Merck & Cie v. Watson Laboratories, Inc. (Fed. Cir. 2016)

By Kevin E. Noonan --

The Federal Circuit had the occasion to revisit the proper application of the on-sale bar under 35 U.S.C. § 102(b) in Merck & Cie v. Watson Laboratories, Inc., ANDA litigation over claim 4 of U.S. Patent No. 6,441,168, which reads:

A crystalline calcium salt of 5-methyl-(6S)-tetrahydrofolic acid [MTHF] with 2 theta values of 6.5, 13.3, 16.8 and 20.1 (Type I) said crystalline salt having a water of crystallization of at least one equivalent per equivalent of 5-methyltetrahydrofolic acid.

The earliest priority date this claim was entitled to was April 17, 2000, making the critical date April 17, 1999, one year before.  Scaltech, Inc. v. Retec/Tetra, LLC, 269 F.3d 1321 (Fed. Cir. 2001).  The relevant facts, and the timing of Merck's activities, were as follows.  In 1997, Merck "began 'exploring a strategic partnership to introduce dietary supplements with Merck ingredients into the United States.'"  One proposal was for a joint venture with Weider Nutrition to market and distribute MTFH in the U.S., in an agreement signed in February 1998.  Language of that Confidentiality Agreement relevant to the opinion reads:

Unless and until such definitive agreement regarding a transaction between Weider and Merck has been signed by both parties, neither party will be under any legal obligation of any kind with respect to such a transaction.

Weider backed out of the arrangement in August 1998, but inquired with Merck regarding purchase of 2kg of MTHF.  Merck responded with a set price and reassurance that Merck could provide more product if Weider desired it.  Weider requested safety and analytical specifics on the product on September 16, 1998, which was provided on September 25, 1998.  The order was confirmed by Merck on October 8, 1998, but over the next few months there were communications back and forth between the parties, culminating in a "mutual decision" to cancel Weider's "existing order" on January 9, 1999.  In the meantime, Merck met with a Weider competitor who wanted exclusive rights to market MTHF in the U.S.

Merck & Cie (a Merck subsidiary), along with co-plaintiffs Bayer Pharma and Bayer Healthcare Pharmaceuticals, brought suit against Watson for infringing claim 4 of the '168 patent under 35 U.S.C. § 271(e)(2) for filing an ANDA for two contraceptives, Safyral® and Beyaz® that comprise the claimed MTHF salt.  Watson stipulated to infringement and went to trial on the validity issue.  The District Court rejected Watson's contentions and evidence that claim 4 was invalid for anticipation, obviousness, and failure to satisfy the written description requirement, and specifically found that claim 4 was not invalid under the on-sale bar.  In applying the Pfaff analysis, Pfaff v. Wells Electronics, 525 U.S. 55 (1998), the District Court found that the circumstances satisfied the first prong of the test, that the invention was "ready for patenting" prior to the critical date.  However, the District Court found that there had been no "commercial offer to sell or sale" of a product falling within the scope of the claims.  In reviewing the evidence, the District Court did not believe that the September 9, 1998 facsimile was "sufficiently definite to qualify as a commercial offer"; specifically with regard to the absence of the safety and quality specifics requested thereafter by Weider.  In addition, the District Court considered the language of the Confidentiality Agreement between the parties to require that there be a "definitive agreement" signed by the parties.  In the absence of such an agreement (which was not in evidence) the District Court held that there had not been a "legally binding sale" and thus the on-sale bar had not been raised prior to the critical date.

The Federal Circuit reversed, in a decision by Judge Mayer, joined by Judges Dyk and Hughes.  Like obviousness, whether there had been a violation of the on-sale bar prior to the critical date is a matter of law based on questions of fact.  The panel quickly passed over the first prong, because Merck had not challenged that the invention was ready for patenting by September 9, 1998.  The question thus for the Federal Circuit was whether there had been a commercial sale or offer for sale more than one year before the earliest priority date of the '168 patent.

In reviewing the District Court's decision, the panel applied "traditional contract law" as a matter of Federal Circuit law.  Grp. One, Ltd. v. Hallmark Cards, Inc., 254 F.3d 1041 (Fed. Cir. 2001).  The Federal Circuit's view of the facts was that Weider had decided that it did not wish to enter into a joint venture with Merck by August 1998.  However, Weider did express a desire to purchase 2kg of MTHF from Merck at that time.  In response, Merck's representative provided the unit cost of the product, provided specifics on how Merck was willing to deliver the product, and reassured Weider that Merck was prepared to sell Weider more than 2kg if requested.  Indeed, "[Merck's] detailed fax -- providing essential price, delivery, and payment terms -- contained all the required elements to qualify as a commercial offer for sale" in the panel's opinion, citing Cargill, Inc. v. Canbra Foods, Ltd., 476 F.3d 1359, 1369 (Fed. Cir. 2007), and Linear Tech. Corp. v. Micrel, Inc., 275 F.3d 1040, 1052 (Fed. Cir. 2001).  Moreover, according to the panel Merck's offer was "not qualified," i.e., it contained no reservations or other indicia of uncertainty or unmet requirements.

