The Medicines Company v. Hospira, Inc. (Fed. Cir. 2016) (en banc)

McDonnell Boehnen Hulbert & Berghoff LLP

The past decade or so of U.S. patent law has been characterized by a consistent theme between Federal Circuit decisions and the Supreme Court's invalidation of them (and sometimes can be discerned even in those rare instances when the High Court deemed the Federal Circuit's decision below to have been correct).  This theme is that the Court has had to intervene to prevent the Federal Circuit from establishing "bright-line" rules in patent cases, or in too stringently applying even those rules that would otherwise be capable of being implemented with sufficient flexibility to pass Supreme Court muster.  There have been exceptions, including the Court's two-prong test for determining whether the on-sale bar under 35 U.S.C. § 102(b) would invalidate a patent.  As set forth in Pfaff v. Wells Electronics, Inc., 525 U.S. 55 (1998), the Court commanded that invalidation required that there be a commercial sale or offer for a commercial sale of a patented product, and that the invention embodied in that product be "ready for patenting" at the time of the sale or offer for sale.  The question before the Court in Pfaff was focused on the circumstances that would satisfy the second prong of this test.  Yesterday, in The Medicines Company v. Hospira, Inc., the Federal Circuit considered en banc the requirements for there to be a commercial sale or offer to sell that would satisfy the first prong.

The case arose in the context of ANDA litigation involving Hospira's generic version of TMC's bivalirudin drug (sold as Angiomax®), an anticoagulant used in heart surgery.  The invention claimed in the patents-in-suit, U.S. Patent Nos. 7,582,727 and 7,598,343, can be appreciated by the following representative claims:

Claim 1 of the '727 patent:

Pharmaceutical batches of a drug product comprising bivalirudin (SEQ ID NO: 1: [Phe Pro Arg Pro Gly Gly Gly Gly Asn Gly Asp Phe Glu Glu Ile Pro Glu Glu Tyr Leu]) and a pharmaceutically acceptable carrier for use as an anticoagulant in a subject in need thereof, wherein the batches have a pH adjusted by a base, said pH is about 5-6 when reconstituted in an aqueous solution for injection, and wherein the batches have a maximum impurity level of Asp9-bivalirudin that does not exceed about 0.6% as measured by HPLC.

Claim 1 of the '343 patent:

Pharmaceutical batches of a drug product comprising bivalirudin (SEQ ID NO: 1: [Phe Pro Arg Pro Gly Gly Gly Gly Asn Gly Asp Phe Glu Glu Ile Pro Glu Glu Tyr Leu]) and a pharmaceutically acceptable carrier, for use as an anticoagulant in a subject in need thereof, said batches prepared by a compounding process comprising: (i) dissolving bivalirudin in a solvent to form a first solution; (ii) efficiently mixing a pH-adjusting solution with the first solution to form a second solution, wherein the pH-adjusting solution comprises a pH-adjusting solution solvent; and (iii) removing the solvent and pH-adjusting solution solvent from the second solution; wherein the batches have a pH adjusted by a base, said pH is about 5-6 when reconstituted in an aqueous solution for injection, and wherein the batches have a maximum impurity level of Asp9-bivalirudin that does not exceed about 0.6% as measured by HPLC.

Bivalirudin is too acidic for direct injection into patients and TMC had attempted to develop formulation methods for overcoming this limitation.  Prior compounding methods produced a degradation product, Asp9 bivalirudin (caused by deamination of Asn9); in high enough concentrations (>1.5%) Asp9 bivalirudin contaminants were unacceptable (per FDA).  Production of bivalirudin batches contaminated with high levels of Asp9 bivalirudin prior to the filing date of the patents-in-suit caused TMC to shut down commercial production for more than a year.  The company's attempts to produce formulations of the drug for commercial sale were unsuccessful, and led TMC to hire a consultant to investigate why there were problems making the drug.  These efforts determined that there were certain ways of adjusting the pH that reduced the impurity levels to less than 0.6% and resulted in the '343 and '727 patents.  The resulting patent applications were filed July 27, 2008, making July 27, 2007 the critical date for determining whether the patents were invalid under the on-sale bar.

