The Medicines Company v. Hospira : When Does Outsourcing Drug Manufacture to a Third-Party Contractor Trigger an On-Sale Bar to Patentability?

Background

The suit arose out of Abbreviated New Drug Applications (ANDAs) filed by Hospira seeking Food and Drug Administration (FDA) approval to sell generic versions of bivalirudin prior to the expiration of two patents owned by The Medicines Company (“MedCo”). MedCo markets the drug under the trademark Angiomax for use as an anticoagulant, particularly during coronary surgery.

MedCo is a specialty pharmaceutical company that does not have its own manufacturing facilities, and thus must rely on CMOs for manufacturing services. In particular, MedCo has contracted with Ben Venue Laboratories (“Ben Venue”) to manufacture Angiomax since 1997. This reliance on a third-party contractor is significant, because the rule announced in the court's vacated panel decision would have penalized companies that engage in such outsourcing, by characterizing the manufacturing service as a potentially patent-invalidating on-sale bar under 35 U.S.C. § 102(b).

Events leading up to the case began in 2005, when Ben Venue began experiencing problems with its manufacturing processes, resulting in batches of Angiomax having unacceptably high levels of an impurity called Asp9-bivalirudin (“Asp9”). MedCo shut down production and hired a specialist to investigate and resolve the issue. This investigation ultimately led to a new compounding process that reduced Asp9 contamination to an acceptable level. The patents at issue in the case, both of which have effective filing dates of July 27, 2008, contain product-by-process claims directed to the improved drug product resulting from the new process.

In late 2006, MedCo paid Ben Venue $347,500 to manufacture three batches of bivalirudin using its newly improved process, i.e., to produce product covered by the product-by-process claims. Collectively, the three batches had a market value well over $20 million. The agreement between the parties required that Ben Venue maintain the confidentiality of the process used. Furthermore, Ben Venue had no authority to manufacture or sell the drug outside the context of its agreement with MedCo, and MedCo retained title in the product from the moment it was manufactured. Once manufactured, the batches were placed in quarantine to allow MedCo to validate that the required low level of impurity had been achieved, and three batches were not released from quarantine and made available for sale until August 2007, i.e., not until after expiration of the § 102(b) critical date. ²

After being sued for patent infringement, Hospira asked the district court to invalidate the asserted patent claims, arguing that the § 102(b) on-sale bar had been triggered when MedCo paid Ben Venue to manufacture bivalirudin according to the improved process more than one year prior to the filing date. The court rejected this argument, however, concluding that the transactions between MedCo and Ben Venue constituted a sale of contract manufacturing services in which title to the drug always resided with MedCo, and thus did not constitute a commercial offer for sale, which is a necessary prerequisite to triggering the on-sale bar. ³ The court further found that because the batches were for “validation purposes” they were not made for commercial profit, but rather for experimental purposes, and for that reason also had avoided the on-sale bar.

On appeal, however, a three-judge panel of the Federal Circuit reversed, explaining that the on-sale bar applies “where the evidence clearly demonstrate[s] that the inventor commercially exploited the invention before the critical date, even if the inventor did not transfer title to the commercial embodiment of the invention.” ⁴ The panel found no distinction between an offer to sell products prepared by a patented method, which the court assumed would necessarily trigger the § 102(b) on-sale bar, and the commercial sale of services that result in a patented product-by-process, explaining that to hold otherwise would conflict with the “no supplier exception principle” set forth in Special Devices, Inc. v. OEA, Inc. ⁵

The panel went on to find that the district court had erred in extending the experimental use exception to Ben Venue's batches. Because the invention had been reduced to practice, the panel concluded that the inventor could not have been experimenting to determine whether the process by which the products formulated achieved the desired results. Controversially, the panel appeared to espouse a bright-line rule that “[e]xperimental use cannot occur after a reduction to practice.” ⁶

On November 13, 2015, the Federal Circuit granted MedCo's petition for rehearing en banc, vacated the panel's decision, reinstated the appeal, and ordered new briefing on the following issues:

(a) Do the circumstances presented here constitute a commercial sale under the on-sale bar of 35 U.S.C. § 102(b)?

