By Mary An Merchant, PhD & Richard T. Timmer

The biopharmaceutical world breathed a collective sigh of relief when the Court of Appeals for the Federal Circuit (“CAFC”) issued its ruling regarding the “on sale bar” as it relates to patent eligibility. In the ruling on Monday, July 11, 2016, the CAFC in The Medicines Company v. Hospira, Inc.(CAFC Case No. 2014-1469, 2014-1504) affirmed the district court ruling and held that to be “on sale” under 35 U.S.C. § 102(b), “a product must be the subject of a commercial sale or offer for sale, and that a commercial sale is one that bears the general hallmarks of a sale pursuant to Section 2-106 of the Uniform Commercial Code.” The CAFC found that no such invalidating commercial sale occurred when The Medicines Company (“TMC”) had contracted with a third-party to manufacture batches of Angiomax® (bivalirudin).

The biopharmaceutical industry makes frequent use of third-party manufacturing entities, often referred to as contract manufacturing organizations or CMOs, to produce drug product both during development and for post-approval sales. The facts in the present case are important to appreciating the implications of the ruling. Under 35 U.S.C. § 102(b), a patent cannot be filed on a product or process that was offered for sale more than a year before the patent was filed. In the present case, the patents that Hospira, Inc. sought to invalidate (U.S. Patent Nos. 7,582,727 and 7,598,343) claimed a product-by-process for the active ingredient in Angiomax®.  Batches of the active ingredient were manufactured by for TMC by a third-party more than one year prior to the filing of the patents. However, the drug material was held in quarantine and not released for sale until after the filing of these patents.

Importantly, the CAFC found that based on the evidence presented in the case, the third party sold contract manufacturing services and not the patented invention to TMC. For example, the invoices stated, “Charge to manufacture  Bivalirudin lot.” In addition, the CAFC agreed with the earlier finding that the third party invoiced the sale as manufacturing services and title to the pharmaceutical batches did not change hands. Because the third party lacked title, it was “not free to use or sell the claimed products or to deliver the patented products to anyone other than” TMC. Under the Uniform Commercial Code, a “sale” is described as the “passing of title from the seller to the buyer for a price.” An additional consideration for the CAFC was the confidential nature of the transaction between TMC and the third-party manufacturer. Although confidentiality is not necessarily disqualifying in all cases, in this instance, the CAFC determined that the scope and nature of the confidentiality imposed on the third-party manufacturer supported the view the sale was not for commercial purposes.

For the industry, particularly for biopharmaceutical companies that outsource manufacturing production, the ruling in this case suggests that contract manufacturing does not per se trigger an “on sale bar”, which helps to insure that a common industry practice does not need to be abandoned. Note that the CAFC stated that there was no reason to treat TMC “differently than we would a company with in-house manufacturing capabilities” because there “is no room in the statute and no principled reason raised…to apply a different set of on-sale bar rules to inventors depending on whether their business model is to outsource manufacturing or to manufacture in-house.”

However, biopharmaceutical companies contracting with third party manufacturers should remain careful and structure their contractual terms appropriately. Supplier agreements should be structured as manufacturing service agreements, and not as a product purchase contracts, with title-retention clauses to make clear that there has been no transfer of title. In addition, it will be important to have appropriate confidentiality and non-disclosure provisions, either in the manufacturing service agreement itself or as a separate agreement with the third party manufacturer.

Link to the CAFC decision:

• CAFC Decision

The information presented is for educational and informational purposes and is not intended to constitute legal advice. Readers should consult their professional advisor. Any opinions expressed within this article are solely the opinion of the featured author and not of Morris, Manning & Martin, LLP.