In the ensuing ANDA litigation, Hospira alleged that the patents were invalid under the on-sale bar of 35 U.S.C. § 102(b), were obvious under § 103 and invalid under § 112 for lack of written description, non-enablement, and indefiniteness.  TMC had a long-standing (1997-2006) relationship with Ben Venue Laboratories to make bivalirudin for commercial sale, and the  evidence established that TMC paid Ben Venue Laboratories $347,500 to manufacture three batches of bivalirudin using the claimed methods, said batches being completed on October 31, 2006, November 21, 2006, and December 14, 2006 (i.e., prior to the critical date).  These batches (which were worth $20 million on the market) were delivered to TMC's authorized and exclusive distributor, Integrated Commercial Solutions (ICS) pending FDA approval per a distribution agreement between TMC and ICS effective February 27, 2007.  None of the batches were released for sale until August 2007, after the critical date.  Hospira urged that bivalirudin produced by Ben Venue prior to the critical date constituted a commercial sale, and delivery of these batches to ICS amounted to an offer for commercial sale.

The District Court disagreed; although the District Court determined that the invention was ready for patenting and thus satisfied the second prong of the Pfaff test, Ben Venue's activities did not constitute a commercial sale nor was transfer of the drug to ICS an offer for sale.  The District Court's reasoning was that the product produced by Ben Venue was produced on TMC's behalf, which always retained title.  Although this by itself was not sufficient, in addition the product was not produced for (immediate) commercial sake but for "validation purposes."  According to District Court, the purpose of the on-sale bar must be considered, which is "to preclude attempts by the inventor or his assignee to profit from commercial use of an invention for more than a year before an application for patent is filed," citing D.L. Auld Co. v. Chroma Graphics Corp., 714 F.2d 1144, 1147 (Fed. Cir. 1983).  Under these circumstances, according to the District Court, this was not the case here; in addition, the District Court found (sua sponte) that these activities constituted "experimental use" and thus avoided the on-sale bar.  The District Court held that the claims were not invalid for violation of the on-sale bar (or any of the other reasons advanced by Hospira) and also were not infringed.

A merits panel, addressing only the question of whether the on-sale bar invalidated TMC's patents, reversed in an opinion by Judge Hughes, joined by Judges Dyk and Wallach (see "The Medicines Company v. Hospira (Fed. Cir. 2015)").  The panel considered this question de novo (Robotic Vision Sys., Inc. v. View Eng'g, Inc., 249 F.3d 1307 (Fed. Cir. 2001)) and applied the Supreme Court's Pfaff standard for applying the on-sale bar.  This question reduced to whether there was a commercial sale or offer to sell (there being no dispute that the invention was ready for patenting and satisfied the second prong of the Pfaff test).  The panel agreed that Ben Venue "invoiced the sale as manufacturing services and title to the pharmaceutical batches did not change hands," but this was not dispositive.  What determined whether the on-sale bar had been breached in the merits panel's opinion was whether an inventor has commercially exploited the invention before the critical date.  Applying this standard, the merits panel found "no principled distinction between the commercial sale of products prepared by the patented method [] and the commercial sale of services that result in the patented product-by-process" that occurred in this case.  The opinion stated that "the sale of the manufacturing services here provided a commercial benefit to the inventor more than one year before a patent application was filed," thus implicating the policy considerations the panel identified as motivating the on-sale bar.

The Federal Circuit vacated this opinion and reinstituted the appeal en banc, ordering the parties (and amici) to brief these issues:

(a) Do the circumstances presented here constitute a commercial sale under the on-sale bar of 35 U.S.C. § 102(b)?
    (i) Was there a sale for the purposes of § 102(b) despite the absence of a transfer of title?
    (ii) Was the sale commercial in nature for the purposes of § 102(b) or an experimental use?
(b) Should this court 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)?