(i) Was there a sale for the purposes of § 102(b) despite the absence of a transfer of title?

Amicus Briefs

The grant of en banc rehearing prompted a number of amici curiae to file briefs urging the Federal Circuit to consider the policy implications of the panel decision and to revise the decision in a manner addressing these concerns. Significantly, there was no amicus support for the original panel's determination that MedCo's confidential use of a third-party CMO triggered the on-sale statutory bar.

The Biotechnology Innovation Organization (BIO) filed a brief on behalf of its members, arguing that the panel decision “needlessly expands the on-sale bar to discriminate against pharmaceutical manufacturers who choose to take advantage of the economic efficiencies of outsourcing clinical manufacturing or other aspects of the drug development process.” ⁸ The BIO brief describes the increasing reliance of pharmaceutical and biotechnology companies on third-party contractors who perform a wide variety of steps in the drug development process, including: manufacture of active pharmaceutical ingredients (API), finish and/or filling processing, final dosage formulations (FDF) manufacturing and packaging, and preclinical studies. Biopharmaceutical CMOs in particular routinely provide important services, including: cell line development, analysis and characterization molecules, cell culture and fermentation production technology, purification, final dosage formulations manufacturing infection, and assistance with preclinical studies.

BIO's brief explains that while smaller startup companies are especially dependent upon CMOs, “[e]ven larger companies with in-house capacity are increasingly utilizing CMOs to take advantage of the flexibility and efficiencies of production that they might not otherwise possess.” According to statistics cited by BIO, an average of 42% of pharmaceutical companies and service providers surveyed in 2015 outsourced over 50% of the commercial (final dosage) manufacturing; 46% of companies outsourced over 50% of their clinical manufacturing; and 56% of companies outsourced over 50% of their API manufacturing. BIO argues that there is no valid policy rationale for “treat[ing] the very same conduct—ramp up production, process validation, and pre-commercialization manufacturing—differently depending on how a patent holder structures its business (i.e., vertically integrated manufacturing vs. third-party subcontracting).” ⁹ According to BIO, the panel's decision “discriminates against companies with specialized expertise or who choose to take advantage of the capital and resources of CMOs and instead encourages inefficiency and delay in bringing important pharmaceutical products to market.”

BIO's brief took issue with the panel's conclusion that the contract between MedCo and Ben Venue constituted a commercial “sale” because, in the words of the panel, “the sale of the manufacturing services provided a commercial benefit to the inventor.” BIO argued that if one were to take this expansive interpretation of “commercial” to its logical extreme, “any step in the commercial development and manufacturing process provides a ‘commercial benefit’ to the inventor—even if the invention is never actually commercialized.”

BIO urged the court to use the en banc rehearing as an opportunity to revise the broad scope of language appearing in the court's 2001 Special Devices decision stating that there is no “supplier exception” to the on-sale bar where a patent holder had contracted with a supplier to “have the patent's commercial embodiment mass-produced” prior to the critical date. ¹⁰ While granting that the court did not need to completely overrule Special Devices “by establishing a broad unbounded ‘supplier exception’ to the on-sale bar,” BIO urged the court to “at minimum, revise the scope of the Special Devices holding to carve out from the on-sale bar contracts between third-party manufacturers and patent holders where (1) the patented product (or a product manufactured by the patented process) was not offered for sale to any potential customer more than one year prior to filing the patent application; (2) the invention was not made available to the public more than one year prior to filing patent application; and (3) the entity who performed the patented process did so pursuant to a confidential contract for manufacturing or related services.” ¹¹

BIO's brief asked the Federal Circuit to revise the panel decision, pointing out the decision's “wide-ranging economic implications for the pharmaceutical and biotechnology industry as a whole,” and the risk that it will chill investment in research, development, and commercialization of new biotechnology products. In particular, BIO urged the en banc court “to clarify that confidential contract manufacturing services provided to a patent holder, when an invention is not sold to the public more than one year before filing a patent application, does not constitute a commercial sale for purposes of the on-sale bar provided in 35 U.S.C. § 102(b), and should not fall within the scope of the Special Devices holding rejecting a ‘supplier exception’ to the on-sale bar.” ¹²

