On-Sale Bar Questions Leading Up To Helsinn At High Court

This article previously appeared on Law360.com. Reprinted with permission. 

On June 25, 2018, the U.S. Supreme Court granted certiorari of the Federal Circuit’s decision in Helsinn Healthcare SA v. Teva Pharmaceuticals USA Inc., in which the Federal Circuit held that the on-sale bar provision of the Leahy-Smith America Invents Act is triggered even “if the existence of the sale is public, the details of the invention need not be publicly disclosed in the terms of the sale.” The Federal Circuit’s decision has left the industry questioning what sales actually qualify as invalidating prior art under the AIA.

What Is the On-Sale Bar?

The on-sale bar doctrine is based on the principle that an inventor may not apply for a patent more than one year after making an attempt to profit from his invention by putting it on sale. Before the AIA, 35 U.S.C. § 102(b) stated that a person shall be entitled to a patent unless “the invention was patented or described in a printed publication in this or a foreign country or in public use or on sale in this country, more than one year prior to the date of the application for patent in the United States.” In 2013, the AIA amended the language of § 102 to prohibit the issuance of a patent if “the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention.”

Relevant Prior On-Sale Bar Cases

Prior to the AIA, the interpretation of the on-sale bar doctrine largely stemmed from the Supreme Court’s decision in Pfaff v. Wells Electronics Inc. In Pfaff, the Supreme Court provided a two-step framework to determine when the on-sale bar will apply: (1) if the invention was “the subject of a commercial offer for sale; and (2) if the invention was “ready for patenting.” Pfaff, however, dealt primarily with the second prong, leaving the definition of “commercial offer for sale” up to the interpretation of the lower courts.

Since Pfaff, and pre-AIA, the Federal Circuit has long held that determining whether a “sale” occurred for the purposes of the on-sale bar doctrine hinges on whether the agreement in question would constitute a sale under the Uniform Commercial Code § 2-106. In its May 2016 opinion in Merck & Cie v. Watson Labs. Inc., the court found that a faxed offer constituted “a commercial offer for sale” when the offer was made in response to a request to purchase a product, contained essential terms including price, method of payment, and delivery, and both parties understood that the fax was an offer to sell the product. Despite the fact that a final agreement was never reached and neither party was legally bound to perform, the court found that the offer to sell was sufficient to trigger the on-sale bar, “regardless of whether that sale is ever consummated.”

In its July 2016 opinion in Medicines I, the Federal Circuit further refined the contours of the analysis. The court found that an agreement for a third party’s manufacturing services in manufacturing the patented product did not rise to the level of a commercial offer for sale under UCC Art. 2 because (1) there was no transfer of title of the patented product, (2) the sale was invoiced as “manufacturing services” rather for sale of the product batches themselves, (3) the invoice was for only 1 percent of the ultimate market value of the product that was manufactured, and (4) the “confidential nature” of the transaction “weigh[ed] against the conclusion that the transactions were commercial in nature.” With respect to the last factor, the court was careful to note that confidential transactions were not always immune to the on-sale bar.

The Helsinn Decisions

The confidentiality of the sale is central to the Helsinn decision and appeal. Unlike the patents in Medicines I and Merck, one of the patents in question in Helsinn is governed by the AIA. As such, Helsinn argued that the AIA requires that the on-sale bar only be triggered when the “sale” of the “patented invention” is sufficiently “public.” This argument is also consistent with USPTO’s guidance on the AIA’s amended § 102 language, which states: “[t]he ‘or otherwise available to the public’ residual clause of AIA 35 U.S.C. § 102(a)(1), however, indicates that AIA 35 U.S.C. § 102(a)(1) does not cover secret sales or offers for sale.” The Federal Circuit, however, disagreed that the AIA created a new standard for the on-sale bar.