Sitting en banc, the Federal Circuit affirmed the District Court's determination that there was no on-sale bar violation, in an opinion for a unanimous court by Judge O'Malley.  The en banc Court held that "to be 'on sale' under § 102(b), 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."  Under the circumstances here there was no commercial sale and thus the District Court correctly found that the claims were not invalid under § 102(b).

The opinion sets forth the en banc Court's understanding ("a brief overview") of the legal and precedential history of the on-sale bar and the policy reasons behind it over the nearly 200 years U.S. law has recognized this requirement.  While grounded generally in the novelty requirements in the Patent Act of 1793, the Court finds the first clear enunciation of the bar in Pennock v. Dialogue, 27 U.S. (2 Pet.) 1 (1829), and later codified in Section 6 of the Patent Act of 1836 (albeit with a later-added two-year grace period which was reduced to one year in 1939).  The opinion recounts its own "totality of the circumstances" test applied under the 1952 Patent Act prior to the Supreme Court's Pfaff opinion (see, for example, Envirotech Corp. v. Westech Eng'g Inc., 904 F.2d 1571 (Fed. Cir. 1990), and Ferag AG v. Quipp Inc., 45 F.3d 1562 (Fed. Cir. 1995)); the Federal Circuit notes that the Supreme Court in Pfaff found the Federal Circuit's test to be "unnecessarily vague."  The opinion also notes that its earlier opinions had considered a "sale" that satisfied the first prong to be one "in a commercial law sense," Trading Technologies International, Inc. v. eSpeed, Inc., 595 F.3d 1340, 1362 (Fed. Cir. 2010).

The Court began its analysis of the case at bar by stating three points it thinks the opinion clarifies.  First, "the mere sale of manufacturing services by a contract manufacturer to an inventor to create embodiments of a patented product for the inventor does not constitute a "commercial sale' of the invention."  Second, "'stockpiling' by the purchaser of manufacturing services is not improper commercialization under § 102(b)."  Finally, "commercial benefit—even to both parties in a transaction—is not enough to trigger the on-sale bar of § 102(b); the transaction must be one in which the product is 'on sale' in the sense that it is 'commercially marketed.'"  These conclusions are supported in this case by three factors:

(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 Ben Venue to sell the product to others; and (3) "stockpiling," standing alone, does not trigger the on-sale bar.

With regard to the question of whether there was a sale, the Court based its conclusions on what was claimed -- pharmaceutical batches -- and the activities of the parties, which was practice of the disclosed processes by Ben Venue to produce batches of the bivalirudin formulation for TMC.  In evaluating whether product-by-process claims were practiced, the panel cites SmithKline Beecham Corp. v. Apotex Corp., 439 F.3d 1312 (Fed. Cir. 2006), for the proposition that such claims are directed to a product, not the process.  Hospira asserted that Ben Venue practiced the unclaimed method, according to the Court, and while sale of tangible objects can fall within the scope of the UCC "'[a] process, however, is a different kind of invention . . . [and] thus [is] not sold in the same sense as is a tangible item.'"  In this regard the Court reiterated its use of the UCC standards for determining what constitutes a sale.  Sale of Ben Venue's services in preparing bivalirudin was not a sale of the patented pharmaceutical batches under the Court's reasoning, and Ben Venue's actions are analogous to acting as 'a pair of 'laboratory hands'" for TMC.  Under these circumstances there was no "sale" of the invention according to the Court, a conclusion supported by the confidentiality of the transaction, the lack of transfer of title and the small amount paid by TMC to Ben Venue relative to the value of the commercial product.  The Court agreed with Hospira that the UCC should not and does not have "talismanic significance" in deciding whether there was a sale, and stated that it is not drawing a bright line rule on the question.  No one factor or even set of factors is dispositive in the en banc Court's view; rather, the Court apparently considered the totality of the circumstances surrounding the parties' activities in arriving at its conclusion that there was no invalidating commercial sale.

