How Much Damage?

If a sale or offer to sell is found preliminarily, the focus shifts to whether such a sale or offer to sell was primarily experimental or commercial in nature, using the 13-factor test for the experimental-use negation adopted by the Federal Circuit in EZ Dock. The experimental-use negation essentially protects a sale or offer for sale from the effects of ' 102(b) when that sale or offer was primarily for the purposes of advancing experimentation or testing of the invention.

Consequently, in order to determine whether a company, intentionally or not, committed an offer to sell (or a sale) that runs afoul of the on-sale bar, a court will examine the circumstances surrounding the offer or sale. Such circumstances include the nature of the invention, prior business dealings between the two entities, whether the entities executed a nondisclosure agreement covering the invention, the terms of any joint development agreement or sponsored research plan and the allocation of experimental tasks, costs and record-keeping relevant to the testing of the invention.

Impact on Biotech Inventions

Small start-up biotechnology or pharmaceutical firms ' or for that matter any typical start-up company ' may have the seed money to test or develop new or improved methods or products, but not the facilities in which to do so. Alternatively, such firms may have access to the proper facilities, but need to license potential rights in future inventions to acquire the seed money to finance the development and/or testing of the future inventions.

In both situations, small firms may enter into joint-development relationships with well-established companies that are structured to do such testing and/or development. Usually, these contracts will contain some sort of intellectual property or technology licensing provision in which the companies agree on how to share or split the rights in any prospective invention that might develop, as well as on a cost/fee schedule for the reimbursement of costs incurred or advanced.

However, by entering into joint-development arrangements, companies may be risking the possibility that a court may hold events arising from, or detailed in, such arrangements subject to the on-sale bar. For example, a court may view a payment by Company A to Company B for the delivery of a Company B-developed product as a commercial sale, even if Company A does further testing or refinement. Moreover, even simple testing of Company A's developed product by off-site Company B may bring the on-sale bar issue into the picture, particularly if Company B has negotiated for marketing, sales or distribution rights for the product.

Therefore, what should a start-up biotechnological or pharmaceutical company consider if it must enter into a joint-developer or sponsored-research type of relationship with an established company for an expected invention that the start-up company hopes to patent?

The Federal Circuit has held that in the biotechnology and pharmaceutical fields, the functionality of new inventions is generally unexpected and not predictable given past tests, inventions and results in the field, and therefore, that further development/testing of the new inventions is generally needed to sufficiently support the patent applications for those inventions. See e.g., Enzo Biochem Inc. v. Calgene, 188 F.3d 1362 (Fed. Cir. 1999). This position has permitted many biotechnology and pharmaceutical patent holders also to argue that their inventions needed testing to determine viability, hoping to avoid any application of the on-sale bar. While this would seem at first to be good news for a start-up with regard to the on-sale bar, such a facile analysis overlooks reality ' in this case the ability to raise capital to fund a development project.

For example, if an invention and its functionality are not easy to predict, then it may be more difficult to raise the capital needed to finance the testing/development of the invention ' and a company may require additional revenue or licensing agreements prior to such testing. Such additional events may raise on-sale bar issues. Conversely, if a company positions its invention's functionality as relatively easy to predict, the company may lose the unpredictability functionality tenet as its basis for testing of the invention. In such a scenario, any testing may be more closely scrutinized to determine whether it was for an actual experimental reason or was merely for commercial exploitation of the invention.

Thus, Company A could designate what is known of the invention and cover these aspects in an initial patent application before entering into a joint-development/testing relationship, and make clear in the joint agreement with Company B what aspects of the invention must be further tested.

Nature of Joint Development

There are many scenarios under which companies engage in joint development of an invention. For example, Company B may supply Company A with a portion or all of the developed product and let Company A direct and perform the testing. Alternatively, each company may work on a discrete portion of the testing, according to the companies' particular expertise. Or one company may simply oversee the other company's ongoing testing and development. In any of these scenarios, the relationship of the entities to each other, and the extent of each company's actions and participation in the testing and development of the invention, must be taken into consideration in light of the applicability of the on-sale bar. Ideally, provisions detailing the development, control and cost allocation of the testing of the new invention should be the subject of a detailed contractual agreement between the parties.