The Pharmaceutical Research and Manufacturers Association (PhRMA) filed its own amicus brief, which largely echoed the concerns expressed by BIO. ¹³ For example, PhRMA pointed out that the panel decision improperly favored vertically integrated patentees over those that relied on third-party contractors, especially smaller pharmaceutical and biotech companies, start-ups, and individual inventors lacking the assets to internalize manufacturing and distribution. Their brief characterized the panel decision's rule as “particularly deleterious in the biopharmaceutical industry because it penalizes companies that choose to focus on research and development and outsource manufacturing and distribution.” PhRMA notes that while smaller pharmaceutical companies are most likely to be compelled by financial considerations to rely on the assistance of third parties, such as contract research organizations (CROs), CMOs, and contract sales organizations (CSOs), even larger pharmaceutical companies are increasingly engaging in the practice in order to “focus their efforts on research and reduce the massive investment required to manufacture and distribute new drugs.” The brief argues that the “on-sale bar is not meant to interfere with manufacturing efficiency, or to discriminate between different classes of patentees,” and urges the en banc court to reject the panel opinion's “unwarranted extension of the on-sale bar rule to contract manufacturing of a company's own products.”

PhRMA's brief explains that pharmaceutical innovation is increasingly occurring at specialty biotechnology and pharmaceutical companies having a specific expertise—companies that focus their energy on discovering important pharmaceutical breakthroughs while outsourcing other aspects of the manufacturing and distribution process. For these companies, typically small- and mid-size biotechnology companies, outsourcing reduces costs by allowing the company to take advantage of the existing skill and investment of third parties. PhRMA argued that these smaller pharmaceutical and biotechnology companies play an important role in the innovation ecosystem, and should be protected and allowed to concentrate on what they do best, not put at a disadvantage relative to vertically integrated pharmaceutical companies.

The United States government also filed an amicus brief in support of MedCo, asking the en banc court to affirm the district court's decision that MedCo's use of a CMO did not trigger an on-sale bar. ¹⁴ The government's brief recognizes that applying the on-sale bar to confidential supplier arrangements can prejudice small companies, individual inventors, and others who lack the ability to manufacture their own inventions in-house, but argues that instead of creating a “supplier exception” to the on-sale bar, the better approach would be for the court to “clarify that, consistent with long-standing Supreme Court precedent and congressional intent, the on-sale bar is triggered only by sales or offers for sale that make the invention available to the public.” ¹⁵ The government advises the court to “overrule its prior cases to the extent they are inconsistent with this interpretation of the on-sale bar.”

The government brief begins by arguing that where the patented invention is a product, “the traditional hallmark of the sale is the transfer of title.” While not going so far as to argue that transfer of title is absolutely required, the brief suggests that absence of transfer of title weighs strongly against the existence of a commercial sale or offer for sale triggering the on-sale bar. In particular, the government argues that in this particular case, where all of the patent claims are directed to the product, and where it was undisputed that MedCo retained title to the drug product at all times, the transactions between MedCo and Ben Venue involved a sale of services, not a sale of the patented product, and thus the invention was not “on sale” as required by § 102(b).

The most interesting and novel aspect of the government's brief is its assertion that § 102(b) requires not merely evidence that a sale or offer for sale has occurred, but also proof that the invention was on sale in a manner that made the invention “available to the public.” ¹⁶ As discussed in more detail below, there are many who believe that § 102(b) as amended by the America Invents Act (AIA) in 2011 requires an on-sale event to render an invention “available to the public” in order to create a statutory bar to patentability, but the government goes one step further here and argues that even pre-AIA § 102(b) incorporates this “public availability” requirement. This interpretation of the on-sale bar would be inconsistent with Federal Circuit precedent, which has clearly rejected the notion that a sale or offer for sale must render an invention publicly available in order to constitute a statutory bar under pre-AIA § 102(b). But the government nonetheless argues that “[t]he Supreme Court has long construed the on-sale bar to mean that the invention must be available for sale to the public,” pointing to a number of historical Supreme Court decisions that purportedly support this unconventional interpretation.

