by

Jeffrey R. Kuester

and

N. Andrew Crain

As published at 14 INTELL. PROP. & TECH. L. J., 1, (Feb. 2002).

For some patent practitioners, consideration of the on-sale bar prior to filing a patent application may simply include inquiring as to whether an invention to be patented has been offered for sale by the client. This type of on sale activity can be characterized as "front door" activity. Unfortunately, those practitioners may overlook indirect, or "back door," sales activities. Back door sales activities may involve situations in which the client is actually the buyer. For example, it is not uncommon for a client having no manufacturing capabilities to engage a supplier to manufacture products embodying the invention. However, unless the client files a patent application on the invention within one year from the supplier’s offer or actual sale to the client, then, according to the Federal Circuit Court of Appeals (Federal Circuit), the on-sale bar will likely apply to this back door sales activity to bar patenting of the invention.

In attempting to prevent the application of the on-sale bar to back door sales activities, patentees have argued for supplier exceptions and joint inventor exceptions. Unfortunately, those attempts to "lock" the back door have failed, and recent Federal Circuit decisions should leave little doubt that front door and back door on-sale activities can trigger the bar. Therefore, patent practitioners should make special efforts to ask their clients about back door on-sale activities.

The need for such inquiry is particularly important for "smaller" clients. With the on-sale bar applying to back door sales activities, many independent inventors and other small entities not capable of internal manufacturing are disadvantaged when compared to larger entities having internal manufacturing capabilities. Thus, larger-sized entities can internally manufacture and stockpile products years before the first "front door" sales activities without triggering the on-sale bar, while this is not true for independent inventors and other smaller sized entities who cannot internally manufacture products. As construed by the Federal Circuit, the on-sale bar therefore economically disadvantages inventors and assignees without manufacturing capabilities. While Congress might be well-advised to remedy this apparent discrimination against smaller entities, patent practitioners must remember to be especially diligent in this area for these types of clients.

Pursuant to 35 U.S.C. § 102, the on-sale bar provides that a person may obtain a patent unless "(b) the invention was …on sale in this country, more than one year prior to the date of the application for patent in the United States."[1] The Supreme Court, in Pfaff v. Wells Electronic, Inc., established a two-pronged test in an effort to provide greater certainty in applying the on-sale bar.[2] The on-sale bar applies when (1) the invention at issue had become the "subject of a commercial offer for sale" more than one year before the filing of the patent application; and (2) the invention was ready for patenting.[3] The Federal Circuit has recently provided a large volume of additional guidance for applying both prongs of the Pfaff test,[4] including revealing that back door sales activities can satisfy the first prong. The Federal Circuit has now made it clear that it is irrelevant who makes the commercial offer.[5] Indeed, the Federal Circuit has even indicated that the on-sale bar applies to an invention stolen by a thief and later sold to an innocent buyer who subsequently offers the invention for sale.[6]

The first prong of the Pfaff test has the dual requirement that the offer must be a "commercial offer," and that it be an offer regarding the patented invention. Since Pfaff, the Federal Circuit has provided a bright-line rule as to what constitutes a "commercial offer." "[O]nly an offer which rises to the level of a commercial offer for sale, one which the other party could make into a binding contract by simple acceptance (assuming consideration), constitutes an offer for sale under § 102 (b)."[7] In an effort to provide additional certainty as to what constitutes an offer, the Federal Circuit stated that the determination is governed by federal common law rather than state law.[8]

In Brasseler v. Stryker Sales Corp., the Federal Circuit continued to provide certainty in this area by rejecting a patentee’s invitation to establish a joint-developer’s exception to the on-sale bar.[9] The court first noted its decision in In re Caveney[10] in which it had previously rejected the notion of a joint ownership exception, finding that a sale between separate and distinct legal entities qualifies as a sale under the statutory bar even where there is an overlap of ownership between the buyer and seller. In Brasseler, the patentee had purchased three thousand products embodying the patented invention from the seller who, along with the patentee, employed some of the named inventors of the subsequently patented invention.[11] The court found the transaction between the buyer-patentee and the seller to be a commercial sale between two separate legal entities, notwithstanding the fact that the patentee-buyer and seller each employed named inventors.[12] Because the seller had invoiced the buyer-patentee for the sale of the jointly developed product, which the patentee intended to market to the public, and because the patentee and seller treated the transaction as a sale of a product, the Federal Circuit refused to establish a joint development exception to the on-sale bar.[13]

Perhaps as significant as the refusal to create a joint inventorship exception is the court’s treatment of the matter with regard to inequitable conduct and attorneys fees. The court affirmed an award of attorney fees against the patentee as an exceptional case since the patentee had apparently breached its duty of candor at the Patent Office by not disclosing the facts surrounding the back door on-sale event. Furthermore, the facts suggested that the client revealed to the patent attorneys that the one year was about to expire, but the patent attorneys did not investigate further into the matter. The court found the inactions by the attorneys to be evidence of bad faith, a "studied refusal to timely investigate."[14] Thus, the court now obviously considers it to be so well-known that back door on-sale activities will trigger the on-sale bar that attorney fees are available and that patent practitioners should timely investigate such matters or risk a finding of inequitable conduct in some cases.