While a mere license, without more, does not present an offer to sell or a sale under ' 102(b), a joint-development arrangement, even structured as a license, may present situations in which the on-sale bar could be applied, especially since there is no 'joint developer' exception to the on-sale bar. Since a sale or offer to sell under ' 102(b) must be between separate entities, the issue of what constitutes separate entities is important in the joint-development arena. Unless there is common ownership or control of both entities involved in the joint development, there is a substantial risk that a court will hold both entities to be separate and thus subject their jointly developed invention to the on-sale bar test. This common ownership hurdle can even affect situations in which both entities employ one or more of the inventors of the new invention. See e.g., Brassler U.S.A. I LP v. Stryker Sales Corp., 182 F.3d 888 (Fed. Cir. 1999).

If the joint development envisions or entails a delivery of the newly developed product, the contract may also specify that a certain limited number of the product should be made available as samples or prototypes, for testing to see if it works for its intended purpose in its intended environment. In this regard, the stage is set not only for experimental testing but also for supporting an argument that there was no commercial delivery of the invention, as only a few samples were sent. The contract may also provide that any sample-delivery costs be nominal, or that delivery be free of charge, in order to minimize any commercial aspects of the transaction.

Splitting the Development

Additionally, since all limitations of the patent claims for the product or process at issue under ' 102(b) need to have been present in the invention alleged to have been sold or offered for sale for ' 102(b) to apply, the joint developers or a single start-up may wish to split the development so that any transfer or 'sale' of the developing product from one developer to the other would not yet have all of the desired features that would be included as a limitation in the patent claims.

For example, one can argue that a sale of a mostly developed product to Joint Developer B from Joint Developer A would not start the one-year ' 102(b) clock if Joint Developer B then added or performed additional steps that were included as a limitation in the patent claims at issue. See e.g., Brassler, 182 F.3d at 891. However, such preplanning of an invention should be performed hand-in-hand with a view toward testing the developed product, to see if it actually works in its intended environment.

A sale or transaction that is made primarily for experimental purposes is generally not subject to the on-sale bar. Since the subjective intent of the inventor is not material, objective factors are analyzed to determine whether the use of the invention by the inventor, company or third party constitutes primarily experimental or commercial use. In other words, the focus will be on how 'commercial sounding' the transaction was and whether it was experimental in nature. The overall balance of these two issues is critical as to whether the court may apply ' 102(b).

The 13 Factors

The 13 factors enumerated in EZ Dock can be consolidated into a few overall groups: need for experimental testing; where testing was performed; control over testing; how and how long testing was performed; record keeping; and the commercial aspects, if any, of the testing. The nature of the expected invention provides the starting point for this analysis. It may dictate who is the most logical party to conduct testing, and ' if testing needs to be done in public (for example, if the invention is a type of pavement for public roads) ' how much control the inventor can exert over testing. See e.g., Monon Corp. v. Stoughton Trailers Inc., 239 F.3d 1253 (Fed. Cir. 2001).

The need for experimental as opposed to commercial testing (such as what color or flavor would a consumer prefer), is dependent on the nature of the invention, and whether such testing needs to be performed under actual conditions of use. For example, when it may be difficult or impossible for the inventor to perform meaningful tests under manufactured conditions, permitting an outside party to subject an invention to conditions more closely approximating actual use may be permitted by the court, as it may be more helpful in bringing the invention to perfection.

This is what happened in EZ Dock, wherein a dock invented by two inventors was sold to a customer and was tested on the customer's waterfront property subject to the inventors' right to inspect and repair the dock. Such testing allowed the inventors more accurately to determine whether the invention was 'capable of performing its intended purpose in its intended environment.' EZ Dock, 276 F.3d at 1353.

For a small start-up, the laboratory set-up/development and testing may both be performed offsite. In such a scenario, the start-up should exercise control over the offsite development or testing. Control over outside or offsite testing should begin with some form of a secrecy or confidentiality agreement, such as a nondisclosure agreement, wherein the parties agree to maintain the confidential nature of the invention.

The control over outside or offsite experimental testing can be demonstrated by showing that such testing is done systematically and pursuant to a written protocol, that records of such testing and procedures are being kept and that the tests are being performed only as long as is necessary to acquire useful experimental-testing data. Such records of progress can be used to show that the inventor was testing the invention and not the market. Tests that run too long, or that are performed without written records/procedures, may run the risk of being deemed commercial in nature.