The government brief further argues that Congress's amendment of § 102 in the AIA confirms that the phrase “on sale” refers to a sale that makes the invention available to the public. In particular, the amendment added the phrase “in public use, on sale, or otherwise available to the public before the effective filing date.” The government argues that “Congress's use of the modifying phrase ‘or otherwise available to the public,’ [] indicates that the preceding terms—‘in public use’ and ‘on sale’—also make the invention ‘available to the public.’” Its brief argues further that “[t]he legislative history of the AIA underscores that Congress chose the word ‘otherwise’ to ‘make[] clear that the preceding clauses describe things that are of the same quality or nature as the final clause—that is, although the categories of prior art are listed, all of them are limited to that which makes invention available to the public.’” ¹⁷

In its brief, the government argues that because the on-sale bar does not apply in this case, the court need not address the “experimental use” issue. However, if the court does decide to address experimental use, the government urged the court to clarify the law on this issue. The government brief characterizes the current case law on experimental use as “confus[ed],” and takes particular issue with the rule announced by the panel that “[e]xperimental use cannot occur after a reduction to practice.” According to the government, the better view is that “the experimental use defense may be available even if the invention had been reduced to practice if the inventor was unaware that the invention had been reduced to practice (i.e., work for its intended purpose), and continue to experiment.” The brief argues that a “categorical bright-line rule is not well-suited for the unpredictable arts, including medical devices, pharmaceuticals, chemistry, and biotechnology, where extensive testing after a reduction to practice may be needed to ascertain whether invention works for its intended purpose.” In the event that the court decided to address experiment use doctrine in this case, the government urged it to “adopt a rule that would allow small-skill inventors and startups to outsource manufacturing, while still maintaining the ability to conduct appropriate, bona fide tests of their products—e.g., for durability and utility.”

The two leading associations representing patent attorneys and patent owners, the American Intellectual Property Law Association (AIPLA) and the Intellectual Property Owners Association (IPO), both also filed amicus briefs asking the en banc court to clarify that MedCo's use of contract manufacturing services did not trigger an on-sale bar under the facts of this case. ¹⁸ AIPLA “urge[d] the Court to recognize that: (1) transfer of title is not required for an on-sale bar but can evidence an offer for sale if tied to a product or process; (2) a transaction is not a commercial for sale if it was solely from a supplier to the inventor in producing the claimed invention; and (3) to the extent Special Devices is contrary to point (2), it should be overruled.” Similarly, IPO asked the court to “clarify that merely outsourcing manufacturing services to a third-party under the circumstances of this case does not trigger the on-sale bar,” or, in the alternative, to “overrule Special Devices and recognize a ‘supplier exception’ to the on-sale bar, at least in the ‘contract manufacturing’ scenario presented” by the present case.

The En Banc Decision

The en banc Federal Circuit overturned the panel's decision and affirmed the district court's determination that the CMO transactions between MedCo and Ben Venue did not constitute commercial sales of the patented product, and thus were not invalidating under § 102(b). The court identified three primary reasons for its modified judgment: (1) only manufacturing services were sold to the inventor—the invention was not; (2) the inventor maintained control of the invention, as shown by the retention of title to the embodiments and the absence of any authorization to Ben Venue to sell the product to others; and (3) “stockpiling,” standing alone, does not trigger the on-sale bar. ¹⁹

The fact that the asserted claims were directed to products of the improved process, rather than the process itself, was significant and possibly even outcome determinative. Hospira argued that by manufacturing embodiments of the patented product for MedCo, Ben Venue had put the invention “on sale.” But the court pointed out that the “invention” is defined by the claims, and in particular, the “‘invention’ in a product-by-process claim is the product,” not the process used to make it. The court stressed that it had “never espoused the notion that, where the patent is to a product, the performance of the unclaimed process of creating the product, without an accompanying ‘commercial sale’ of the product itself, triggers the on-sale bar.”

