Alerts and Updates

What Your Competitors Don’t Know Can Hurt You - The Supreme Court Rules that Secret Sales Can Trigger the On-Sale Bar Under the AIA

January 24, 2019

The Court held that “a commercial sale to a third party who is required to keep the invention confidential may place the invention ‘on sale’ under [the AIA].”

The Supreme Court of the United States recently affirmed the decision of the U.S. Court of Appeals for the Federal Circuit in Helsinn Healthcare v. Teva Pharmaceuticals, 855 F.3d 1356 (2017), which invalidated a patent-in-suit under the post-AIA on-sale bar. The question presented, answered by the Court in the affirmative, was “[w]hether, under the Leahy-Smith America Invents Act [AIA], an inventor’s sale of an invention to a third party that is obligated to keep the invention confidential qualifies as prior art for purposes of determining the patentability of the invention.”

Justice Thomas, writing for the Court, concluded that the “on sale” provision in §102(a)(1) of the AIA was a re-enactment of the “on sale” bar provision in the pre-AIA patent statute that did not alter its meaning or interpretation, despite the inclusion of the phrase “or otherwise available to the public” in post-AIA §102(a)(1). Thus, based on the Federal Circuit’s “settled precedent,” and consistent with the Supreme Court’s decision in Pfaff v. Wells Electronics, 525 U.S. 55 (1998), the Court held that “a commercial sale to a third party who is required to keep the invention confidential may place the invention ‘on sale’ under [the AIA].” Details of the ruling and some takeaways for companies entering into licenses and supply agreements are discussed below.

Background

Helsinn, a Swiss company, obtained FDA approval for palonosetron to treat chemotherapy-induced nausea and vomiting (CINV). Helsinn owns several patents related to the treatment, including U.S. Patent Nos. 7,947,724; 7,947,725; 7,960,424; and 8,598,219 (the “’219 patent”; collectively, the “patents-in-suit”), of which, only the ’219 patent was filed post-AIA. Prior to receiving FDA approval, Helsinn entered into two agreements with its U.S. marketing partner, MGI Pharma: (1) a license agreement in which Helsinn granted MGI the right to distribute, promote, market and sell palonosetron products; and (2) a supply and purchase agreement in which MGI agreed to purchase palonosetron products exclusively from Helsinn.

After Teva Pharmaceuticals USA, Inc. filed an Abbreviated New Drug Application (ANDA) for a generic palonosetron product, Helsinn brought suit against Teva, alleging infringement of the patents-in-suit. In defense, Teva asserted, inter alia, that the asserted claims were invalid under the on-sale bar provision of 35 U.S.C. § 102 because two years before applying for the priority application for the patents-in-suit, Helsinn entered into an agreement to sell the claimed formulation to MGI. Existence of the agreement was publicly disclosed, but price terms and the specific dosage formulations were not disclosed and were subject to a confidentiality obligation. With respect to the post-AIA ’219 patent, Helsinn countered that the “on sale” provision in §102(a)(1) of the AIA—“A person shall be entitled to a patent unless (1) the claimed invention was… on sale, or otherwise available to the public before the effective filing date of the claimed invention” (emphasis added)—did not apply to a commercial sale to a third party who is required to keep the invention confidential.

Pre-AIA On-Sale Bar Jurisprudence

Under pre-AIA § 102(b), “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 application for patent in the United States.” Section 102(b) creates an absolute bar to patentability based on a prior sale of the invention.

The Supreme Court set forth a test for the on-sale bar under pre-AIA § 102(b) in Pfaff v. Wells Electronics, 525 U.S. 55, 67 (1998), holding that the on-sale bar applies when the product is “the subject of a commercial offer for sale,” and the invention is “ready for patenting.” See id. The Court explained that “[a]n inventor can both understand and control the timing of the first commercial marketing of his invention.” Id. The condition that the invention is ready for patenting “may be satisfied in at least two ways: [2a] by proof of reduction to practice before the critical date; or [2b] by proof that prior to the critical date the inventor had prepared drawings or other descriptions of the invention that were sufficiently specific to enable a person skilled in the art to practice the invention.” Id. at 67-68.

In Pfaff, the inventor had prepared engineering drawings of a computer chip socket invention. Before the bar date, the inventor showed the drawing to a customer and “accept[ed a] purchase order.” Id. at 63. The inventor did not reduce the invention to practice until after the critical date, but the Court nevertheless held that the on-sale bar applied because “the drawings Pfaff sent to the manufacturer before the critical date fully disclosed the invention.” Id. at 68. The Court quoted Justice Learned Hand’s observation that “[I]t is a condition upon an inventor’s right to a patent that he shall not exploit his discovery competitively after it is ready for patenting; he must content himself with either secrecy, or legal monopoly.” Metallizing Engineering Co. v. Kenyon Bearing & Auto Parts Co., 153 F.2d 516, 520 (2d Cir. 1946).

Consistent with the idea of refraining from even confidential commercial activity prior to pursuing a patent on an invention, the Court in Helsinn noted that the Federal Circuit “made explicit what was implicit in this Court’s pre-AIA precedent, holding that ‘secret sales’ could invalidate a patent.” Helsinn at 2. For example, in Special Devices, Inc. v. OEA, Inc., 270 F.3d 1353, 1354-57 (Fed. Cir. 2001), the Federal Circuit held that OEA’s contract with a supplier to mass-produce OEA’s patented invention constituted an on-sale bar where OEA entered into the supply agreement more than one year before it filed its patent application. The Special Devices panel reiterated that the on-sale bar would apply even if the patentee’s commercial activities took place in secret. Special Devices, 270 F.3d at 1357.