In addition, the costs of testing should be kept to an absolute minimum, below market prices if fees/costs are collected. Such costs should be the costs of supplying the invention or of testing it without any markups that would accompany a payment in a commercial transaction. The company's course of doing business can play a large role here in determining what business is considered commercial for that company and what is considered experimental expenditures. Of course, any commercial exploitation of the invention, even during the testing period, may present enough of an activity that a second party could simply accept it as an offer and make it into a binding
contact. See e.g., Linear Tech. Corp. v. Micrel Inc., 275 F.3d 1040 (Fed. Cir. 2001).

Conclusion

Both small start-up biotechnology and pharmaceutical companies should closely monitor their ongoing development and marketing programs with the 13 factors enunciated in EZ Dock to ensure that no offer to sell (or sale) of any invention is committed before the company is ready to offer to sell or to sell. Incorporation of recent case law with the EZ Dock experimental factors into the company's routine course of business dealings, both in research and development as well as marketing, should assist a company and its corporate counsel in determining compliance with the ' 102(b) on-sale bar and when a patent application should be filed.

Robert P. Hoag is an attorney at Moser, Patterson and Sheridan, LLP, Shrewsbury, NJ.

The recent decision by the U.S. Court of Appeals for the Federal Circuit in EZ Dock Inc. v. Schafer Systems Inc. , 276 F.3d 1347 (Fed. Cir. 2002) may well have an impact on the development of biotechnological and pharmaceutical inventions. In EZ Dock, the Federal Circuit adopted a 13-factor 'totality of the circumstances' test to determine whether an offer to sell an invention is primarily commercial or primarily experimental, and thus whether the on-sale bar under 35 U.S.C. 102(b) should apply.

The on-sale bar prevents a patentee from obtaining and enforcing a patent if the invention was the subject of a commercial sale or offer for sale in the United States more than 1 year before the inventor or company filed a patent application on the invention. The rationale behind the bar is four-fold. First, the bar discourages the removal of inventions from the public domain after the public has come to believe the invention is freely available as a result of the sale of products embodying it. Second, the bar favors widespread disclosure of inventions. Third, the bar provides the inventor a reasonable amount of time after sales have started to decide whether the invention is worth patenting. Finally, the bar prevents the inventor from unduly extending the period of his monopoly by delaying the filing of a patent application until he fears that he might start to experience competition. King Instrument Corp. v. Otari Corp. , 767 F.2d 853 (Fed. Cir. 1985).

The test for whether the on-sale bar applies was enunciated by the U.S. Supreme Court in Pfaff v. Wells Electronics Inc. , 525 U.S. 55 (1998). This two-prong test focuses on whether there was a commercial offer for sale (or a sale) of the invention and, if so, whether the invention at that time was ready to be patented. The intent of the inventor to sell or not to sell (or to experiment or not to experiment) is not relevant to the determination; the test instead relies on objective factors and events that are evaluated against the patented invention on a claim-by-claim basis. See e.g., EZ Dock, 276 F.3d at 1357.

If a sale or offer to sell is found preliminarily, the focus shifts to whether such a sale or offer to sell was primarily experimental or commercial in nature, using the 13-factor test for the experimental-use negation adopted by the Federal Circuit in EZ Dock. The experimental-use negation essentially protects a sale or offer for sale from the effects of ' 102(b) when that sale or offer was primarily for the purposes of advancing experimentation or testing of the invention.

Consequently, in order to determine whether a company, intentionally or not, committed an offer to sell (or a sale) that runs afoul of the on-sale bar, a court will examine the circumstances surrounding the offer or sale. Such circumstances include the nature of the invention, prior business dealings between the two entities, whether the entities executed a nondisclosure agreement covering the invention, the terms of any joint development agreement or sponsored research plan and the allocation of experimental tasks, costs and record-keeping relevant to the testing of the invention.

Impact on Biotech Inventions

Small start-up biotechnology or pharmaceutical firms ' or for that matter any typical start-up company ' may have the seed money to test or develop new or improved methods or products, but not the facilities in which to do so. Alternatively, such firms may have access to the proper facilities, but need to license potential rights in future inventions to acquire the seed money to finance the development and/or testing of the future inventions.

