Chickens First or Eggs: Pre-filing Commercialization Efforts

Is it the chicken or the egg? Your client InventCo thinks it has several great new products, but it needs money to bring the products to the U.S. marketplace. Tooling costs money, as does producing sufficient inventory, and don't even mention what needs to be put aside to pay the patent attorney ' all for products that might flop in the market. “You've got to spend money to make money,” InventCo's president says. “Too bad I can't offer them for sale now and see if any of them actually sell before I start the patenting process, but I remember what you told me about 1-year on-sale bars and what happed to that Pfaff guy,” he continues. “Hold on a minute,” you tell him, “there's a way around Pfaff.”

The on-sale bar to patentability, 35 U.S.C.A. '102(b), prevents the patenting of any invention “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 Pfaff v. Wells Electronics, Inc., 525 U.S. 55, 119 S.Ct. 304 (1998), the Supreme Court addressed the stage of development an invention had to be at, when offered for sale, in order to trigger the 102(b) bar.

Pfaff's filing date was April 19, 1982. On April 8, 1981, Pfaff received a written purchase order from Texas Instruments accepting his offer to sell 30,100 sockets at a total price of $91,155. Id. at 57. Defendant Wells claimed that this proved that the invention was on sale more than 1 year prior to the filing date. Pfaff countered that his “invention” could not have been on sale because it was not finished. He noted that when he received the written purchase order, he did not even have a working prototype. Rather, “[t]he manufacturer took several months to develop the customized tooling necessary to produce the device, and Pfaff was not able to fill the order until July 1981.” Id. at 58.

The Court articulated the on-sale bar test as follows: “[T]he on-sale bar applies when two conditions are satisfied before the critical date. First, the product must be the subject of a commercial offer for sale … Second, the invention must be ready for patenting.” Id. at 67. The “ready for patenting” prong “may be satisfied in at least two ways: by proof of reduction to practice before the critical date; or 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.

The Supreme Court found that the first prong of the test was satisfied because the purchase order was definite as to financial terms and quantities, so that it clearly evidenced a commercial offer for sale. Id. at 68. Pfaff countered that his invention was not reduced to practice until months after the critical date of April 19, 1981. However, Wells proved that prior to the critical date, Pfaff had sent drawings of the invention to Texas Instruments. The Supreme Court held that the second prong of the test was satisfied because these drawings “fully disclosed the invention” as claimed, and thus the on-sale bar applied. Id. at 68. The Court ruled that a final commercial embodiment was not needed. Id. Accordingly, Pfaff suggests that the “ready for patenting” prong can be satisfied fairly early in the inventing process.

Pfaff, however, was not as draconian with respect to the “offer for sale” prong. For example, in Elan Corp., PLC v. Andrx Pharmaceuticals, Inc., 366 F.3d 1336 (Fed. Cir. 2004), pharmaceutical manufacturer Elan sued generic manufacturer Andrx for infringement of U.S. Patent No. 5,637,320, directed toward a controlled-release version of the anti-inflammatory drug naproxen. Andrx countered that the '320 patent was invalid due to an on-sale bar. The critical date for purposes of '102(b) was Jan. 14, 1990. At issue was whether an Aug. 7, 1987 letter from Elan to Lederle laboratories was a commercial offer for sale under the first prong of the Pfaff test. In the letter, a vice president of Elan wrote the following:

With regard to naproxen, I would like to confirm to you our licensing and development plans for our once daily tablet. … [W]e plan to be in a position to file an I.N.D. by early 1988, and believe that we will need a clinical program involving enrollment of 500 patients and running for up to two years. …

As I indicated to you, we see any license as involving two types of payment ' a licensing fee in the form of recoverable advance royalties and a charge for the clinical program as patients become enrolled. On the former, the total licensing fee would be $2.75 million dollars, payable:

(i) $500,000 on contract signature,

(ii) $500,000 on I.N.D. filing,

(iii) $750,000 on N.D.A. filing, and

(iv) $1,000,000 on N.D.A. approval,

all recoverable against a 5% running royalty by withholding one-third of each payment due.

