Monday, 19 August 2013

Hamilton v Sunbeam: when outsourcing triggers the on-sale bar

On Wednesday, the US Court of Appeals for the Federal Circuit issued an interesting judgment in Hamilton Beach Brands Inc. v Sunbeam Products Inc., affirming the applicability of the on-sale bar in a case where the invalidating offer for sale came from a foreign supplier, which the patent holder had asked to manufacture products embodying the patent invention. The dissenting opinion argued, instead, that the majority failed to evaluate the commercial nature of the offer for sale, and the experimental purpose of the purchase order. Under the pre-AIA 35 USC § 102(b), the on-sale bar prevented the patentability of an invention which was on sale in the US more than one year prior to the date of the patent application: the rule aimed at obtaining widespread disclosure of new inventions as soon as possible, and at preventing the inventor from commercially exploiting the exclusivity of his invention substantially beyond the statutorily authorised period (RCA Corp. v Data Gen. Corp.). The Supreme Court, in Pfaff v Wells Electronics Inc., clarified that the on-sale bar is applicable to an invention which (i) is the subject of a commercial offer for sale not primarily for experimental purposes, and (ii) is ready for patenting.

On February 8, 2005, Hamilton Beach issued a purchase order to its supplier for the manufacture of almost 2000 units of its Stay or Go® slow cookers (electrically heated pots used for cooking food at low temperatures); on February 25, the supplier confirmed receiving the order, adding that it would begin production upon receipt of Hamilton Beach's release. On March 1, 2006, Hamilton Beach filed a patent application, later issued as US Patent No. 7,485,831, claiming a portable 'slow cooker' equipped with clips, mounted on its body, to seal the detachable lid. The company brought the invention to the market through its line of Stay or Go® slow cookers. Sunbeam, a direct competitor in the small kitchen appliance sector, soon marketed the competing slow cooker Cook & Carry®, which featured sealing clips mounted on the lid of the pot. Hamilton Beach subsequently filed a continuation of its original application, claiming a slow cooker with lid-mounted clips. When the patent was issued in 2011 as US Patent No. 7,947,928, the patent holder immediately filed suit against Sunbeam for infringement.

The District Court for the Eastern District of Virginia ruled out infringement, and found the '928 patent to be invalid. This was because (i) it was not entitled to an earlier filing date because Hamilton Beach had added new matter when it had filed its continuation, and the sales of the Stay or Go® slow cooker, begun more than one year before that date, triggered the on-sale bar; and (ii) even if the patent was entitled to an earlier priority date, Hamilton Beach's purchase order with a foreign supplier constituted an invalidating commercial offer for sale.

The Federal Circuit limited its review to the applicability of § 102(b) to Hamilton Beach's purchase order with its supplier, and employed, as the earlier critical date, the date most favourable to the plaintiff (March 1, 2005 - one year before the '831 filing date). From the outset, citing Special Devices Inc. v OEA Inc., the court noted that 'there is no "supplier exception" to the on-sale bar'; further, even if the commercial offer for sale was made by a foreign entity, it fell under § 102(b), as it was directed to a US customer at its place of business in the US. The decision then analysed the District Court's reliance on Linear Tech. Corp. v Micrel Inc., under which the transmission of a purchase order, before the critical date, from a manufacturer to a supplier, which fulfils the order by manufacturing the requested items, constitutes an offer to buy, which 'amounts to an invalidating sale under § 102(b) as long as the offer is accepted and a binding contract to sell is formed'.

The court observed that Linear Tech (and thus the requirement of a binding contract) was factually distinguishable: in the case in hand, Hamilton Beach's supplier had, before the critical date, (i) confirmed receipt of the purchase order, and (ii) stated that it was ready to fulfil it upon release. Reciting previous case law, the decision clarified that a commercial offer for sale 'is one which the other party could make into a binding contract by simple acceptance', and held that the supplier's offer to sell the slow cookers to Hamilton Beach, which the latter could have made into a binding contract by simple acceptance, 'was enough to satisfy Pfaff's first prong without the need for a binding contract', even if the plaintiff provided the release only after the critical date.

Assessing whether the invention was 'ready for patenting' before the critical date, the Federal Circuit found that evidence of pre-critical date meetings with representatives of retail customers, during which detailed descriptions and drawings of the Stay or Go® slow cooker had been presented, was enough to satisfy the requirement. Although Hamilton Beach alleged that, before the critical date, its prototypes did not meet the '928 patent claim that the seals prevented any leakages from the interior of the pot, the court held that '[g]iven the relative simplicity of the invention, the descriptions and drawings Hamilton Beach showed to its retail customers and the specifications provided to its supplier [were] sufficiently enabling and, as an admitted commercial embodiment of the patent-in-suit, would meet every limitation of the asserted claims'. In this perspective, it was noted that the addition of minor improvements ('fine-tuning') to the invention after the critical date 'does not mean that the invention was not ready for patenting'.

Judge Reyna, in his dissenting opinion, argued that 'with no review of whether the offer was commercial in nature, the majority in this case has extended the no-supplier-exception rule to a case without considering whether the purchase order was placed for purely experimental purposes'. Although the majority noted that the plaintiff had not asserted an experimental use defence, the dissenting judge argued that Hamilton Beach's order appeared to be for experimental purpose, as, at the time, the company was still struggling to refine the invention in order to prevent food leakages, and the order was not the result of customer demand or projections. Thus, he concluded that:
My greatest concerns involve the implications this case will have for future innovators, most notably small enterprises and individual inventors who lack in-house prototyping and fabricating capabilities. […] Whenever the development process requires those entities to manufacture working prototypes or pre-mass-production samples, they often have no choice but to reach out to third party suppliers. Under the majority’s holding in this case, a single offer to buy for purely experimental purposes may trigger the on-sale bar, and the experimental-use exception will offer them no salvation.
The Federal Circuit's decision is likely to attract significant debate, as many companies rely on third party suppliers for manufacturing both their prototypes and final products. At first sight, the judgment appears to blur the line between a transaction of commercial nature and one justified by experimental purposes, as highlighted by Judge Reyna, and to arbitrarily extend the on-sale bar to the outsourcing of those prototyping activities which relate to the fine-tuning of the invention. A deeper look suggests, however, that, while the decision would have benefited from a more open discussion of these issues, the Federal Circuit did not depart from its established case law. On one side, the majority clarified that its opinion 'will not “eviscerate” [the experimental-use] defense', as it was neither raised, nor examined in the case. On the other, where such defence does not apply, the applicability of the on-sale bar appears justified by the policy considerations surrounding § 102(b), which favour the prompt disclosure of inventions ready for patenting, over commercial considerations which may delay their availability to the public. Although this balance lies on an evaluation which is subjective in nature, as a company may assess its invention's readiness through different criteria than those employed by a public authority, filing a patent application as early as possible is usually both a viable and a sensitive remedy. The changes introduced by the America Invents Act could, however, alter the functioning of the on-sale bar, as the sale must now make the invention available to the public (see the USPTO Guidelines II.B. 1.d), in order to trigger an invalidating effect.

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