United States: A Prior Agreement To Outsource Manufacturing Does Not Invalidate A Patent

Abstract

A patent is invalid if a product embodying the claimed invention was "on sale" more than one year before the filing of an application for the patent. In a recent en banc decision, the Court of Appeals for the Federal Circuit held that, for an invention 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, specifically, the passing of title from the seller to the buyer for a price, evidencing relinquishment of interest and control over the product.

Under Supreme Court precedent, parties to a contract are released from their contractual obligations when a contract expires. But a court will compel arbitration under an expired contract if a dispute falls within the scope of the arbitration clause of that contract.

The courts will invalidate a patent, if an applicant commercially sells or offers a product for sale that practices the patent's claims more than one year before filing a patent application. Recently, in The Medicines Co. v. Hospira, Inc., an en banc Federal Circuit held that entering into a contract with a manufacturer to make a patented product does not constitute such an invalidating commercial sale.

Background

The Medicines Company ("MedCo") holds two patents that cover an anticoagulant drug, bivalirudin, which MedCo sells under the trade name Angiomax. These patents were filed in July of 2008. Thus, any commercial sale of bivalirudin prior to July of 2007 would render the patents invalid.

MedCo does not have its own manufacturing facilities so in late 2006, MedCo contracted with Ben Venue to manufacture Angiomax according to the patented formula. By the end of 2006, Ben Venue manufactured three batches of Angiomax, valued at over $20 million. The contract between MedCo and Ben Venue stated that "the solution will be filled for commercial use" and that the manufactured product would be placed on hold until testing was completed. The invoices for each batch that Ben Venue manufactured stated that it would be "released to MedCo for commercial and clinical packaging."

MedCo placed the products into quarantine pending FDA approval. MedCo signed a distribution agreement making ICS the exclusive authorized distributor of Angiomax in the United States and made the quarantined Angiomax available for sale in August 2007.

Before MedCo's patents expired, Hospira filed applications with the FDA to request approval to sell a generic form of the drug. MedCo sued Hospira, alleging that Hospira's FDA applications to manufacture and sell bivalirudin infringed its patents for manufacturing the drug. During litigation, Hospira alleged that the patents were invalid because MedCo sold products manufactured according to the process claimed in the asserted patents when it paid BenVenue to manufacture Angiomax in 2006, and that MedCo offered to sell manufactured Angiomax to ICS for distribution in 2007.

Under the Supreme Court's decision in Pfaff v. Wells, a patent is invalid under the "on-sale bar" rule if a product embodying the claimed invention is both ready for patenting, and commercially offered for sale more than one year before the date of the patent application. Although finding that the claimed was invention ready for patenting more than a year before the application date, the district court found that the invention was not commercially offered for sale prior to the priority date of the patent applications. Specifically, the district court found that the transaction between MedCo and Ben Venue was a sale for contract manufacturing services, and that title to the Angiomax always resided with MedCo. The court also found that because the batches manufactured by Ben Venue were for "validation purposes," they were not made for commercial profit, as required by the "on-sale bar," but for experimental purposes. The district court also held that MedCo's agreement with ICS wasn't an invalidating sale, but rather, the agreement was merely an agreement for ICS to be the sole U.S. distributor of Angiomax—"a contract to enter into a contract." Hospira appealed.

On appeal, Hospira criticized the district court's conclusion that the batches of Angiomax were for experimental purposes, noting that MedCo had not claimed that the Angiomax manufactured by Ben Venue was for experimental use, and that, although title to the manufactured drugs never transferred between MedCo and Ben Venue, MedCo was able to stockpile its product for future sale, thereby enjoying a commercial benefit from the transaction, thus triggering the "on-sale bar" rule.

The En Banc Decision

An en banc Federal Circuit held that for the "on-sale rule" to apply, a product must be the subject of a commercial sale or offer for sale, and that a commercial sale is one that in which title passes from the seller to the buyer for a price, evidencing relinquishment of interest and control over the product. The court found that in this case, no such invalidating commercial sale occurred. The court emphasized that it must focus on activities that constituted sales and offers for sale "in the commercial community." The court found that the transactions between MedCo, Ben Venue, and ICS in 2006 and 2007 did not constitute commercial sales of the patented Angiomax product.

The court first clarified that the sale of manufacturing services by a contract manufacturer to create embodiments of a patented product for the inventor did not constitute a "commercial sale" of the invention. Ben Venue merely sold contract manufacturing services to MedCo—not the patented invention. MedCo paid Ben Venue only about 1% of the ultimate market value of the product that Ben Venue manufactured, and Ben Venue invoiced the sale as manufacturing services.

The court further explained that the sale was only of Ben Venue's manufacturing services since title to the manufactured pharmaceuticals remained with MedCo. Because Ben Venue lacked title, it was not free to use or sell the claimed products or to deliver the patented products to anyone other than MedCo.

The court also explained that "stockpiling" was not improper commercialization that would invalidate the patent. Commercial benefit, even to both parties in a transaction, is not enough to invalidate a patent under the "on-sale bar" rule. Rather, the product "on sale" must be "commercially marketed," and did not include preparation for potential or eventual marketing The court therefore found that MedCo did not market or release its invention to any purchasers by contracting with Ben Venue. The court therefore vacated the panel opinion and remanded to the panel for further proceedings.

Strategy and Conclusion

This case illustrates how patent holders can structure transactions with suppliers before commercially marketing goods and services to avoid potentially negative consequences later on. For example, patent owners outsourcing manufacturing services should retain title to products embodying the patented invention and maintain confidentiality over contracted services.

Footnotes

1 The MedCo  opinion may be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2016/MedicinesCompanyvHospiraInc.pdf.

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