Locke Lord QuickStudy: What Constitutes a “Commercial Offer” to Trigger the On-Sale Bar?

The on-sale bar defense under 35 U.S.C. § 102(b) remains a topic of interest for the Federal Circuit.  For example, the Federal Circuit, en banc, is considering whether a supplier exception should exist to the on-sale bar when a patentee contracts with a third party to manufacture a claimed pharmaceutical product.  See The Medicines Company v. Hospira, Inc., 805 F.3d 1357 (Fed. Cir. 2015).  More recently, on May 13, 2016, the Federal Circuit reversed a finding of no invalidity under the on-sale bar because the patentee had, in fact, made a bona fide offer to sell the product before the critical patent date.  See Merck & Cie et al. v. Watson Laboratories, Inc., Nos. 2015-2063, 2015-2064, slip op. (Fed. Cir. May 13, 2016). 

Under the Supreme Court’s analysis in the Pfaff case, whether a patent is invalid due to the on-sale bar is a two-part test – whether the claimed invention (1) was ready for patenting and (2) the subject of a commercial sale or offer for sale before the critical date.  Pfaff v. Wells Elecs., Inc., 525 U.S., 55, 67-68 (1998). In Merck, the issue centered around whether there existed a commercial offer to sell, as Merck had not contested whether the claimed invention was ready for patenting.  Merck had entered into discussions, and executed a confidentiality agreement with, Weider Nutrition International, Inc. (“Weider”) concerning a potential partnership to promote a crystalline calcium salt of a tetrahydrofolic acid (“MTHF”).  Id. at 2-3.  Weider decided not to pursue the partnership, but indicated an interest in purchasing 2 kg of MTHF on a stand-alone basis.  Id. at 3.  A Merck representative sent a signed fax to Weider indicating, inter alia, the price of $25,000 USD per kg and requesting that Weider “send the order to my attention and I will arrange everything.  . . .  If you need more, we have no problem for an immediate[] delivery.”  Id. at 3-4.  Weider responded stating that it would order 2 kg of MTHF, and asked for a specification sheet, MSDS and a certificate of insurance.  Id. at 4.  The specification sheet and MSDS was sent to Weider, and Merck reiterated that the cost would be $25,000 USD per kg and confirmed that Weider had placed a “first order.”  Id.  A couple months later, prior to delivery, Weider indicated that it would be cancelling its “existing order for” MTHF.  Id. at 5.  All of these facts occurred before the claimed invention’s critical date.

At the district court, Watson argued that the asserted claim was invalid under the on-sale bar.  The court held that, although Merck had not contested that the MTHF was “ready for patenting,” there was no invalidating commercial offer for sale or sale of the product.  Id.  “In the court’s view, the fax Merck sent to Weider on September 9, 1998, was not sufficiently definite to qualify as a commercial offer because it did not include ‘important safety and liability’ terms” and because, pursuant to the confidentiality agreement, “any ‘definitive agreement’ between Merck and Weider had to be signed by both parties” and the fax was signed only by Merck.  Id. at 5-6. 

On review, the Federal Circuit noted that traditional contract law applies when determining if an event triggered the on-sale bar.  Id. at 7.  “Only 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).”  Id. (citation omitted).  The Federal Circuit disagreed with the district court, finding that the correspondence between Merck and Weider constituted an offer for sale under § 102(b).  Specifically, the Federal Circuit relied on the following facts:

• Merck’s “September 9, 1998, fax was not an unsolicited price quote sent to numerous potential customers” but was “sent in direct response to Weider’s request to purchase two kilograms of MTHF.”  Id. at 8.
• Merck’s fax “providing essential price, delivery, and payment terms—contained all the required elements to qualify as a commercial offer for sale.”  Id. at 8.
• The parties actions indicated that they were proceeding on the understanding that Merck had made an unequivocal offer to sell MTHF.  Id. at 9.
• The Confidentiality Agreement was executed when the parties were discussing possible partnership, but did not indicate that the terms were applicable to stand-alone agreements; nevertheless, the requirement for signature from both parties did not apply to offers.

Accordingly, the Federal Circuit found that a commercial offer for sale did exist such that the on-sale bar was triggered and the asserted claim was invalid under § 102(b). 

The Merck decision illustrates the importance of developing the underlying factual bases when asserting the on-sale bar defense.  Moreover, because an actual sale is not needed to trigger the on-sale bar, an accused infringer should be cognizant of offers for sale and should endeavor to seek all documents related to such offers during the fact discovery stage.  Price, delivery and payment terms – and not other terms that might eventually be added into a final offer contract – are all that the Federal Circuit required in Merck.