In both situations, small firms may enter into joint-development relationships with well-established companies that are structured to do such testing and/or development. Usually, these contracts will contain some sort of intellectual property or technology licensing provision in which the companies agree on how to share or split the rights in any prospective invention that might develop, as well as on a cost/fee schedule for the reimbursement of costs incurred or advanced.

However, by entering into joint-development arrangements, companies may be risking the possibility that a court may hold events arising from, or detailed in, such arrangements subject to the on-sale bar. For example, a court may view a payment by Company A to Company B for the delivery of a Company B-developed product as a commercial sale, even if Company A does further testing or refinement. Moreover, even simple testing of Company A's developed product by off-site Company B may bring the on-sale bar issue into the picture, particularly if Company B has negotiated for marketing, sales or distribution rights for the product.

Therefore, what should a start-up biotechnological or pharmaceutical company consider if it must enter into a joint-developer or sponsored-research type of relationship with an established company for an expected invention that the start-up company hopes to patent?

The Federal Circuit has held that in the biotechnology and pharmaceutical fields, the functionality of new inventions is generally unexpected and not predictable given past tests, inventions and results in the field, and therefore, that further development/testing of the new inventions is generally needed to sufficiently support the patent applications for those inventions. See e.g., Enzo Biochem Inc. v. Calgene , 188 F.3d 1362 (Fed. Cir. 1999). This position has permitted many biotechnology and pharmaceutical patent holders also to argue that their inventions needed testing to determine viability, hoping to avoid any application of the on-sale bar. While this would seem at first to be good news for a start-up with regard to the on-sale bar, such a facile analysis overlooks reality ' in this case the ability to raise capital to fund a development project.

For example, if an invention and its functionality are not easy to predict, then it may be more difficult to raise the capital needed to finance the testing/development of the invention ' and a company may require additional revenue or licensing agreements prior to such testing. Such additional events may raise on-sale bar issues. Conversely, if a company positions its invention's functionality as relatively easy to predict, the company may lose the unpredictability functionality tenet as its basis for testing of the invention. In such a scenario, any testing may be more closely scrutinized to determine whether it was for an actual experimental reason or was merely for commercial exploitation of the invention.

Thus, Company A could designate what is known of the invention and cover these aspects in an initial patent application before entering into a joint-development/testing relationship, and make clear in the joint agreement with Company B what aspects of the invention must be further tested.

Nature of Joint Development

There are many scenarios under which companies engage in joint development of an invention. For example, Company B may supply Company A with a portion or all of the developed product and let Company A direct and perform the testing. Alternatively, each company may work on a discrete portion of the testing, according to the companies' particular expertise. Or one company may simply oversee the other company's ongoing testing and development. In any of these scenarios, the relationship of the entities to each other, and the extent of each company's actions and participation in the testing and development of the invention, must be taken into consideration in light of the applicability of the on-sale bar. Ideally, provisions detailing the development, control and cost allocation of the testing of the new invention should be the subject of a detailed contractual agreement between the parties.

While a mere license, without more, does not present an offer to sell or a sale under ' 102(b), a joint-development arrangement, even structured as a license, may present situations in which the on-sale bar could be applied, especially since there is no 'joint developer' exception to the on-sale bar. Since a sale or offer to sell under ' 102(b) must be between separate entities, the issue of what constitutes separate entities is important in the joint-development arena. Unless there is common ownership or control of both entities involved in the joint development, there is a substantial risk that a court will hold both entities to be separate and thus subject their jointly developed invention to the on-sale bar test. This common ownership hurdle can even affect situations in which both entities employ one or more of the inventors of the new invention. See e.g., Brassler U.S.A. I LP v. Stryker Sales Corp. , 182 F.3d 888 (Fed. Cir. 1999).

If the joint development envisions or entails a delivery of the newly developed product, the contract may also specify that a certain limited number of the product should be made available as samples or prototypes, for testing to see if it works for its intended purpose in its intended environment. In this regard, the stage is set not only for experimental testing but also for supporting an argument that there was no commercial delivery of the invention, as only a few samples were sent. The contract may also provide that any sample-delivery costs be nominal, or that delivery be free of charge, in order to minimize any commercial aspects of the transaction.

