Federal Circuit Defines Supplier Exemption to the On-Sale Bar

On July 11, 2016, the Federal Circuit in The Medicines Co. v. Hospira, Inc., No. 14-1469 (Fed. Cir. July 11, 2016) (O’Malley, J.) (en banc) narrowed the reach of the on-sale bar under 35 U.S.C. § 102(b) to exclude contract manufacturing activities, provided certain criteria are met. The Court held that even though some commercial benefit may be obtained by each party to a contract manufacture agreement, where the inventor retains control of the product and is the limited recipient of the manufactured product, the on-sale bar is not triggered. This was true even where the volume of manufactured product may be considered a “stockpile” for subsequent distribution. The Court remanded the case for further consideration of a related issue of whether a distribution agreement constituted an “offer for sale.”

In addressing this contract manufacturing issue, the Federal Circuit provided further guidance as to how to apply the first prong of the Supreme Court’s Pfaff decision. Under Pfaff, an on-sale bar occurs when, before the critical date, the claimed invention was (1) the subject of a commercial offer for sale; and (2) was ready for patenting. The Court’s unanimous holding looked to Section 2-106 of the Uniform Commercial Code to guide application of the “commercial offer for sale” prong of Pfaff. Specifically, the Federal Circuit held that in order for an alleged sale to be a commercial sale triggering 102(b), the sale must “bear the general hallmarks of a commercial sale pursuant to Section 2-106 of the Uniform Commercial Code.” Slip op. at 3.

Applying this rule to the issue of whether the contract manufacturer “sold” the product to MedCo, the court concluded that no sale, for purposes of assessing novelty, had occurred, identifying three reasons for its judgment in this case:

1. Only manufacturing services were sold to the inventor—the invention was not;
2. The inventor maintained control of the invention, as shown by the retention of title to the embodiments and the absence of any authorization to the contract manufacturer to sell the product to others; and
3. “Stockpiling,” standing alone, does not trigger the on-sale bar.

Slip op. at 19. This holding is significant because companies which outsource their manufacturing can now better understand how to avoid having commercial manufacturing activities considered to constitute an on-sale bar—i.e., by carefully maintaining control of the invention and limiting distribution from the commercial manufacturer to the inventor and not to the public generally. Although the relevant novelty statute (35 U.S.C. § 102) has changed following implementation of the America Invents Act (“AIA”), these considerations are still relevant with respect to the post-AIA novelty statute, which changed the date on which certain activities constitute an on-sale bar, but not the types of activities that constitute an on-sale bar. (We note that a similar on-sale bar issue, but under the new, post-AIA statute, is currently pending at the Federal Circuit in Helsinn Healthcare S.A. v. Teva Pharmaceuticals USA, Inc., Nos. 16-1284, 16-1787 (Fed. Cir.).)

MedCo was seeking FDA approval of a generic form of a branded product. However, the original process MedCo used to prepare the product also produced a by-product, which made the product less shelf-stable. MedCo developed a new process, and engaged BenVenue, a contract manufacturer, to perform this chemistry on the commercial scale and provide MedCo with sufficient material to obtain FDA approval.

In terms of the contract manufacturing activity, MedCo paid BenVenue to make and deliver what was, in fact, a commercial quantity of the drug product in question. MedCo quarantined the product for an extended period of time to verify that it was shelf-stable. Once it was determined that the product was shelf-stable, MedCo sought patent protection. While the drug product itself was known, the new process produced a product with sufficiently low levels of the by-product. MedCo therefore sought and obtained “product-by-process” claims.

One of the key facts in this case is that BenVenue’s “sale” of the drug product to MedCo occurred more than a year before MedCo’s patent applications were filed.

MedCo’s abbreviated new drug application (“ANDA”) had to be approved by the U.S. Food and Drug Administration (“FDA”) before MedCo’s first commercial sale could occur, and the FDA could not approve the ANDA without verifying that MedCo’s product met the necessary specifications. MedCo filed its patent applications before the ANDA was approved, and before MedCo’s first commercial sale.

Since BenVenue’s sale to MedCo occurred more than one year before MedCo filed for patent protection, Hospira argued that the sale by BenVenue invalidated MedCo’s patent claims.

Accordingly, one of the key issues before the court was whether the date on which BenVenue sold the product to MedCo triggered an on-sale bar, in which case MedCo’s patent claims would be invalid, or whether the date on which MedCo first sold its product is the relevant date, in which case MedCo’s patent claims would not be invalidated by BenVenue’s sale to MedCo.

Hospira also asserted that when MedCo stockpiled its product, this constituted a sale. Hospira contended that where a transaction provides a commercial benefit to the inventor, it is enough to trigger the on-sale bar (even though the stockpiled product was not yet sold), under a theory that MedCo received a commercial benefit from BenVenue by being able to stockpile its product for future sale.

In the earlier panel decision, the court had agreed with Hospira that contract manufacturing and stockpiling product for a later sale each constituted a sale because MedCo received a commercial benefit from the transactions with its contract manufacturer. The panel reasoned that, because MedCo paid its contract manufacturer for services that resulted in the patented product, the transactions were commercial sales. Medicines Co. v. Hospira, Inc., 791 F.3d 1370-71 (Fed. Cir. 2015).

MedCo petitioned for a panel rehearing or a rehearing en banc, which was granted on November 13, 2015. The panel’s decision was vacated, the appeal was reinstated, and new briefing was ordered on a) whether the circumstances constituted a commercial sale, b) whether there was a sale, despite the absence of a transfer of title, c) whether the sale was commercial, or an experimental use, and d) whether the court should overrule or revise the principle in Special Devices, Inc. v. OEA, Inc., 270 F.3d 1353 (Fed. Cir. 2001), that there is no “supplier exception” to the on-sale bar of 35 U.S.C. § 102(b).

The full court has now appeared to revise the principle in Special Devices, by outlining relevant considerations under which there can be a “supplier exception” to the on-sale bar.

The full court evaluated the term “sale” as being a “commercial sale,” pursuant to various UCC provisions. In a typical sale under the UCC, title to a product typically transfers from the manufacturer to the purchaser at some point after the purchase price is paid, and the product is shipped. In the instant case, title to the product always remained with MedCo, so this was one factor the court considered in determining that BenVenue’s activities did not constitute a “commercial sale” for purposes of assessing novelty.

Further, in a typical “commercial sale,” there is typically a reasonable correlation between the price paid for a product and the market value of the product. In this case, the product is a high-priced biological product. The price MedCo paid BenVenue related more to the cost of performing toll synthesis than the value of the product.

Looking at these factors, the court determined that BenVenue’s activities did not constitute a commercial sale for purposes of establishing a lack of novelty.

One likely take-home message to companies outsourcing their product manufacturing is that, until their patent application is on file, they should ensure that title to the product being manufactured does not transfer, that the manufacturer is not permitted to sell the product to others, and that all transactions with the product manufacturer are held in confidence.

It is still possible that entering into a Distribution Agreement before a patent application is filed could be construed as an offer for sale, and this will be determined on remand. Further, Hospira could petition the Supreme Court to overturn the Federal Circuit’s approach to a “supplier exception” to the on-sale bar. Since many small companies, including those in the pharma and biotech industries, outsource their manufacturing, and may do so before filing for patent protection, we expect that many amici will also weigh in with their views about the Federal Circuit’s approach if this issue is considered by the Supreme Court.