Court Relied on AIA’s Use of “the Exact Language” from Pre-AIA §102(b) and Settled Pre-AIA Precedent in Holding that AIA Re-enacted the On-Sale Bar

The Supreme Court surveyed the history of “on-sale bar” statutory provisions and relevant decisions by the Court and the Federal Circuit, concluding that the AIA re-enacted the pre-AIA on sale bar. For reference, the pre-AIA and post-AIA provisions are shown side by side in the table below:

Pre-AIA “On-Sale” Provision

Post-AIA “On-Sale” Provision

A person shall be entitled to a patent unless (b) 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

Pre-AIA 35 U.S.C. § 102(b) (emphasis added)

(a) A person shall be entitled to a patent unless (1) the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public

Post-AIA 35 U.S.C. § 102(a)(1) (emphasis added)

 

After observing that every patent statute since 1836 has included an on-sale bar, the Court compared the language of the pre-AIA and post-AIA “on-sale” provisions, concluding that the AIA retained the on-sale bar using “the exact language used in its predecessor statute,” while adding “the catchall clause (‘or otherwise available to the public’).” The Court then determined that Congress’ addition of the catchall phrase was “simply not enough of a change for us to conclude that Congress intended to alter the meaning of the reenacted term ‘on sale.’” In support of that conclusion, the Court discussed “settled pre-AIA precedent,” including Pfaff, Special Devices and other cases interpreting pre-AIA on-sale bar provisions. As further support for its ruling, the Court quoted the deputy solicitor general’s acknowledgement at oral argument in response to Justice Kagan’s question that if “on sale” had a settled meaning before the AIA was adopted, then adding the catchall phrase “‘would be a fairly oblique way of attempting to overturn’ that ‘settled body of law.’” Helsinn at 7; see Helsinn tr. at 27-28. Thus, “Given that the phrase ‘on sale’ had acquired a well-settled meaning when the AIA was enacted,” the Court declined to read the addition of a broad catchall phrase to upset that body of precedent.

 Interestingly, the government had argued against finding an on-sale bar, urging that Helsinn’s transaction did not trigger the on-sale bar because MGI did not plan to use the drug for its commercial purpose of treating patients, and the transaction did not provide any assurance that title would pass to MGI because the terms of the deal were conditional. Additionally, the opinion makes no reference to the amicus brief of Congressman Lamar Smith, co-sponsor of the AIA, and chairman of the Committee on the Judiciary of the U.S. House of Representatives during the pendency of the AIA. Congressman Smith’s amicus brief in support of Helsinn, stated:

Unlike the pre-H.R. 1249 Patent Act, the comparable text of the newly enacted statute makes explicit that a public accessibility standard applies with respect to all “in public use” or “on sale” activities under the newly enacted statute—by virtue of the addition to the statute of the new terminal qualifier “or otherwise available to the public.” The added qualifier could have no other purpose and, thus, leaves no room for doubt. [Emphasis in original.] —Brief for Amicus Curiae Congressman Lamar Smith in Support of Petitioner at 4.

Finally, the Court’s decision made no reference to Medicines Co. v. Hospira, Inc., 827 F.3d 1363 (Fed. Cir. 2016), an en banc decision by the Federal Circuit holding that a patentee’s agreement for a third-party provider to manufacture commercial quantities of a drug was not a commercial sale constituting an on-sale bar, where (1) a significant change made to the manufacturing process after the agreement was entered produced the patented drug; (2) “the most natural conclusion to draw from all of the evidence presented,” is that the third-party sold a process, “manufacturing services”—not the patented product (that evidence included invoices that only covered manufacturing charges, and payment at 1 percent of market value); (3) title never passed to the manufacturer; and (4) the manufacturer was subject to a confidentiality provision. Therefore, contract manufacturing agreements may not trigger the on-sale bar, in contrast to the distribution agreement at issue in Helsinn, and in later proceedings in the Medicines Co. case. See Medicines Co. v. Hospira, Inc., 881 F.3d 1347, 1352 (Fed. Cir. 2018) (“The Distribution Agreement here is very similar to the agreement in Helsinn Healthcare S.A. v. Teva Pharmaceuticals USA, Inc., 855 F.3d 1356 (Fed. Cir. 2017).”)

Takeaways

In view of the Supreme Court’s decision in Helsinn and the Federal Circuit’s prior decisions in Medicines Co. and Special Devices, keep these considerations in mind for patent strategy and while negotiating license agreements and manufacturing and supply agreements:

  • To reduce the risk of patent challengers raising an on-sale bar, companies should coordinate patent prosecution and commercialization strategies to ensure that they preferably file patents before any license, supply or distribution agreements are entered into or, at the latest, within a year of entering into those agreements.
  • For companies outsourcing manufacturing, although not addressed directly in Helsinn, a comparison of the Federal Circuit’s ruling in Medicines Co. with its ruling in Special Devices suggests that courts may be less likely to view agreements structured as contract manufacturing agreements (services agreements) as an on-sale bar to product patents and more likely to view agreements structured as “product supply” agreements as posing an on-sale bar.
  • Decisions about the on-sale bar also distinguish between experimental and commercial sales. See, e.g., EZ Dock v. Schafer Sys., Inc., 276 F.3d 1347, 1352-53 (Fed. Cir. 2002) (“[T]his court and its predecessor have noted that experimentation negates a bar when the inventor tests claimed features of the invention.”) Where accurate, patentees should consider emphasizing any experimental or testing aspects of collaboration, development and precommercial license agreements.

For Further Information

If you have any questions about this Alert, please contact Vicki G. Norton, Ph.D., Jonathan Lourie, Matthew C. Mousley, Moreshwar (Moru) B. Vaze, Ph.D, any of the attorneys in the Intellectual Property Practice Group, attorneys in the Life Sciences Industry Group or the attorney in the firm with whom you are regularly in contact.

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