No On-Sale Bar From Manufacturing Agreement Without An Actual Sale of the Invention

The Medicines Co. v. Hospira, Inc. (Fed. Cir. July 11, 2016) (Before Newman, Lourie, Dyk, Moore, O’Malley, Reyna, Wallach, Taranto, Chen, Hughes, Stoll and Prost, CJ.) (Opinion for the court, O’Malley, J.)

Hospira filed an Abbreviated New Drug Application (“ANDA”), requesting approval to sell a generic form of Angiomax, an anticoagulant drug sold by The Medicines Company (“MedCo”).  MedCo sued Hospira, alleging that the ANDA infringed two patents that covered the manufacture of bivalirudin, which is the active ingredient in Angiomax.  Hospira argued that the patents were invalid under the on-sale bar of § 102(b), due to a commercial sale of the patented bivalirudin product more than one year before the patents were filed (the “critical date”).  Specifically, MedCo contracted with Ben Venue to manufacture bivalirudin, and contracted with ICS to store and distribute the bivalirdun. Both contracts were entered into before the critical date.

The agreement with Ben Venue required Ben Venue to manufacture three commercially-saleable batches of bivalirudin using the methods covered by MedCo’s patents.  MedCo paid $347,500 for this service, although the approximate market value of the bivalirudin Ben Venue manufactured was $30 million. The contract further specified that the bivalirudin would be owned by MedCo, “filled for commercial use” and would be “placed on quality hold until all testing had been successfully completed.”  Each batch received a “Commercial Product Code” and a customer lot number, and each batch was “released [to MedCo] for commercial and clinical packaging.”

The agreement with ICS required ICS to store and distribute the bivalirudin. That agreement made ICS the exclusive distributor of Angiomax, and stated that the “title and risk of loss” would pass to ICS once the bivalirudin was released by the FDA for commercial sale.

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The district court applied a two-step analysis for determining whether an alleged sale triggered the on-sale bar, under Pfaff v. Wells Electronics, Inc. A patent is barred by a sale under § 102(b) where the claimed invention was (1) the subject of a commercial offer for sale, and (2) ready for patenting.  The district court held that there had been no commercial sale which would trigger the on-sale bar under the first prong of Pfaff.  The agreement with Ben Venue was a manufacturing services contract, and not for sale of the product itself.  The contract with ICS was a “contract to enter into a contract” for future sales of Angiomax, and also was not a commercial sale that would trigger § 102(b). Hospira appealed.

A panel of the Federal Circuit reversed the district court, holding that the contract with Ben Venue was a commercial sale, because the contract demonstrated that the inventor had “commercially exploited” the invention more than one year before filing a patent application, even if the inventor did not transfer title of the commercial embodiments. In short, the Court did not distinguish between an offer to sell products prepared by a patented method, and the commercial sale of a services that would result in a patented product.  MedCo requested re-hearing of the case en-banc.

The Federal Circuit, sitting en banc, unanimously reversed the prior panel, holding that MedCo was not barred from seeking its patents due to a commercial sale under § 102(b).  The sale of manufacturing services by a contract manufacturer to an inventor to create an embodiment of a patented product for the inventor does not constitute a “commercial sale” of the invention.  Further, “stockpiling” a product prior to the bar date is not a “commercialization” that would trigger § 102(b).  Instead, the transaction must be one in which the product is “on sale” in the sense that it is commercially marketed.

Here, only manufacturing services were sold to the innovator, its own invention was not sold back to it.  This is clear, in that MedCo paid less than 1% of the market value of the drug to Ben Venue for its services.  Further, the Uniform Commercial Code is helpful in understanding whether a “sale” has taken place. The UCC requires that title pass from the seller to the buyer for a price.  The contracts with Ben Venue and ICS did not allow either of them to possess title to the bivalirduin, and thus were not “sales” under the UCC.  Instead, the inventor maintained control of the invention, as shown by its retention of title in the bivalirudin until after the critical date for § 102(b).  Finally, stockpiling alone does not constitute a “commercial sale.”  Stockpiling, even through a vendor, is merely a preparation for future commercial activity, not a commercial sale itself.

Before a patent is applied for, an innovator should take steps to ensure that its contracts with third-party manufacturers and distributors provide that: (1) the contracts are for services rendered and not for sale of product that embodies the invention; and (2) the innovator retains title in all products that embody the invention. Further, compensation under such agreement should reflect a fee for services rendered and not the value of the product itself.

Also contributing to this summary was Parker Hancock and Puja Dave.

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