Turning to the question of whether "stockpiling" implicates the on-sale bar, the Court held that it does not, because "commercial benefit generally is not what triggers § 102(b); there must be a commercial sale or offer for sale."  Under Pfaff, the Federal Circuit says the Supreme Court has directed that "we are not to look to broad policy rationales in assessing whether the on-sale bar applies; we are to apply a straightforward two-step process—one which permits an inventor to 'both understand and control the first commercial marketing of his invention.'"  Accordingly:

[T]he mere stockpiling of a patented invention by the purchaser of manufacturing services does not constitute a "commercial sale" under § 102(b).  Stockpiling—or building inventory—is, when not accompanied by an actual sale or offer for sale of the invention, mere pre-commercial activity in preparation for future sale.  This is true regardless of how the stockpiled material is packaged.  The on-sale bar is triggered by actual commercial marketing of the invention, not preparation for potential or eventual marketing.  [N]ot every activity that inures some commercial benefit to the inventor can be considered a commercial sale.  Instead, stockpiling by an inventor with the assistance of a contract manufacturer is no more improper than is stockpiling by an inventor in-house.

The opinion characterized TMC's payment to Ben Venue for batches of formulated Angiomax® as "a pre-commercial investment" that should be treated no differently than "a company with in-house manufacturing capabilities" and hence not a violation of the on-sale bar.

Finally, the Court addressed Hospira's allegations that finding no on-sale bar in this case would be inconsistent with several earlier panel decisions, for example, in Brasseler, U.S.A. I, L.P. v. Stryker Sales Corp., 182 F.3d 888 (Fed. Cir. 1999); Special Devices, Inc. v. OEA, Inc., 270 F.3d 1353 (Fed. Cir. 2001); and Hamilton Beach Brands, Inc. v. Sunbeam Products, 726 F.3d 1370 (Fed. Cir. 2013).  The en banc Court provides several grounds for distinguishing these cases from its opinion here.  But the Court concludes that "to the extent language in those cases might be viewed as dictating a different result here, they are overruled" with the important caveat that the Court is not creating "a blanket 'supplier exception'"; that relationship may be "an important indicator that the transaction is not a commercial sale," but it is not determinative on its own.  For example, "[w]here the supplier has title to the patented product or process, the supplier receives blanket authority to market the product or disclose the process for manufacturing the product to others, or the transaction is a sale of product at full market value, even a transfer of product to the inventor may constitute a commercial sale under § 102(b)."  it is not the identities of the participants but rather the "commercial character of the transaction" that determines whether there has been an offer for a commercial sale according to the Court -- in short, the totality of the circumstances considered in a commercial context.  The Court returned the appeal to the merits panel for its consideration of the other issues raised by the parties.

Any en banc decision by the Federal Circuit is significant, if only because it gives the patent community (and even the Supreme Court) the benefit of the Federal Circuit's special and particular expertise in patent law.  More than a dozen years of being reversed and sometimes chastised by the Supreme Court for its (mis)understanding of the law may have created, at the Court and elsewhere, the false impression that the Federal Circuit has lost this expertise; even respected jurists like Judge Diane Wood of the 7th Circuit has opined that other circuits could make as many mistakes as the Federal Circuit has, as an argument that the Federal Circuit should lose exclusive appellate jurisdiction over patent law.  Recent decisions have hinted that the Federal Circuit may be making an attempt to reassert its earlier preeminence (at least at anything less than the 30,000 foot level commanded by the Supreme Court).  It cannot be anything but good if the Federal Circuit seizes every opportunity to get its patent law mojo back.

The Medicines Company v. Hospira, Inc. (Fed. Cir. 2016) (en banc)
Panel: Chief Judge Prost and Circuit Judges Newman, Lourie, Dyk, Moore, O'Malley, Reyna, Wallach, Taranto, Chen, Hughes, and Stoll
Opinion by Circuit Judge O'Malley

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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