Medical Device Link.

Originally Published MX May/June 2002

GOVERNMENTAL & LEGAL AFFAIRS

Breffni X. Baggot

Intellectual properties are the lifeblood of medical technology companies, providing the essential bases for product development innovations that ultimately give value to those companies. Without careful stewardship, however, companies can lose control of these most-valued possessions. In turn, even the most innovative of companies can find that a market they created has been thrown open to competitors that are all too eager to undercut them. To avoid this possibility, medical technology executives need to consider a recent ruling of the United States Supreme Court when developing their patent strategies.

Rationale

The on-sale bar is based on four policy considerations that derive from the goal that the Founding Fathers had when they provided for patents in the Constitution: "to promote the progress of science."⁴

The first consideration prohibits an inventor from commercially exploiting the invention beyond the statutory grant of exclusive patent rights. A patent grants exclusive rights for 20 years from the date of patent filing. An inventor who puts marketing before patenting is trying to get more than he or she is entitled to.

Second, patent law recognizes that the policy against prolonged commercial exploitation must be balanced against the competing policy of giving inventors a reasonable time to determine whether a patent is worth pursuing. This policy concern is fulfilled by a one-year grace period from the date an invention is offered for sale.

A third consideration takes into account what the public has come to believe. Courts are slow to recognize an inventor's rights where the inventor's particular sales activities have led the public to believe the invention was freely available to all. Moreover, where the sale of the invention is for experimental purposes rather than for profit, an experimental-use exception to the on-sale bar applies, because both the inventor and the public benefit when an invention is properly tested before a patent is granted.

A fourth policy consideration recognizes that imposition of the on-sale bar for mere discussions of inventions that are only conceptual would tend to encourage the premature filing of patent applications on those undeveloped inventions.

Evolution in Law

Historically, courts have said that if the patented articles were not on hand, ready to be delivered to the purchaser, they could not be said to be on sale within the meaning of the Patent Act, even though the invention itself was complete.⁵ But the Second Circuit Court later ruled that the offer of an invention for sale would trigger the bar if the following conditions were met.

• The complete invention was embodied in or obvious in view of the thing offered for sale.
• The invention had been tested sufficiently to verify that it was operable and commercially marketable (in effect, that it had been reduced to practice).
• The sale was primarily for profit rather than for experimental purposes.⁶

However, not all courts have followed this rule, and the lack of consensus has made product strategy for U.S. companies difficult.

Then, Congress established the Federal Circuit Court of Appeals to hear all patent appeals. The Federal Circuit rejected the Second Circuit's ruling, holding that "if the inventor had merely a conception, or was working towards development of that conception, it can be said that there is not yet any invention which could be placed on sale."⁷ So while the mere conception of an invention offered for sale would not lead to a bar on its patent, the court decided that an invention's substantial embodiment would do so.

But the Federal Circuit has not closely followed this ruling either. In a seemingly contradictory decision, the court stated that the "general rule is that the on-sale bar starts to accrue when a complete invention is offered for sale."⁸ A complete invention is "known [to] work for its intended purpose without further testing or evaluation." Such seemingly contradictory interpretations leave open the question of whether an idea on paper can be considered a patentable invention.

These decisions preceded Pfaff v. Wells Electronics, which the Federal Circuit decided in 1997. Wayne Pfaff, a small-town inventor from Texas, owned a U.S. patent relating to a socket for testing leadless chip carriers. Texas Instruments contacted Pfaff and asked him to develop a socket for its chip carriers. After developing a concept, Pfaff prepared detailed engineering drawings and, in February or March 1981, sent them to a tooling company for production. Texas Instruments issued a purchase order to Pfaff's company for sockets. Pfaff did not file a patent application on the socket until more than a year after the purchase order was issued. The patent was issued. Years later, Pfaff sued Wells Electronics, a company he claimed was selling a device that infringed his patent.

At trial, the court determined that Pfaff's invention was not on sale within the meaning of the Patent Act (35 USC Section 102(b)), and that Wells Electronics' device infringed the patent. On appeal, the Federal Circuit reversed the earlier decision, reiterating that "reduction to practice is not necessarily a prerequisite to application of the on-sale bar." Instead, "the appropriate question is whether the invention was substantially complete at the time of sale such that there was reason to expect that it would work for its intended purpose upon completion." Because Pfaff had created engineering drawings with precise requirements before the purchase order was issued, sent the drawings to the tooling company to prepare customized tooling, and in the past had gone directly into production without manufacturing prototypes, the Federal Circuit concluded that Pfaff had expected that his invention would work for its intended purpose at the time of sale.

The court rejected Pfaff's contention that he was not certain his invention would work until it had survived a 72,000-cycle test, which occurred after the critical date, because the durability of the socket was neither a claimed nor an inherent feature of the invention, and was not needed for the substantial completion of the invention. The court emphasized that no prototype was necessary because the invention was not complicated, and it found that Pfaff was in fact confident that his invention would work.

Inventor Appeals

The Supreme Court considered this question posed by Pfaff's lawyers: In view of the long-standing statutory definition that the one-year grace period to an on-sale bar can start to run only after an invention is fully completed, should the Pfaff patent have been held invalid under 35 USC Section 102(b) when Pfaff's invention was admittedly not fully completed more than one year before he filed his patent application? Lawyers for Pfaff asserted that the Federal Circuit had "impermissibly substituted its own judgment for that mandated by the Congress."

