
February 9, 2017
On-Sale Bar for Contractor and Supplier Activities
The Federal Circuit addressed the potential for contract manufacturing to create an “on sale” bar to patentability, in a decision that could affect how supplier relationships are managed.  Whether a sale or offer for sale of an invention bars a patent depends on whether a sale occurred in the commercial sense more than one year earlier under pre-AIA 102(b).  While this case pertains to interpretation of pre-AIA 102, the law remains unsettled as to whether the pre-AIA on-sale bar case law applies post-AIA.[1] To assess whether a sale occurred in the commercial sense, the transaction can be evaluated under the Uniform Commercial Code to assess whether the parties had a contract to transfer title for consideration.  It is typically not a sale where a contractor or supplier provides manufacturing services to create the invention, but no title to the invention transfers.  Beware that there is no “supplier exception,” so if a supplier or contractor holds or transfers property rights/title, it may be deemed a sale.
Meds. Co. had no in-house manufacturing capabilities and used an outside contractor to manufacture its pharmaceutical active ingredient (bivalrudin) via a manufacturing services contract. Â An impurity was found in the product at unacceptable levels. Â Thus, Meds. Co. worked with the outside contractor and found a solution to reducing the impurity levels during manufacturing, which was eventually patented as product-by-process claims.
The question arose as to whether the contract manufacturing of the active ingredients by the new process amounted to a sale or offer for sale that would have been a bar to obtaining a patent.  To be “on sale” under § 102(b), a product must be the subject of a commercial sale or offer for sale, that bears the general hallmarks of a sale pursuant to Section 2-106 of the Uniform Commercial Code (a sale is the passing of title from the seller to the buyer for a price). Therefore, a “sale” under §102(b) “occurs when the parties … give and pass rights of property for consideration.”  The mere sale of manufacturing services by a contract manufacturer to an inventor/company to create embodiments of a patented product does not constitute a “commercial sale” of the invention, where no title transferred.  Use of patented methods or processes, however, can trigger the on-sale bar despite no transfer of title.  There is also no blanket “supplier exception” to the on-sale bar that would exempt activities between a supplier and inventor/company.
If title transfers, the supplier receives blanket authority to market the product or disclose the process to others, or the transaction is a sale of product at full market value, a sale may have occurred despite occurring being between the supplier and inventor/company.
Takeaway: It may be appropriate to structure contract manufacturing agreements to be for services only, avoiding a transfer of title in the goods, and avoiding use of market prices/full market value with any compensation per unit. Â Notably, method and process claims can still be offered for sale or sold, despite no transfer of title occurring. Â Thus, the safest strategy may be to file a patent application prior to working with any outside party, including suppliers or contractors, particularly when the work may result in further technological development. Â This is especially true in view of the uncertainty of the language in the post-AIA 102 and whether pre-AIA 102 case law regarding sales activities and on-sale bar applies to post-AIA 102.
[1] The ambiguous statutory language found in post-AIA 102 is yet to be interpreted by the courts, leaving open the question of whether pre-AIA case law regarding on-sale bar activities should apply to post-AIA 102. A conservative approach assumes that pre-AIA on-sale bar case law will still apply to post-AIA 102. See e.g., Helsinn v. Teva (pending before the Fed. Cir. as Appeal No. 2016-1284 from D. N. J. 2016) considering whether the bar against secret commercialization from pre-AIA case law applies post-AIA.
Citation: The Meds. Co. v. Hospira, Inc., 827 F. 3d 1363, 119 U.S.P.Q.2d 1329 (Fed. Cir. 2016) defining “on sale” activities under pre-AIA 35 U.S.C. 102(b).