In Helsinn, the agreement at issue was publicly disclosed in a U.S. Securities and Exchange Commission filing, but the key details concerning price and the precise dosage formulations of the product (which were covered by the patents) were redacted and kept confidential. In the panel decision, the Federal Circuit first applied the familiar analysis from Pfaff to the pre-AIA patents, focusing on the commercial nature of the agreement and whether or not it would rise to the level of a commercial offer for sale under UCC Art. 2. In finding that the distribution agreement in Helsinn was invalidating under the pre-AIA on-sale bar, the court found that (1) the agreement expressly contemplated the transfer of title, (2) the agreement included specific terms addressing price, method of payment, and method of delivery, and (3) Helsinn had publicly sought marketing partners for its product before entering into the agreement “to distribute, promote, market, and sell the claimed invention.”

With respect to the AIA patent, the Federal Circuit similarly held the agreement to be invalidating under the on-sale bar. The court rejected the argument that the AIA had changed the standard for the on-sale bar, holding that despite the fact that the specific dosage formulations — which were the subject of the patent — were kept confidential, the public disclosure of the existence of the sale was sufficient to trigger the on-sale bar under the AIA. The court held that “[f]or the reasons already stated, the Supply and Purchase Agreement between Helsinn and MGI constituted a sale of the claimed invention—the 0.25 mg dose—before the critical date, and therefore both the pre-AIA and AIA on-sale bars apply.”

On Jan. 16, 2018, the Federal Circuit summarily denied en banc review of the Helsinn panel’s decision. In an unusual move, Judge Kathleen O’Malley, a member of the Helsinn panel, submitted a lengthy concurrence to explain further why she believed the panel had “correctly concluded that the AIA did not change long-standing precedent governing the on-sale bar.” Judge O’Malley’s concurrence downplayed the Helsinn decision’s emphasis on the public existence of the sale, instead retreating to prior commercial law principles and the pre-AIA framework.

Since Helsinn

Since the Helsinn panel decision in 2017 and the en banc denial in 2018, the Federal Circuit ruled in Medicines II that a supplier and distributer agreement similar to the one in Helsinn was also enough to trigger the on-sale bar. Specifically, the terms of the distribution agreement in Medicines II (1) included a “Commercial Price List” for the price of the product, (2) involved a transfer of title for the product, and (3) required the buyer to place weekly orders for quantities of the product and the seller to make reasonable efforts to fill the product orders. The court expressly addressed the “stark differences” between the distribution agreement at issue and the one discussed previously in Medicines I — the Medicines I agreement had only contemplated manufacturing services, not title to a product, while the Medicines II agreement dictated a sale of a product that included the “commercial price” of the product and the transfer of title between the two parties. The court further noted that the on-sale bar does not exempt commercial agreements between a patentee and its supplier or distributor, because the correct analysis is focused on the “commercial character” of the transaction and “not solely the identity of the participants.” Under such analysis, where the supplier obtains title to the patented product and has blanket authority to market the product, or the transaction involves a sale at full market value, even transfer to an inventor may constitute a commercial sale.

Takeaways

While the Supreme Court will tackle the issue of whether the AIA did in fact intend to overrule decades of precedent and change the standard for the on-sale bar in Helsinn, in effect creating room for commercial sales that will not trigger the on-sale bar so long as they are not sufficiently public, some guidance as to contract drafting to avoid the “commercial” nature requirement of the on-sale bar altogether may already be found in the Federal Circuit’s precedent such as Helsinn and Medicines I and II. For example, confidential supplier or distributor agreements that do not contemplate a transfer of title of the product or process but are invoiced for particular “services” may be more defensible. Likewise, agreements that involve substantially less than the full market value of the product, or agreements where the “commercial price” of the product are not contemplated may survive an on-sale bar challenge post-Medicines II. Given the uncertainty pending the Supreme Court’s review and decision in Helsinn, patentees must be diligent in contract negotiations and drafting and continue to be wary of any agreement that could constitute a commercial sale under the UCC Art. 2, lest they unintentionally invalidate their patent.