The court noted that “[t]he cases on which Hospira relies uniformly involve process or method patents in which the (1) inventors sought compensation (2) from the buying public for (3) performing the claimed processes or methods.” In other words, there were three ways in which the court could have distinguished the present case from the earlier case law: (1) in this case it was not the inventor that had sought compensation, but rather the third-party CMO Ben Venue; (2) Ben Venue had not sought compensation from the “buying public,” but rather from the patentee, pursuant to a confidential manufacturing agreement; and (3) the claims were directed to products, not processes or methods. The court emphasized that it was the third distinction that primarily drove the outcome, stating that although these earlier cases “are distinguishable on multiple grounds, we find particular significance in the fact that the inventions-at-issue there were processes or methods,” and observing that while a tangible item is on sale when the transaction rises to the level of a commercial offer for sale, a process is a different kind of invention and thus is not sold in the same sense as a tangible item. ²⁰ The court concluded that the transaction between MedCo and Ben Venue involved the sale of contract manufacturing services, not the patented product, a conclusion underscored by the absence of any transfer of title in the pharmaceutical batches and the confidential nature of the transactions.

In contrast, the fact that it was a third party rather than the inventor seeking compensation was apparently not a factor in the court's decision. To the contrary, the court stated that its “focus is on what makes our on-sale bar jurisprudence coherent: preventing inventors from filing for patents a year or more after the invention has been commercially marketed, whether marketed by the inventor himself or a third party.” ²¹

The court refused to weigh in on the question of whether a patented invention must be made available to the “buying public” in order to trigger the on-sale bar. In a footnote, the court noted that the U.S. government's amicus brief argued that “recent amendments to § 102 in the AIA reflects Congress's view that the public use bar and the on-sale bar both turned on the ‘public’ nature of the activity at issue,” but the court explicitly declined to address the issue in this case. ²²

In its decision, the court rejected Hospira's argument that to find the on-sale bar inapplicable in this case “would improperly permit an inventor to commercially stockpile his invention in order to restock its long-depleted commercial pipeline.” The court held that, “[c]ontrary to Hospira's assertions, not every activity that inures some commercial benefit to the inventor can be considered a commercial sale.” In the view of the court, “[a]pplying the on-sale bar to the transaction-at-issue would be: (1) arbitrary, as it treats companies making the same pre-commercial preparations differently; (2) ineffective to discourage stockpiling, as it does not penalize or prevent companies with in-house manufacturing capabilities from stockpiling; (3) and unnecessary, as stockpiling by the purchaser of manufacturing services is not the type of commercial activity with which the on-sale bar is concerned.”

With regard to the “no supplier exception” language appearing in Special Devices, the court clarified that:

[T]he import of Special Devices is simply that the fact that a sale is made by supplier is not, standing alone, sufficient grounds upon which to characterize the transaction having all the hallmarks of a commercial sale under the UCC as something other than a commercial sale. [] Lest there be any doubt, however, to the extent language in [Special Devices and its progeny] might be viewed as dictating a different result here, they are overruled with one important caveat. We still do not recognize a blanket “supplier exception” to what would otherwise constitute a commercial sale as we have characterized it today. [] Where the supplier has title to the patented product or process, the supplier receives blanket authority to market the product or disclose the process for manufacturing a product to others, or the transaction is a sale of product at full market value, even a transfer of product to the inventor may constitute a commercial sale under § 102(b). The focus must be on the commercial character of the transaction, not solely on the identity of the participants. ²³

The court declined to address the question of experimental use, agreeing with the government that the point was moot given the court's conclusion that there was no “commercial sale” of the claimed inventions.

Three Important Unresolved Questions

While the en banc decision is helpful in clarifying that, at least under certain circumstances, it is possible for a patentee to outsource manufacturing to a third-party contractor without creating a statutory bar, the decision leaves at least three important outstanding questions unresolved: (1) Will the outcome be different with respect to process or method claims?; (2) Is the on-sale bar triggered by a transaction that does not render the invention available to the public?; and (3) Are there cases in which the experimental use doctrine can be invoked even after a reduction to practice?