More recently, in Special Devices, Inc. v. OEA, Inc., the Federal Circuit explicitly refused to create a supplier exception to the on-sale bar.[15] In that case, OEA’s patent was invalidated because OEA had contracted with its supplier to have a commercial embodiment of the invention mass produced prior to the 102(b) critical date.[16] Prior to the critical date, OEA arranged for its supplier to manufacture 20,000 units of the claimed invention and also agreed upon a requirements contract that would annually supply OEA with millions of units embodying OEA’s invention.[17] OEA did not dispute that its activities constituted commercial offers; however, OEA argued for a supplier exception to the on-sale bar for patentee-supplier relationships.

Unfortunately, in refusing to create such an exception, the Federal Circuit emphasized the literal text of § 102(b). Accordingly, anyone, be it a supplier, a patentee, or another third party, who places the invention on-sale may trigger the on-sale bar. Moreover, the court iterated that all OEA had to do was simply file its patent application in a timely manner to preserve its rights, thereby obviating any need for a patentee-supplier exception to the on-sale bar.[18]

The policy rationale proffered by the Federal Circuit for the on-sale bar stems from the notion of encouraging inventors to promptly enter the patent system, thereby leading to the widespread disclosure of inventions to the public. This rationale also seeks to prevent what essentially constitutes an extension of patent term by commercially exploiting the invention prior to filing the patent application. While these policies clearly justify application of the on-sale bar in "front door" sales situations, there is certainly no unfair term extension involved in back door activities that merely involve a patentee preparing to build an inventory that may not be commercialized for years. Moreover, the rule effectuated to protect these policies may unfairly discriminate against smaller entity patentees and inventors that cannot manufacture a product without aid from a third party supplier.

To illustrate the disproportionality, consider the following example. Mega Corp. is a large global corporation of many thousand employees, including its own internal research and development and manufacturing divisions. Products conceived and developed by Mega Corp.’s research and development division are manufactured by Mega Corp’s manufacturing division. In this example, Mega Corp.’s manufacturing division made 5,000,000 units of Mega Corp.’s latest product development, which will be highly marketed, and stored the products in a warehouse—all before the first sale to the public. Once the 5,000,000 units were made and warehoused, Mega Corp. released its marketing campaign in time for the Christmas season and sold the 5,000,000 units to retailers. Mega Corp. subsequently filed a patent application on the invention embodied in the product sold on the one-year anniversary of the first sale or offer for sale.

Consider also Smallco Inc., which is a small company of approximately 50 employees with no manufacturing capabilities. Smallco is essentially a distributor of products in its industry and has employees that design new products tailored to Smallco’s industry. At the same time as Mega Corp., Smallco developed an internal product conception that it desired to mass produce and sell. However, because Smallco does not have any manufacturing capabilities, Smallco engaged Supply, Inc, a third party supplier, for the purpose of manufacturing the product embodying the invention for the subsequent sale, by Smallco, to the public. Thus, Supply, Inc. manufactured, according to its agreement with Smallco, 5,000,000, units, and Smallco, upon delivery, stored the units in a rented warehouse prior to the first sale to the public. In time for the Christmas season, Smallco later made its first "front door" sale or offer for sale after the units were manufactured and stored in the warehouse. Smallco subsequently filed its patent application on the invention embodied in the manufactured product on the one-year anniversary of Smallco’s first "front door" sale or offer for sale, which is 13 months after Smallco received Supply Inc.’s offer to manufacture and sell the products to Smallco.

Assuming both patents issue, and putting aside any inequitable conduct issues that may arise from Smallco’s failure to disclose the back door sales from Supply, Inc., Smallco’s patent is most likely invalid under 102(b), while Mega Corp.’s patent is not. Smallco’s patent is invalid even though its pre-filing activity is essentially the same as that of Mega Corp., whose patent is not affected by its own internal manufacturing and product stockpiling. Therefore, Mega Corp. has distinct legal and economic advantages as a larger company because it has the ability to manufacture and stockpile the product to be later patented without invoking the on-sale bar. In contrast, Smallco’s engagement of Supply, Inc. to manufacture the product that Smallco cannot itself manufacture would constitute an on-sale bar triggering event that would invalidate Smallco’s patent, which, in this example, issued from an application filed on the one-year anniversary of Smallco’s first "front door" sale or offer for sale.

It is not uncommon for a company to manufacture and warehouse units prior to sale, and in Smallco’s case of having to engage Supply, Inc. to make the product, the back door sale is not enabling Smallco to unfairly commercially exploit the invention beyond the patent term. However, the on-sale bar clock for Smallco begins when Supply, Inc. sells or offers to sell Smallco the product embodying Smallco’s invention, whereas Mega Corp.’s on-sale bar clock does not begin counting until Mega Corp.’s first "front door" sale. The time between initial manufacturing and first "front door" sale for Mega Corp. and Smallco can be years, so Mega Corp has a clear economic advantage under the patent law.