On the clinical side, we would ask for a payment of $250,000 upon enrollment of each 50 new patients, up to a maximum of $2.5 million dollars.

Finally, I would confirm that we would take responsibility for supplying bulk tablets with our objective being to achieve a price structure allowing you an initial gross margin based on current naproxen prices of not less than 70% after taking into account our processing charge (at current exchange rates, around $60/1000 x 500 mg tablets, excluding A.I. cost), A.I. cost, packaging and royalty.

Elan Corp. v. Andrx Pharms., Inc., 272 F.Supp.2d 1325, 1332-33 (S.D.Fla. 2002).

Similar letters were sent to other laboratories during the following year. Id. at 1333-36.

The district court held that this letter was an offer for sale under '102 (b). It pointed out that the letter referenced a price term and used the word “contract.” Id. at 1341-42. The district court reasoned that “Elan's characterization of the letter as a 'licensing' proposal seeking partners does not vitiate the fact that it offered for sale an embodiment of the invention at issue.” Id. at 1344. The district court also found that the Elan's invention was ready for patenting prior to the critical date, and that the composition “offered for sale” was the same composition that was eventually claimed. Id. at 1346-49. Thus, it found the '320 patent invalid under '102(b). Id. at 1349.

The Federal Circuit reversed the district court's finding of invalidity. It held that the offer to “license” was not sufficient to trigger '102(b). Elan Corp., PLC v. Andrx Pharmaceuticals, Inc., 366 F.3d 1336, 70 USPQ 2d 1722 (Fed.Cir. 2004). It relied on the principle that “[a]n offer to enter into a license under a patent for future sale of the invention covered by the patent when and if it has been developed … is not an offer to sell the patented invention that constitutes an on-sale bar.” Id. at 1341. The Federal Circuit found that the letter “is clear on its face that Elan was not offering to sell naproxen tablets to Lederle, but rather granting a license under the patent and offering Lederle the opportunity to become its partner in the clinical testing and eventual marketing of such tablets at some indefinite point in the future.” Id. (emphasis added)

The Federal Circuit noted that the letter lacked certain material terms that are ordinarily present in an offer for sale under contract law, namely quantity, time and place of delivery, and product specifications. Id. While there were price terms stated in the letter, the court found fatal deficiencies in those price terms. For example, “the dollar amounts recited in the fourth paragraph of the letter to Lederle are clearly not price terms for the sale of tablets, but rather the amount that Elan was requesting to form and continue a partnership with Lederle. Indeed, the letter explicitly refers to the total as a 'licensing fee' … ” Id.

There was also a price term recited in the sixth paragraph, which the district court had cited as providing a price term for sale of the actual product, thereby making the letter an offer for sale. Under that paragraph, Elan would supply Lederle with tablets at some point in the future for a price that would “enable Lederle to achieve an initial gross profit margin of not less than 70% based on 'current naproxen prices,' i.e., once [third party] Syntex's patent had expired and Lederle could begin selling the tablets.” Id. at 1342. The Federal Circuit disagreed, reasoning that “until the formulation had been finalized and proven to be safe and efficacious for its intended use and Syntex's patent had expired, however, there was no way that it could have been determined what 'current naproxen prices' and hence the offering price would be … [T]he cost of the active ingredient, packaging, and processing, as well as the exchange rate, are all factors that would need to be factored into that price term, and it could not have been known in 1988 what those costs would be in 1993.” Id. Referring to the letters sent to other laboratories, the court found them “similarly deficient in failing to set out critical terms of any proposed agreement of sale.” Id.

As a general rule, it is best to begin the patenting process as soon as possible. However, as demonstrated by Elan, where appropriate or necessary, there can be ways to test the waters of commercialization and determine whether an invention is worthy of the time and money investment of pursuing patent rights, without running afoul of 35 U.S.C. '102(b). In Elan, that way was to enter into a licensing program that was not merely a veiled sales contract. Accordingly, commercialization offers that are vague as to specified price, quantity, and time and place of delivery, were not found in Elan to trigger the on-sale bar. Interestingly, vagueness as to the product itself did not save the patent in Pfaff. Therefore, licensing offers that are specific as to the product, but not specific as to typical sales contract terms, can avoid triggering the on-sale bar.