Regarding the first question, there is language in the en banc decision suggesting that the outcome might have been different if the claims at issue were directed to the process developed by MedCo, rather than the products of the process. The court emphasized the fact that the focus of the on-sale analysis is on sale of the claimed invention, and if the claims are directed to a product the absence of transfer of title is strong evidence that what was sold was contract manufacturing services, not the patented invention. At the same time, the court also stressed that products and processes are different kinds of inventions, sold in different ways. Responding to a hypothetical raised by Hospira, the court opined that in a case where “an inventor could commercially exploit a newly invented machine by charging others a fee to use it without transferring title to it[,] the ‘invention’ would still likely be considered ‘on-sale’ because use of the invention is on-sale for a price.” ²⁴ The court also stated that “[i]t is with vigilance that we have held that the sale of products made using patented methods triggers the on-sale bar, even though title to the claimed method itself does not pass.” ²⁵

On the other hand, BIO and PhRMA argued in their briefs for a rule that would shield both product and process claims from the threat of an on-sale bar created by use of a third-party CMO. From a policy perspective, this would be the desirable outcome—it would seem to make no more sense to discriminate between product and process claims than it is to discriminate between vertically integrated firms and firms that rely on third-party contractors. However, given the manner in which Medicines Company was decided, with the main focus on the distinction between product and process claims, resolution of this issue will likely have to wait until a case involving process claims is brought before the court.

The Federal Circuit ducked the “public availability” issue this time, but will have another chance to address it soon in Helsinn Healthcare v. Teva, a case currently before the Federal Circuit. ²⁶ In the decision below, the district court held in Helsinn that, as amended by the AIA, § 102 requires a sales transaction to make an invention publicly available in order to constitute a statutory bar. ²⁷ Notably, the Helsinn court was unwilling to go as far as the government did in its Medicines Company amicus brief—the district court concluded that there was no public availability requirement for “on sale” under pre-AIA § 102.

Not surprisingly, the government has filed an amicus brief in Helsinn, reiterating its position that an invention is only “on sale” under the AIA if the sale or offer for sale makes the invention “available to the public.” ²⁸ The government's view is supported by amicus briefs filed on behalf of BIO, PhRMA, AIPLA, and the Naples Roundtable (a 501(c)(3) non-profit organization whose “primary mission is the exploration of ways to improve and strengthen the patent system”), all of whom argue that non-public sales do not trigger a statutory bar under post-AIA § 102. ²⁹ The key difference between Medicines Company and Helsinn is that pre-AIA § 102 is at issue in Medicines Company, while in Helsinn (because of the later filing date of the applications), it is post-AIA § 102. None of the amici in Helsinn argue that § 102 has always included a “public availability” element, even prior to the AIA, the position taken by the government in Medicines Company.

Perhaps the most interesting amicus brief in Helsinn was the one filed by Congressman Lamar Smith. ³⁰ Congressman Smith served as Chairman of the Committee on the Judiciary of the U.S. House of Representatives during the pendency of various patent reform bills, including the AIA. He was also lead sponsor of the bill and managed consideration of the bill in the House through the debate on the House floor. In his brief, Congressman Smith explains to the court that it was Congress's clear intent in enacting the AIA that in order to constitute prior art, a “public use” or “on sale” activity must make the subject matter of the invention “available to the public.” In support of this position, Congressman Smith points to the legislative history, including committee reports and floor debates associated with passage of the AIA.

On the other hand, a group of 42 intellectual property law professors (which did not include this author) filed an amicus brief in Helsinn arguing that, contrary to the understanding of Congressman Smith, Congress had not altered the definition of “public use” and “on sale” by introducing “a new ‘publicness’ requirement to § 102. ³¹ The law professors stand almost—but not quite entirely— alone in refusing to agree that the AIA excludes non-public prior art from § 102. There was one other amicus brief filed in Helsinn advocating for this position, filed by a pro se party (non-lawyer) named Ron Katznelson, who describes himself in his brief as “a technology entrepreneur, inventor and an independent scholar of the patent system.” ³²