The Supreme Court disagreed. "The primary meaning of the word 'invention' in the Patent Act unquestionably refers to the inventor's conception rather than to a physical embodiment of that idea," wrote Justice John Paul Stevens. "The statute does not contain any express requirement that an invention must be reduced to practice before it can be patented."

The Supreme Court opinion also quoted language from an 1888 case, when it upheld Alexander Graham Bell's telephone patent, which he was awarded before having built a working model.

Conclusion

Although Pfaff v. Wells Electronics deals with an electronics patent, the Supreme Court decision will have far-reaching application to all patent cases—including those for inventions in the biomedical, biotechnology, chemical, and software industries. Myriad companies will be affected—whether they are high-tech, low-tech, or no-tech.

Wayne Pfaff's mistake was not an isolated instance. Other executives have stumbled over the on-sale bar, as shown in the cases of Paragon Podiatry Laboratory v. KLM Laboratories, and Biodex v. Loredan Biomedical.^9,10

Medical technology executives should seek to avoid repeating Pfaff's mistake. His role as a supplier to Texas Instruments was equivalent to a medical technology company being the sole supplier of a technology that it has complete control over so long as it owns the patent. As the holder of the patent, Pfaff was the market. He was the sole price setter, free to set marginal revenue equal to marginal cost, and free to set price far above marginal cost. Thus situated, he could afford to run a costly operation, supported by the fat margins he could expect as owner of the patent.

The aftermath of the court case turned all of this on its head. As a practical matter, with the patent out of the way, Pfaff is through. The inventor is effectively prevented from selling his own invention. He no longer knows what the demand is because he is no longer the only company in the market. Accordingly, he doesn't know how many units to produce. He had tooled up for one level of demand and now faces an entirely different and—more importantly—elastic demand. Even if the inventor knew what the market demand was, he might not be able to support his operations on a price just above the marginal costs of the lean competitors that have rushed in to undercut him.

In sum, no buyers will now pay the prices Pfaff had asked when he held the patent. And Pfaff's business operation is no longer lean enough to compete in the market he created.

Medtech companies can get themselves into trouble by offering an invention for sale without determining the legal ramifications of such sales. Medtech companies should notify their attorneys when they think they might have invented something. They should not make this decision on their own. When a company does make such a decision without appropriate legal advice, the result is often that the invention is offered for sale and the need to address the patent issues is deferred to a later time. But later on usually proves to be too late—the on-sale bar has been triggered and the patent rights have been permanently lost.

Companies can safeguard against loss of patent protection by having inventors keep a lab notebook. This notebook should be signed and dated by two witnesses who state that they have read and understood what they signed. The process of having a lab notebook witnessed has a separate benefit: it highlights for inventors the fact that their work has legal ramifications which in turn affect the assets of the company, its financial statements, its ability to raise debt or equity, and so on.

If the one-year grace period has already expired since the invention was first sold, companies may still be able to recover some of their intellectual property rights by inventing something else—and soon. This strategy is especially viable in the medical device arena, where incremental improvement is a common means of advancing new technologies.

A good idea usually spawns more good ideas, and the inventors of the me-too ideas will also want patent protection. Such follow-on ideas are often better than the original in terms of marketability, user-friendliness, and practicality. If the invention has only been in the public domain a little while, the most likely inventor of the follow-on ideas is the original inventor. By patenting the follow-on ideas in a timely fashion, the original inventor may be able to minimize the loss of patent protection on the original idea.

The bottom line for inventors is that whether products are completed or not, their sale starts the one-year countdown during which inventors must file for patent protection or risk losing their rights. Inventors considering foreign markets should also bear in mind the effects of foreign laws. Throughout most of the world, the offer of an invention for sale will bar patentability, and inventors are not allowed a one-year grace period as they are in the United States.

For company management, the bottom line is communication. Neither marketing nor patenting can be done in a vacuum. Those in charge of R&D need to send the same messages to the legal and marketing departments. The legal department must know what is being offered for sale, and the marketing department must know what is to be patented. If all the essential departments hold together, so should the elements of the invention.

References

1. Pfaff v. Wells Electronics 124 F. 3d 1429 (Fed. Cir. 1997).

2. Pfaff v. Wells Electronics 48 USPQ2d 1641, 124 F.3d 1429 (U.S. Supreme Court 1998).

3. Stearns et al. v. Beckman Instruments, 222 USPQ 457 (CAFC 1984).

4. U.S. Constitution, article I, section 8.

5. See Burke Elec. Co. v. Independent Pneumatic Tool Co., 234 F.2d 93 (2d Cir. 1916).

6. Timely Products v. Arron, 523 F.2d 288 (2d Cir. 1975).

7. UMC Electronics v. United States, 816 F.2d 647 (Fed. Cir. 1987).

8. Seal-Flex v. Athletic Track, 98 F.3d 1318 (Fed. Cir. 1996).

9. Paragon Podiatry Laboratory v. KLM Laboratories, 25 USPQ.2d 1561 (CAFC 1993).

10. Biodex v. Loredan Biomedical, 20 USPQ.2d 1252 (CAFC 1991).

Breffni X. Baggot is a business consultant, bioengineer and patent attorney, and electrical engineer. He can be reached via http://www.biotechlawyer.com.

Illustration by Bek Shakirov

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