Splitting the Development

Additionally, since all limitations of the patent claims for the product or process at issue under ' 102(b) need to have been present in the invention alleged to have been sold or offered for sale for ' 102(b) to apply, the joint developers or a single start-up may wish to split the development so that any transfer or 'sale' of the developing product from one developer to the other would not yet have all of the desired features that would be included as a limitation in the patent claims.

For example, one can argue that a sale of a mostly developed product to Joint Developer B from Joint Developer A would not start the one-year ' 102(b) clock if Joint Developer B then added or performed additional steps that were included as a limitation in the patent claims at issue. See e.g., Brassler, 182 F.3d at 891. However, such preplanning of an invention should be performed hand-in-hand with a view toward testing the developed product, to see if it actually works in its intended environment.

A sale or transaction that is made primarily for experimental purposes is generally not subject to the on-sale bar. Since the subjective intent of the inventor is not material, objective factors are analyzed to determine whether the use of the invention by the inventor, company or third party constitutes primarily experimental or commercial use. In other words, the focus will be on how 'commercial sounding' the transaction was and whether it was experimental in nature. The overall balance of these two issues is critical as to whether the court may apply ' 102(b).

The 13 Factors

The 13 factors enumerated in EZ Dock can be consolidated into a few overall groups: need for experimental testing; where testing was performed; control over testing; how and how long testing was performed; record keeping; and the commercial aspects, if any, of the testing. The nature of the expected invention provides the starting point for this analysis. It may dictate who is the most logical party to conduct testing, and ' if testing needs to be done in public (for example, if the invention is a type of pavement for public roads) ' how much control the inventor can exert over testing. See e.g., Monon Corp. v. Stoughton Trailers Inc. , 239 F.3d 1253 (Fed. Cir. 2001).

The need for experimental as opposed to commercial testing (such as what color or flavor would a consumer prefer), is dependent on the nature of the invention, and whether such testing needs to be performed under actual conditions of use. For example, when it may be difficult or impossible for the inventor to perform meaningful tests under manufactured conditions, permitting an outside party to subject an invention to conditions more closely approximating actual use may be permitted by the court, as it may be more helpful in bringing the invention to perfection.

This is what happened in EZ Dock, wherein a dock invented by two inventors was sold to a customer and was tested on the customer's waterfront property subject to the inventors' right to inspect and repair the dock. Such testing allowed the inventors more accurately to determine whether the invention was 'capable of performing its intended purpose in its intended environment.' EZ Dock, 276 F.3d at 1353.

For a small start-up, the laboratory set-up/development and testing may both be performed offsite. In such a scenario, the start-up should exercise control over the offsite development or testing. Control over outside or offsite testing should begin with some form of a secrecy or confidentiality agreement, such as a nondisclosure agreement, wherein the parties agree to maintain the confidential nature of the invention.

The control over outside or offsite experimental testing can be demonstrated by showing that such testing is done systematically and pursuant to a written protocol, that records of such testing and procedures are being kept and that the tests are being performed only as long as is necessary to acquire useful experimental-testing data. Such records of progress can be used to show that the inventor was testing the invention and not the market. Tests that run too long, or that are performed without written records/procedures, may run the risk of being deemed commercial in nature.

In addition, the costs of testing should be kept to an absolute minimum, below market prices if fees/costs are collected. Such costs should be the costs of supplying the invention or of testing it without any markups that would accompany a payment in a commercial transaction. The company's course of doing business can play a large role here in determining what business is considered commercial for that company and what is considered experimental expenditures. Of course, any commercial exploitation of the invention, even during the testing period, may present enough of an activity that a second party could simply accept it as an offer and make it into a binding
contact. See e.g., Linear Tech. Corp. v. Micrel Inc. , 275 F.3d 1040 (Fed. Cir. 2001).

Conclusion

Both small start-up biotechnology and pharmaceutical companies should closely monitor their ongoing development and marketing programs with the 13 factors enunciated in EZ Dock to ensure that no offer to sell (or sale) of any invention is committed before the company is ready to offer to sell or to sell. Incorporation of recent case law with the EZ Dock experimental factors into the company's routine course of business dealings, both in research and development as well as marketing, should assist a company and its corporate counsel in determining compliance with the ' 102(b) on-sale bar and when a patent application should be filed.

Robert P. Hoag is an attorney at Moser, Patterson and Sheridan, LLP, Shrewsbury, NJ.