Do Prior Secret Sales Invalidate Patents?

The quid pro quo of the U.S. patent law is that the inventor is awarded commercial exclusivity for a limited period of time in exchange for public disclosure.  However, once knowledge enters the public domain it cannot be recalled; thus public disclosure before a certain date (called “critical date”) precludes subsequent attempts to obtain patent protection.  If it is discovered that a sale or an offer for sale of a product covered by a later filed patent occurred prior to the critical date for the filing of the patent, the patent is invalidated.  This is because a commercial sale made prior to the critical date is viewed as an unfair extension of the period of exclusivity granted by the patent.  An issue arises when a sale or an offer of sale is first made privately followed by a later patent filing.  In the pharmaceutical industry, such sales are sometimes made between a small business innovator and its contract supply manufacturers or research organizations because the small business lacks the necessary resources to manufacture the product and conduct clinical trials by themselves.  These sales often precede patent filing because in the early stages of development, companies often don’t realize the commercial value of what they have.  The law was aimed at large companies that have an internalized supply chain, but disadvantages small companies that rely on external suppliers to help conduct their research and development.

Historically, the courts have interpreted the patent statute in a way that even secret sales disqualified subsequently filed patents.  The America Invents Act (AIA) that applies to patents filed on or after March 16, 2013 may have changed this law.  Under the current widespread interpretation of the AIA law, only public sales will render later-filed patents unenforceable.  However, there is still a lot of uncertainty in that interpretation, but a pair of cases that are now percolating through the courts should provide much needed clarity to the pharmaceutical industry.

October 12, 2016, Merck asked the Supreme Court to review the decision of the Court of Appeal for the Federal Circuit that even a secret offer of sale invalidates later filed patents.  Merck & Cie, et al. v. Watson Laboratories, Inc., No. 16-493. (Sup. Ct.).  In this case, Merck and Weider Nutrition negotiated sale terms for 2 kg of a drug for evaluation purposes.  The relevant patent was filed before the AIA law kicked in. The Federal Circuit applied “traditional contract law” and found that “[Merck’s] detailed fax — providing essential price, delivery, and payment terms — contained all the required elements to qualify as a commercial offer for sale” that invalidated Merck’s later filed patent.  On January 9th, 2017 the Supreme Court declined to review this case. 

Another interpretation of the “on sale bar” is the issue in Helsinn Healthcare SA et al. v. Teva Pharmaceuticals USA Inc. et al., which was decided in the U.S. District Court for the District of New Jersey in 2016.  In this case, the judge held that Helsinn’s licensing and supply agreement did not qualify as a patent-invalidating sale. “The new requirement that the on-sale bar apply to public sales comports with the plain language meaning of the amended section, the USPTO’s interpretation of the amendment, the AIA Committee Report, and Congress’ overarching goal to modernize and streamline the U.S. patent system.”  “The post-AIA on-sale bar inquiry . . . requires that the sale make the claimed invention available to the public . . .”  In this case, the patent was filed after the AIA took effect.  Teva is currently appealing the decision to the Court of Appeal for the Federal Circuit.  The decision is expected to eventually be appealed to the Supreme Court.

The ability to use outside contract manufacturing and research organizations without losing patent exclusivity is critical to small pharmaceutical and biotechnology companies.  There is hope in the pharmaceutical and biotech patent communities that “on sale bar” will not apply to secret sales that occurred after the AIA.  The uncertainty remains, and the investment community has to  pay close attention to the contract dates in relation to patent filing dates when evaluating potential investments.  The upcoming Helsinn case should some provide much-needed clarity.