The Software IP Report

Distribution Agreement held to be “Offer for Sale”

By Mike McCandlish

Categories: 35 U.S.C. §§ 102, 103, The Software IP Report

The Federal Circuit held a distribution agreement including transfer of title to the distributor and exclusivity in the United States for three years to be an “offer for sale” under the on-sale bar.

In The Medicines Company v. Hospira, Inc., (Fed. Cir. Feb. 6, 2018) the Medicines Company (MedCo) appealed findings of no infringement made by the U. S. District Court for the District of Delaware. Hospira cross-appealed the district court’s finding that a distribution agreement did not constitute an invalidating “offer for sale” under 35 U.S.C. §102(b).

MedCo owns U.S. Patent Nos. 7,582,727 and 7,598,343, both filed on July 27, 2008. The patents covered an improved mixing process for manufacturing bivalirudin. MedCo had used bivalidurin for almost 20 years to manufacture Angiomax, which represents 90% of its revenues. The improved process allowed MedCo to more consistently manufacture Angiomax within a specified maximum impurity level. Ben Venue Laboratory, a contract manufacturer for MedCo, first incorporated the patented mixing process on Oct. 25, 2006.

On February 27, 2007, MedCo entered into a Distribution Agreement with Integrated Commercialization Solutions, Inc. (ICS). The agreement stated that MedCo “now desire[d] to sell the Product” to ICS, and ICS “desire[d] to purchase and distribute the Product.” According to the agreement, “title passed to ICS “upon receipt of Product at the distribution center.” The agreement further forbade MedCo from selling Angiomax to other parties in the United States for three years. ICS had been distributing Angiomax prior to the agreement, but did not take title to the product under the previous agreement.

The court initially held that Hospira did not infringe the ‘727 and ‘343 patents. Both the ‘727 and ‘343 patents required “efficient mixing” which included introducing the bivalirudin solution at a controlled rate, and further included the use of a homogenizer. Hospira’s manufacturing process did not perform “efficient mixing.” Hospira introduced the bivalirudin in three portions instead of at a controlled rate. Further, Hospira used a paddle mixer instead of a homogenizer.

The court then turned to the question of invalidity. A patent is invalid under 35 U.S.C. §102(b) if before the critical date, 1) the product is the subject of a commercial offer for sale, and 2) the invention is ready for patenting.

The court found that the distribution agreement constituted a “commercial offer for sale.” A commercial sale “is a contract between parties to give and to pass rights of property for consideration which the buyer pays or promises to path the seller for the thing bought or sold.” Medicines Co. v. Hospira, Inc., 27 F.3d 1363, 1373 (Fed. Cir. 2016) (Medicines I.) Further, an offer for sale is “one which the other party could make into a binding contract by simple acceptance.” Grp. One, Ltd. v. Hallmark Cards, Inc., 254 F.3d 1041, 1048 (Fed. Cir. 2001).

MedCo took the position that since MedCo could reject all purchase orders submitted by ICS, that the distribution agreement was not an offer for sale. The court disagreed for two reasons. First, under the distribution agreement, MedCo agreed to sell Agiomax, and ICS agreed to purchase it. MedCo and ICS purposefully changed their previous distribution services relationship to let ICS take title to the product.

Second, the distribution agreement required MedCo to take “commercially reasonable efforts” to fill purchase orders from ICS. Further, as a factual matter, the district court found that “rejecting an order would be unlikely given the parties’ course of dealing.”

The court further held that the invention of the ‘727 and ‘343 patents was ready for patenting before the critical date. Ben Venue Laboratory manufactured bivalirudin according to the patented process on October 25, 2006, under contract to MedCo, prior to the critical date of July 7, 2008.

The court remanded for a factual determination whether the distribution agreement referred to products manufactured according to the new (patented) manufacturing process, or the previous process.

Lessons for Practice

The obvious tip for manufacturers is to file for patent protection for new manufacturing processes before entering into agreements to sell the product. In the case of distribution agreements, manufacturers can avoid triggering the on-sale bar by retaining title to the product. This only helps, though, until the distributor makes its first sale.