Is it the chicken or the egg? Your client InventCo thinks it has several great new products, but it needs money to bring the products to the U.S. marketplace. Tooling costs money, as does producing sufficient inventory, and don't even mention what needs to be put aside to pay the patent attorney ' all for products that might flop in the market. “You've got to spend money to make money,” InventCo's president says. “Too bad I can't offer them for sale now and see if any of them actually sell before I start the patenting process, but I remember what you told me about 1-year on-sale bars and what happed to that Pfaff guy,” he continues. “Hold on a minute,” you tell him, “there's a way around Pfaff.”

The on-sale bar to patentability, 35 U.S.C.A. '102(b), prevents the patenting of any invention “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 Pfaff v. Wells Electronics, Inc., 525 U.S. 55, 119 S.Ct. 304 (1998), the Supreme Court addressed the stage of development an invention had to be at, when offered for sale, in order to trigger the 102(b) bar.

Pfaff's filing date was April 19, 1982. On April 8, 1981, Pfaff received a written purchase order from Texas Instruments accepting his offer to sell 30,100 sockets at a total price of $91,155. Id. at 57. Defendant Wells claimed that this proved that the invention was on sale more than 1 year prior to the filing date. Pfaff countered that his “invention” could not have been on sale because it was not finished. He noted that when he received the written purchase order, he did not even have a working prototype. Rather, “[t]he manufacturer took several months to develop the customized tooling necessary to produce the device, and Pfaff was not able to fill the order until July 1981.” Id. at 58.

The Court articulated the on-sale bar test as follows: “[T]he on-sale bar applies when two conditions are satisfied before the critical date. First, the product must be the subject of a commercial offer for sale … Second, the invention must be ready for patenting.” Id. at 67. The “ready for patenting” prong “may be satisfied in at least two ways: by proof of reduction to practice before the critical date; or 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.

The Supreme Court found that the first prong of the test was satisfied because the purchase order was definite as to financial terms and quantities, so that it clearly evidenced a commercial offer for sale. Id. at 68. Pfaff countered that his invention was not reduced to practice until months after the critical date of April 19, 1981. However, Wells proved that prior to the critical date, Pfaff had sent drawings of the invention to Texas Instruments. The Supreme Court held that the second prong of the test was satisfied because these drawings “fully disclosed the invention” as claimed, and thus the on-sale bar applied. Id. at 68. The Court ruled that a final commercial embodiment was not needed. Id. Accordingly, Pfaff suggests that the “ready for patenting” prong can be satisfied fairly early in the inventing process.

Pfaff, however, was not as draconian with respect to the “offer for sale” prong. For example, in Elan Corp., PLC v. Andrx Pharmaceuticals, Inc. , 366 F.3d 1336 (Fed. Cir. 2004), pharmaceutical manufacturer Elan sued generic manufacturer Andrx for infringement of U.S. Patent No. 5,637,320, directed toward a controlled-release version of the anti-inflammatory drug naproxen. Andrx countered that the '320 patent was invalid due to an on-sale bar. The critical date for purposes of '102(b) was Jan. 14, 1990. At issue was whether an Aug. 7, 1987 letter from Elan to Lederle laboratories was a commercial offer for sale under the first prong of the Pfaff test. In the letter, a vice president of Elan wrote the following:

With regard to naproxen, I would like to confirm to you our licensing and development plans for our once daily tablet. … [W]e plan to be in a position to file an I.N.D. by early 1988, and believe that we will need a clinical program involving enrollment of 500 patients and running for up to two years. …

As I indicated to you, we see any license as involving two types of payment ' a licensing fee in the form of recoverable advance royalties and a charge for the clinical program as patients become enrolled. On the former, the total licensing fee would be $2.75 million dollars, payable:

(i) $500,000 on contract signature,

(ii) $500,000 on I.N.D. filing,

(iii) $750,000 on N.D.A. filing, and

(iv) $1,000,000 on N.D.A. approval,

all recoverable against a 5% running royalty by withholding one-third of each payment due.

On the clinical side, we would ask for a payment of $250,000 upon enrollment of each 50 new patients, up to a maximum of $2.5 million dollars.