Merck argued that whether there had been a commercial offer for sale was belied by the parties' behavior, both parties not acting in a way consistent with the existence of an offer for sale.  To the contrary, the Federal Circuit believed that the activity between the parties in the period after the September 9, 1998 facsimile evidenced the existence of an "unequivocal offer" by Merck to sell Weider the MTHF product.  These activities included the express language of subsequent communications, the request for safety and analytical specifications from Weider, and requests and reassurances of a certificate of insurance to protect against loss during delivery.  This evidence led the Federal Circuit to conclude that:

Regardless of whether the communications between Merck and Weider in the fall of 1998 were sufficient to establish a binding contract for the sale of MTHF, they confirm that, at a minimum, both parties understood that Martin's September 9, 1998, fax was an offer to sell the product.

The fact that as things turned out Merck never did deliver the product and the parties agreed to negate the sales agreement was of no moment:  "[a]n offer to sell is sufficient to raise the on-sale bar, regardless of whether that sale is ever consummated" according to the opinion, citing Hamilton Beach Brands, Inc. v. Sunbeam Prods., Inc., 726 F.3d 1370, 1374–76 (Fed. Cir. 2013).

In assessing the District Court's opinion, the Federal Circuit considered and rejected evidence the Court relied upon regarding sales of this product:  that MTHF was "a potentially dangerous new drug" and thus the request for safety and analytical information were necessary components of an offer for sale.  According to the panel, there was no evidence supporting the assertion that MTHF was a "potentially dangerous drug" and indeed there was evidence to the contrary.  Also unpersuasive was testimony regarding what were "standards" for such contracts because, according to the Federal Circuit there was no supporting evidence for such standards.  Finally, the "conclusory" testimony offered by Merck's expert was inconsistent with the documentary record, which the opinion characterized as "unambiguous."

Turning to the confidentiality agreement that formed the basis for the District Court's opinion, the Federal Circuit distinguished the purpose of that agreement (because the parties entered into that agreement "during a period when they were contemplating entering into a broad-ranging joint venture relationship") and the issue here was a simple offer to sell 2kg of the MTHF product.  Moreover, while the agreement contains language that might encompass an actual sale, it does not apply to an offer to sell, which is enough to implicate the on-sale bar.  And the panel concludes this portion of the opinion by noting that the offer to sell was not for experimental purposes, thus eliminating the "experimental use" exception from the argument.

While not unremarkable, the opinion is notable for extending the scope of the on-sale bar to include the type of informal commercial activity between potential partners (even when that partnership does not occur) and unfulfilled commercial activity that happened here.  It provides an additional cautionary tale that patentees and potential patentees must be careful, once an invention is ready for patenting, to engage in no activity that could be construed as commercial activity, and to file an application for such an invention as soon as the invention is patent-ready.

Merck & Cie v. Watson Laboratories, Inc. (Fed. Cir. 2016)
Panel: Circuit Judges Dyk, Mayer, and Hughes
Opinion by Circuit Judge Mayer

Comments

[Paul F. Morgan]

Although it probably would not have affected this outcome, the Fed. Cir. here seems to again be ignoring the longstanding Sup. Ct. requirement of Erie v. Tompkins et al to apply state contract law to general contact law issues? [Issues of product sales, employment agreements, assignments, etc.] [One of these days may we see a Sup. Ct. admonishment?]

[Paul F. Morgan]

P.S. Some cited expanded-follow-on Sup. Ct. cases re Erie v. Tompkins include Semtek International Inc. v. Lockheed Martin Corp., United Mine Workers v. Gibbs, 383 U.S. 715 (1966) and Butner v. United States, 440 U.S. 48 (1979).

[skeptical]

Three puzzling items in a row, starting with the past thought of the article (offer for sale already existed, so there is NO expansion with this ruling), and then a double dip by Mr. Morgan who has Erie on the mind / this case has zero to do with Erie, as this was clearly a case of Federal patent law.

[Paul F. Morgan]

Re: "this case has zero to do with Erie, as this was clearly a case of Federal patent law."
There is no preemption or definition in patent law of what kind of contractual arrangement constitutes an "on sale" bar. Furthermore, the Sup. Ct. gave it a standard commercial definition, overruling prior Fed. Cir. decisions.
Not every legal issue that arises in patent cases is entitled to special definitions unique to patent cases, nor did the Fed. Cir. even argue for that in this case.

[skeptical]

Mr. Morgan - the "on sale" bar is part and parcel of the Federal law of 102.

What the Supreme Court does is very much part of the problem with the Federal (statutory) law - maybe you should try harder to be aware of that.