Does this fact pattern apply to you or your company?
You ask one or more companies to manufacture and distribute your idea for the next big thing (“NBT”). You ask for manufacturing and distribution services on a date, T1, and get one company to agree to your manufacturing terms on a later date, T2, and get another company to agree to your distribution terms on a date later than T2, which we will call T3. The first sale of NBT takes place later that year, T4, which is later than any of T1, T2, or T3.
Sales of NBT take off and you finally ask your patent attorney to file for patent protection on NBT. You understand that you have a year grace period under certain circumstances to file a patent application. You file a first patent application (P1) more than a year after T1 and T2, but less than a year after T3. You file a second patent application (P2) more than a year after each of T1, T2 and T3. Patents issue from both P1 and P2. You and your company celebrate.
If this fact pattern applies to you or your company, then you should ask the million (or possibly multi-million) dollar question: Which one of P1 or P2 is still a valid patent?
Starting The Invalidity Clock With A Pre-Patent Sale/Offer For Sale
The United States Patent Laws require you to file for a patent application within one year from the date in which you commercially offered for sale or sold the patent-practicing product while that product was “ready for patenting.”1 While prior to the America Invents Act (“AIA”) a sale could constitute a bar even if done in secret,2 the Federal Circuit has not conclusively held that the AIA requires an invalidating offer for sale to be public.3
For the purposes here, we are going to assume that (i) your NBT was ready for patenting at the time you requested manufacturing/distribution services, (ii) your NBT is the subject of both the manufacturing and distribution agreements, and (iii) the manufacturing and distribution agreement terms are publicized or otherwise made available to the public.
Do Any Of Your Agreements Qualify As A “Commercial Sale”?
Believe it or not, the Federal Circuit has recently clarified that manufacturing and distribution agreements between a patent owner and its own manufacturers or distributors can give rise to a finding of patent invalidity. “[T]he on-sale bar does not exempt commercial agreements between a patentee and its supplier or distributor.”4
In Medicines I, the Federal Circuit looked at the situation where a company’s own manufacturing/distribution agreements were being used to invalidate its patents. The court held that offers for sale relate to “those activities that would be understood to be commercial sales and offers for sale ‘in the commercial community.’”5 For guidance, the court referred to §2-106 and §2-306 of the Uniform Commercial Code (“UCC”). From these and other precedents, the court held that “[a]n offer for sale is ‘one which the other party could make into a binding contract by simple acceptance.’”6
On remand from
Medicines I, the Federal Circuit provided numerous examples of what may qualify as a “commercial sale” in a manufacturing/distribution agreement:
7
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Agreeing to let the manufacturer/distributor sell the patented product to customers;
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Agreeing to let the customer retain title of the patented product once received from the distributor;
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Agreeing to let the distributor to use “commercially reasonable efforts” to fill purchase orders;
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Agreeing to a sole supplier of product to meet purchase orders;
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Agreeing to a designated purchaser of product within the United States for a fixed duration to receive all product from distributor;
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Agreeing to let the distributor supply worldwide requirements at reasonable times and prices, even though the purchaser was able to purchase products at prices and time schedules which were reasonably competitive with those of other sources; and
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Invoices identifying a product being sold and a transfer of title to the purchaser.
In our fact pattern,
P1 and
P2 are invalid if the signed manufacturing agreement qualifies as an offer for sale (it was signed more than a year before applications for
P1 and
P2 were filed). In contrast, only
P2 would be invalid if the signed distribution agreement constituted an offer for sale. But what if soliciting manufacturing or distribution services alone qualified as an invalidating offer for sale (e.g., the critical date is
T1 in the fact pattern)? What if distributing the terms of services to potential vendors could render
P1 and
P2 invalid regardless of whether they were actually signed? It remains to be seen whether these types of activities would qualify as offers themselves or could qualify depending on the parties’ prior conduct and other circumstances. Resolution of these issues are highly fact specific.
Conclusion/Recommendations
Avoid any potential invalidating offers for sale by filing a patent application well before negotiating or entering into a manufacturing and/or distribution agreement. If manufacturing is necessary before filing, then make sure the agreement is specific to manufacturing services and is not aimed at sales of a product or method; this includes making sure vendor invoices reflect the services and not product sales or title transfer.
In addition, have your patent attorney involved in any negotiations concerning manufacturing or distribution agreements to help avoid the issues mentioned in the Medicine cases. It is better to have your patent attorney review those agreements now rather than have the patent attorney of an accused infringer, a potential acquiring company, a venture capitalist, or an angel investor look at those agreements first and then tell you that your patent is invalid rendering your case and/or your company not worth the time or the money.
With respect to manufacturing and distribution agreements, keep in mind that when you as the owner of a subsequently patented product relinquish title to a supplier, you can effectively give authority to the supplier to market that product or disclose it to others. Remember, it is possible that a transfer to the inventor by such a supplier could technically meet the law’s requirements of an invalidating offer for sale.
With the above in mind, please make sure you know what is in your or your company’s manufacturing/distribution agreements and, if you haven’t yet done so, consider re-reading those agreements in view of the above concerns.
Innovate onward.
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1 See Pfaff v. Wells Elecs., Inc., 525 U.S. 55, 67 (1998).
2 In re Caveney, 761 F.2d 671, 675 (Fed. Cir. 1985).
3 See Helsinn Healthcare S.A. v. Teva Pharms. USA, Inc., 855 F.3d 1356, 1368 (Fed. Cir. 2017) (We decline the invitation by the parties to decide this case more broadly than necessary)
4 Caveney, 761 F.2d at 676 (“The mere fact that a product is delivered to a distributor does not exempt the transaction from 35 U.S.C. § 102(b).”); Medicines Co. v. Hospira, Inc., 827 F.3d 1363, 1373 (Fed. Cir. 2016) (en banc) (“Medicines I”) (accord).
5 Medicines I, 827 F.3d at 1373.
6 Id.
7 Medicines Co. v. Hospira, Inc., App. No. 2014-1469,-1504, 2018 WL 717186, at *3-4 (Fed. Cir. Feb. 6, 2018).
