In a unanimous en banc decision, the US Court of Appeals for the Federal Circuit established the circumstances under which a product manufactured according to product-by-process claims is invalid under the “on-sale bar” of 35 USC § 102(b). The Medicines Co. v. Hospira, Inc., Case Nos. 14-1469; -1504 (Fed. Cir., July 11, 2016) (O’Malley, J). In order for a commercial transaction to trigger the on-sale bar and invalidate the challenged claims, it must “bear the general hallmarks of a sale pursuant to Section 2-106 of the Uniform Commercial Code.”

The Medicines Company (MedCo) brought a patent case under the Hatch Waxman Act against Hospira for patents covering the brand name drug Angiomax. Following a bench trial, the Federal Circuit reversed the district court’s finding that the claims were not invalid based on the legal conclusion that commercial exploitation prior to the critical date triggered the on-sale bar. The full court revisited the panel decision, but this time affirmed the district court’s conclusion that the transactions with a contract manufacturer did not trigger the on-sale bar. The full court remanded all remaining issues to the merits panel, including open questions related to claim construction, non-infringement and whether an agreement with MedCo’s distributor separately constituted an invalidating sale under § 102(b).

MedCo operates as a specialty pharmaceutical company that is not capable of manufacturing its products in-house. Instead, MedCo prepared the active pharmaceutical ingredient and contracted with Ben Venue Laboratories to manufacture commercial quantities of the finished pharmaceutical. More than one year before the priority date, MedCo paid Ben Venue $347,500 to manufacture three batches of the pharmaceutical according to the patents-at-issue (claims directed to a product made by a process that uses a pH-adjusting agent as well as the pH-adjusted product). Hospira argued during the litigation that the on-sale bar was triggered when MedCo paid Ben Venue to manufacture Angiomax before the critical date. 

The full Federal Circuit, like the district court, began by applying the two-step framework as explained in the 1998 Supreme Court of the United States case Pfaff v. Wells Electronics, Inc. Under Pfaff, the on-sale bar is triggered where the claimed invention was (1) the subject of a commercial offer for sale and (2) ready for patenting. The Federal Circuit did not reach the second prong, focusing exclusively on whether the transactions between MedCo and Ben Venue were commercial offers for sale. The Federal Circuit rejected Hospira’s argument that MedCo’s transactions with Ben Venue were a commercial sale under § 102(b) because the companies benefitted from the commercial arrangement. Tracing its own precedent since Pfaff, the Court explained that assessment of what constitutes a commercial offer for sale must focus on activities that would be understood to be commercial sales and offers for sale “in the commercial community.” Indeed, as a general proposition, the Court looks to the Uniform Commercial Code to decipher whether the circumstances rise to the level of a commercial offer for sale. 

The Federal Circuit explained that the facts presented in this case did not trigger the on-sale bar for the following reasons:

• Only manufacturing services—not the invention itself—were sold to the inventor.

• The inventor maintained control of the invention, as shown by the retention to title to the embodiments and absence of any authorization to Ben Venue to sell the products to others.

• “Stockpiling” of inventory is an act of preparation for commercial sales but does not, standing alone, constitute a “commercial sale” when no offer has yet been made.

Importantly, the Federal Circuit analyzed the significance of the type of claim at issue in this case, clarifying that the disposition might be different where the claims were directed to a process or method instead of a patented product.

Practice Note: The Federal Circuit’s analysis provided ample commentary that may inform future interactions between a patent holder and a contract manufacturer. For example, the Federal Circuit clarified that the passage of title is a “helpful indicator” as to whether a product is “on sale,” but declined to create a bright line rule or attach “talismanic significance” to any one factor when determining whether there has been a commercial offer for sale; the best guidepost in analyzing the on-sale bar is the Uniform Commercial Code’s definition of “sale.” As a practical matter, however, the Federal Circuit emphasized a desire for coherency in the application of its precedent. Adopting the view of amici in the biotechnology and pharmaceutical sectors, the Federal Circuit indicated that attaching the on-sale bar based on the facts of this case would penalize those companies without manufacturing capabilities—presenting costs and difficulties in the drug development process that might deter future investments in innovation. The applied rationale aims to provide equal treatment and a single set of rules to all companies engaging in pre-commercial activities.

Although the Federal Circuit’s decision applies a pre-America Invents Act (AIA) version of the on-sale bar in 35 USC § 102(b), the rationale likely also applies to post-AIA patents. An open question remains as to whether contractual activity is disqualified as an on-sale bar when done under the cover of secrecy rather than in public view. In a pending appeal, Helsinn v. Teva, Case No. 16-1284, the Federal Circuit will be asked to decide, under the AIA, whether “on-sale” activity is limited to activity that is “available to the public.”