Finally, I would confirm that we would take responsibility for supplying bulk tablets with our objective being to achieve a price structure allowing you an initial gross margin based on current naproxen prices of not less than 70% after taking into account our processing charge (at current exchange rates, around $60/1000 x 500 mg tablets, excluding A.I. cost), A.I. cost, packaging and royalty.

Elan Corp. v. Andrx Pharms., Inc., 272 F.Supp.2d 1325, 1332-33 (S.D.Fla. 2002).

Similar letters were sent to other laboratories during the following year. Id. at 1333-36.

The district court held that this letter was an offer for sale under '102 (b). It pointed out that the letter referenced a price term and used the word “contract.” Id. at 1341-42. The district court reasoned that “Elan's characterization of the letter as a 'licensing' proposal seeking partners does not vitiate the fact that it offered for sale an embodiment of the invention at issue.” Id. at 1344. The district court also found that the Elan's invention was ready for patenting prior to the critical date, and that the composition “offered for sale” was the same composition that was eventually claimed. Id. at 1346-49. Thus, it found the '320 patent invalid under '102(b). Id. at 1349.

The Federal Circuit reversed the district court's finding of invalidity. It held that the offer to “license” was not sufficient to trigger '102(b). Elan Corp., PLC v. Andrx Pharmaceuticals, Inc., 366 F.3d 1336, 70 USPQ 2d 1722 (Fed.Cir. 2004). It relied on the principle that “[a]n offer to enter into a license under a patent for future sale of the invention covered by the patent when and if it has been developed … is not an offer to sell the patented invention that constitutes an on-sale bar.” Id. at 1341. The Federal Circuit found that the letter “is clear on its face that Elan was not offering to sell naproxen tablets to Lederle, but rather granting a license under the patent and offering Lederle the opportunity to become its partner in the clinical testing and eventual marketing of such tablets at some indefinite point in the future.” Id. (emphasis added)

The Federal Circuit noted that the letter lacked certain material terms that are ordinarily present in an offer for sale under contract law, namely quantity, time and place of delivery, and product specifications. Id. While there were price terms stated in the letter, the court found fatal deficiencies in those price terms. For example, “the dollar amounts recited in the fourth paragraph of the letter to Lederle are clearly not price terms for the sale of tablets, but rather the amount that Elan was requesting to form and continue a partnership with Lederle. Indeed, the letter explicitly refers to the total as a 'licensing fee' … ” Id.

There was also a price term recited in the sixth paragraph, which the district court had cited as providing a price term for sale of the actual product, thereby making the letter an offer for sale. Under that paragraph, Elan would supply Lederle with tablets at some point in the future for a price that would “enable Lederle to achieve an initial gross profit margin of not less than 70% based on 'current naproxen prices,' i.e., once [third party] Syntex's patent had expired and Lederle could begin selling the tablets.” Id. at 1342. The Federal Circuit disagreed, reasoning that “until the formulation had been finalized and proven to be safe and efficacious for its intended use and Syntex's patent had expired, however, there was no way that it could have been determined what 'current naproxen prices' and hence the offering price would be … [T]he cost of the active ingredient, packaging, and processing, as well as the exchange rate, are all factors that would need to be factored into that price term, and it could not have been known in 1988 what those costs would be in 1993.” Id. Referring to the letters sent to other laboratories, the court found them “similarly deficient in failing to set out critical terms of any proposed agreement of sale.” Id.

As a general rule, it is best to begin the patenting process as soon as possible. However, as demonstrated by Elan, where appropriate or necessary, there can be ways to test the waters of commercialization and determine whether an invention is worthy of the time and money investment of pursuing patent rights, without running afoul of 35 U.S.C. '102(b). In Elan, that way was to enter into a licensing program that was not merely a veiled sales contract. Accordingly, commercialization offers that are vague as to specified price, quantity, and time and place of delivery, were not found in Elan to trigger the on-sale bar. Interestingly, vagueness as to the product itself did not save the patent in Pfaff. Therefore, licensing offers that are specific as to the product, but not specific as to typical sales contract terms, can avoid triggering the on-sale bar.