Perhaps the simplest solution to this situation, in a perfect world, is for Smallco to file its patent application as soon as possible, at least by the one-year anniversary of any offer to sell by Supply, Inc. In many situations, prompt filing renders many of these issues moot. Therefore, the best solution that has the highest probability of protecting Smallco’s invention is prompt filing.

However, this is not a perfect world, and even the timely filing of a patent application does not guarantee that Smallco will have complete patent protection for all aspects of the manufactured and marketed product. Indeed, it is not unusual for novel features of a product to be later discovered after the product has been manufactured, marketed, and/or used by the public/consumer. In addition, another benefit of the on-sale bar is discouraging inventors from filing patent applications for ideas that have no commercial feasibility. Thus, one result of these recent rulings is that more patent applications will be filed for commercially impractical inventions since there will be less time to recognize such impracticality.

One possible solution to this problem is for Congress to create a patentee-supplier exception. Indeed, in Special Devices, the Federal Circuit specifically stated that it is for Congress to create such an exception and not the Courts.[19] As such, Congress should resolve this inequity to ensure that smaller patentees are not be unfairly punished for being small and without manufacturing capabilities. It should not be possible under the law for one party to be able to freely manufacture in preparation for subsequent sales while another party is prevented from outsourcing the same manufacturing prior to subsequent sales because such manufacturing would constitute improper back door sales activities.

Another potential solution to this problem is to structure supplier agreements as service manufacturing agreements rather than product purchase agreements. The court in Brasseler hinted to such a solution in stating that when an "individual inventor takes a design to a fabricator and pays the fabricator for its services in fabricating a few sample products," the on-sale bar may not apply.[20] However, the Brasseler court indicated that such an arrangement might only cover "a few sample products," and likely not the five million units discussed in the example above. Nevertheless, if patentees structured service agreements so that the patentees supply and/or purchase all raw materials and merely pay the suppliers for assembly and manufacturing services, it is at least arguable that there has been no sale of a product to trigger the on-sale bar. This argument would be based on the fact that the patentee retained ownership rights in the product during the entire assembly and manufacturing process and that legal title to the products never changed hands.

It should not go unnoticed that if a party is savvy enough to take the preventive steps to create a service agreement in this manner, it is also likely that the party would also likely be able to file its patent application in a timely manner, which, in most situations, renders the on-sale bar issue moot. However, as discussed above, merely filing an application may not always resolve the issue in regard to later discovered features, so structuring service manufacturing agreements in this manner may provide additional protection against invalidity assertions later in litigation.

It is clear that the Federal Circuit is intent on applying the on-sale bar to back door sales activities. Therefore, practitioners should be diligent in discussing these issues with their clients and investigating as necessary. In addition, practitioners should advise clients to file early and often in an attempt to gain the broadest and most complete scope of the invention prior to any offer or sale from a supplier of the invention to be patented. Congress should also create a supplier exception to level the field for smaller concerns, and patentees, when negotiating supplier agreements, should draft such agreements as service manufacturing agreements rather than mere product purchase agreements or requirements contracts.

N. Andrew Crain is a registered patent attorney and an aAssociate with the intellectual property law firm of Thomas, Kayden, Horstemeyer & Risley, LLP in Atlanta, Georgia. Mr. Crain’s practice is concentrated on patent preparation and prosecution, trademarks, copyrights, and related litigation.

ENDNOTES

1 35 USC §102 (b) (2001).

2 525 U.S. 55, 59 (1998).

3 Id. at 67.

4 See e.g. Special Devices, Inc. v. OEA, Inc., 270 F.3d 1353, 1355 (Fed.Cir.2001); Group One, Ltd. v. Hallmark Cards, Inc., 254 F.3d 1041, 1048, (Fed. Cir. 2001); Linear Tech. Corp. v. Micrel, Inc., 2001 WL 1669382 (Fed. Cir. 2001); Robotic Vision Sys., Inc. v. View Eng’g, Inc., 249 F.3d 1307, (Fed. Cir. 2001); Space Systems/Loral, Inc. v. Lockheed Martin Corp., 271 F.3d 1076, (Fed. Cir. 2001); and Brasseler v. Stryker Sales Corp 182 F.3d 888 (Fed. Cir. 2001).

5 See Special Devices, Inc. v. OEA, Inc., 270 F.3d 1353, 1355 (Fed.Cir.2001).

6 See id.

7 Group One, Ltd. v. Hallmark Cards, Inc., 254 F.3d 1041, 1048, (Fed. Cir. 2001).

8 See id.

9 182 F.3d 888 (Fed. Cir. 2001).

10 761 F.2d 671, 676, (Fed. Cir. 1985).

11 See Brasseler, 182 F.3d at 889.

12 See id. at 890.

13 See id.

14 See id.

15 270 F.3d 1353 (Fed. Cir. 2001).

16 See id. at 1354.

17 See id.

18 See id. at 1355.

19 See Special Devices, 270 F.3d at 1357.

20 Brasseler, 182 F.3d at 891.