Imagine Company A is located right across the street from Company B. Company A is three times the size of Company B, with the infrastructure to design, manufacture, and test all of its products in-house. Because of its smaller size, Company B must outsource these activities to a subsidiary manufacturer, and begins contracting an agreement to do so. Both companies make a timely patent filing, less than one year after manufacturing begins.

Ten years later . . .

Both companies want to assert patent rights over potential infringers. While Company A is able to do so, Company B could be pre-empted due to the on-sale bar in 35 U.S.C. § 102(a). The only difference between these companies is the outsourcing Company B undergoes—and this very activity could invalidate Company B’s patent claims in litigation later down the line. It is important for small companies lacking the infrastructure to manufacture in-house to understand the state of the law on this issue.

The Current Law

35 U.S.C. § 102(a) of the America Invents Act (AIA) states that

[a] person shall be entitled to a patent unless—(1) the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention . . . .1

Meanwhile, 35 U.S.C. § 102(b)(1) states that “[a] disclosure made 1 year or less before the effective filing date of a claimed invention shall not be prior art to the claimed invention . . . .”2 In other words, patents filed on or after March 16, 2013, and thus governed by the AIA, have a limited one-year grace period before the filing of the patent. Any on-sale activity that occurs before or outside this grace period would potentially invalidate prior art against the patent claim.

It is important to note the difference between the post-AIA and pre-AIA statutes. Patents filed before March 16, 2013, adhere to the old statutes, where the grace period covered descriptions in printed publications in the United States or elsewhere or in public use or on sale in the United States made within one year of the application’s filing date. Hence, the one-year grace period might differ for pre-AIA patents and post-AIA patents.

The AIA changes lead to stricter on-sale scrutiny, where there is a potentially later grace period based on filing date, and therefore a longer time period when activities may bar a patent’s validity. Additionally, while the barring on-sale activities of pre-AIA patents were limited to those in the United States, the AIA on-sale bar applies to activities in any country.

What the Federal Circuit Has to Say

The Federal Circuit has repeatedly stated that there is “no ‘supplier exception’ to the on-sale bar”3because the purpose of the on-sale bar is to prevent inventors from commercially profiting from an invention for more than a year before the application for patent is filed. Hence, even if there was no transfer of title of the invention, the on-sale bar could still apply if “the evidence clearly demonstrated that the inventor commercially exploited the invention before the critical date.”4

However, the Court seems to take a broad view of what it means to commercially exploit. For example, in Kinzebaw v. Deer & Co.,5 the court found that Deere commercially benefitted from a third party testing the warrantability and durability of a patented product, and those activities therefore constituted an invalidating public use under § 102(b). Moreover, just last year in Medicines, the Federal Circuit held that a pharmaceutical company’s use of a third party, hired to perform services for attaining approval by the Food and Drug Administration (FDA), constituted commercial benefit for the inventor more than one year before the patent application was filed.6 In reaching this decision, the court noted that gaining FDA approval and marking batches with commercial product codes and customer lot numbers were all significant commercial activities “consistent with the commercial sale of pharmaceutical drugs.”7

In deciding if the on-sale bar applies, the court looks to whether two conditions are met: (1) the claimed invention must be the subject of a commercial offer for sale; and (2) the invention must be ready for patenting.8 An actual sale (or transfer of title) is not required, and general contract law is followed to determine whether “it is ‘sufficiently definite that another party could make a binding contract by simple acceptance’” when there is an attempt to sell.9 For example, in Hamilton Beach, Hamilton Beach sent a purchase order to its supplier, and the supplier acknowledged that it had received the order “and was ready to fulfill it upon Hamilton Beach’s ‘release.’”10 The court ruled that even though there was no transfer or actual sale, the exchange was “one which the other party could make into a binding contract by simple acceptance,” and therefore constituted a sale under the first condition of the on-sale bar analysis.11

In deciding whether the second “ready for patenting” requirement is met, the courts look to see whether the patent is reduced to practice. If it cannot be shown that the invention was reduced to practice, it is sufficient to show the invention was “depicted in drawings or other descriptions ‘that were sufficiently specific to enable a person skilled in the art to practice the invention.’”12 For example, in Hamilton Beach, the district court looked at Computer Aided Design (CAD) drawings depicting the patented product and presented at meetings with retail customers’ buying agents, in addition to communications with Hamilton Beach’s supplier.13 The Federal Circuit considered the “relative simplicity of the invention” to conclude that the descriptions and drawings used in the presentations were enough to allow a person of ordinary skill in the art to build the invention.14 While Hamilton Beach concerned a utility patent, it is not difficult to see how this ruling could apply to small businesses that design a product and have it manufactured by a supplier.

How the Law Might Change

Following the decision in Medicines, The Medicines Company filed a combined petition for panel rehearing and rehearing en banc at the Federal Circuit, which the Federal Circuit has granted. Among the issues that are to be addressed is whether the “no supplier exception” to the on-sale bar should be overruled.15 Moreover, the rehearing will also address whether there can be a sale under the on-sale bar despite the absence of transfer of title (or actual sale).16 In its amicus brief, The Medicines Company argues, “[T]he business arrangement mirrored the manufacturing services that a large corporation would typically perform in-house.”17 While the decision could improve the outlook for smaller companies that might outsource the manufacturing of patented products out of necessity, it is unclear whether any change will apply to the AIA on-sale bar, since the patent in Medicines was a pre-AIA patent.

What Small Business Owners Need to Know

Small businesses that outsource manufacturing, supply, or testing must be particularly careful about the timing of patent application filings and consider these issues in evaluating whether to assert a patent. Now that the AIA relies on a uniform patent filing date for § 102 inquiries, it is important to adhere to a timely filing within a year of outsourcing contract activities. It is particularly important to pay close attention to method claims, as a third party’s testing activities could constitute the reduction to practice necessary to constitute an on-sale bar.18