer’s sale to the inventor of manufacturing services where neither title to the embodiments nor the right to market the same passes to the supplier does not constitute an invalidating sale under § 102(b).”30

Analysis

The Federal Circuit’s holding in this case provides important guidance in preserving the right to patent inventions to those whose development efforts involve contract manufacturing. While a wide variety of different industries employ contract manufacturers, they are commonly used by the pharmaceutical industry and especially by virtual and specialty pharmaceutical companies. For such companies, preserving the right to seek patent protection is essential. As a result, the lack of clarity as to how relationships with contract manufacturers should be structured can have devastating effects. But by applying the guidance now provided by the Federal Circuit, contract manufacturers may be used with greater confidence that patent rights will not be lost.

In order to benefit from this guidance, those who rely on the services of contract manufacturers should ensure that their agreements with such manufacturers recite the purchase of manufacturing services – not the goods themselves. Such agreements should also require confidentiality and should make clear that the contract manufacturer neither takes title to the goods it makes nor has the right to freely market such goods. By employing such terms and restrictions, transactions with contract manufacturers should not be viewed as commercial sales that trigger the on-sale bar of § 102(b).