A fax invalidates a patent due to the on sale bar

Ryan Chirnomas | June 8, 2016

Merck & Cie et al. v. Watson Laboratories, Inc.

May 13, 2016

Before Dyk, Mayer and Hughes.  Opinion by Mayer.

Summary

Over a year before filing for a patent on the drug MTHF, Merck corresponded with a potential commercial partner regarding sale of a small quantity of the drug.  Although the sale was never consummated, the correspondence was sufficient to be an invalidating offer for sale.  In particular, a fax providing price, quantity and delivery information in response to a specific request for such information was considered sufficient, even though safety and liability information was not yet provided.

Details

Background

Merck is the owner of USP 6,441,168, the application for which was filed on April 17, 2000.  The ‘168 patent issued on August 27, 2002, and claims a crystalline calcium salt of a tetrahydrofolic acid (MTHF).  In 2013, Watson filed an ANDA application seeking FDA approval to sell a generic oral contraceptive including MTHF.   Watson stipulated that the patent was infringed if valid.  The district court held that claims were not anticipated, obvious or invalid due to lack of written description.  The district court also held that there was no invalidating sale or offer to sell.

The facts

In 1997, Merck and a company called Weider Nutrition International began looking into a strategic partnership relating to dietary supplements with Merck ingredients, including a potential joint venture to market and distribute MTHF.  In February 1998, the parties signed a Confidentiality Agreement stating:

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.

Then, in August 1998, Weider told Merck that they were no longer interested in the joint venture.

Nonetheless, at the same time, Weider told Merck that it was interested in buying 2 kilograms of MTHF.  Weider requested a price, and stated that they wanted to handle the purchase in the manner that was “simplest…for both companies.”   On September 9, 1998, a manager from Merck replied with a signed fax stating the following:

[W]e would like to handle your purchase of [MTHF] very simpl[y].

Therefore please send the order to my attention and I will arrange everything. In addition we need the exact delivery address/person.

The price is 25,000 US$ per kg [of MTHF] free delivered to your R&D center in the U.S. Payment terms are 60 days net. With Rick Blair and Richard Bizzaro we discussed a purchase of 2 kg [of MTHF]. If you need more, we have no problem for an immediate[] delivery. After receiving your order you will get the official confirmation of the order.

On September 16, 1998, the purchasing manager from Weider replied, indicating that he would like purchase 2 kg, but that he needed additional information to complete their purchase order.  This additional information included the specification sheet and material safety data sheet for MTHF, as well as a certificate of insurance.

On September 25, 1998, Merck sent Weider the specification and material safety data sheets, and stated that the certificate of insurance would be sent “after the first dispatch of [the] product”.  The September 25, 1998 communication also reiterated the price and delivery of the MTHF.  On October 8, 1998, Merck confirmed to Weider that it had placed a first order for 2 kg of MTHF.

However, after this, Merck met with a competitor of Weider, who informed Merck that they were interested in obtaining exclusive rights to market MTHF in the U.S. and Canada.  In November 1998, an internal Weider memo stated that it needed to track its MTHF order and determine a delivery date.  In December, Merck agreed to try to locate the order.  In January 1999, Merck inquired with Weider as to whether the order was still “active”.   On January 6, 1999, a Weider internal email stated that “Merck wasn’t expecting us to buy any [MTHF] immediately,” and that there would be no dire consequences to canceling the order.  On January 9, 1999, Weider sent an email to Merck informing them of a “mutual decision” to cancel the “existing order” for MTHF.

When these facts were raised in the district court litigation, the court held that Merck’s September 9, 1998 fax was not an invalidating commercial offer because it did not include “important safety and liability terms.”  The district court also noted that the Confidentiality Agreement required that a “definitive agreement” must be signed by both parties, and that no agreement had been reduced to writing and signed by both parties.  The district court concluded held that there had been no legally binding sale.

The Decision

First, the CAFC reiterated that an on-sale bar exists where the claimed invention is (1) ready for patenting and (2) subject to a commercial offer for sale prior to the critical date of one year prior to the application filing date (in this case, April 17, 1999).  There was no challenge as to whether MTHF was ready for patenting as of September 9, 1998.  Thus, the only issue in this case is whether the fax to Weider was a commercial offer for sale according to the law of contracts as generally understood.

The CAFC concluded that the September 9, 1998 fax did constitute a commercial offer for sale for several reasons.  First, the fax was not an unsolicited price quote sent to many potential customers, but rather was a response to a specific inquiry from Weider.  The fax included all the elements of an offer for sale, including price, delivery and payment terms.  Moreover, the Merck representative did not qualify the offer, and instead stated that he would “arrange everything.”

Although Merck argued that the fax was not an offer to sell because “neither Weider nor Merck ever acted as if Merck had made…a binding offer to sell,” the CAFC disagreed.  In particular, the CAFC pointed to the events which followed the fax:  an email from Weider reiterating the requested quantity and delivery information, request and provision of data safety sheet, and the request for a certificate of insurance and Merck’s reiterating of the price, quantity and delivery information.  As such, both parties understood that the fax was treated as an offer to sell, regardless of whether a binding contract was established at any point.

Additionally, the CAFC criticized the district court, which concluded that the fax was not an offer because MTHF was a potentially dangerous new drug and “important safety and liability terms” were omitted.  However, the CAFC found no evidence that the drug actually is “dangerous” and, more importantly, found no evidence that inclusion of the safety and liability terms was standard industry practice in an offer to sell.

The CAFC went on to stress the documentary record, and that the question is not whether the drug would have ultimately been sold without the safety and liability issues being resolved.  The court came back to the fax which included Merck’s representative agreeing to “arrange everything” and “immediately” supply the drug.  The CAFC cited to Cargill v. Canbra Foods, where a written response, including price, quantity and shipping terms, provided in response to a verbal purchase request, was regarded as an invalidating commercial offer.  In Cargill, like in the present case, even if an employee testified that they subjectively did not consider a document to be an offer for sale, the objective documentary evidence of the communication was sufficient.

Merck also attempted to argue that the fax was not an invalidating commercial offer because the Confidentiality Agreement required a “definitive agreement” to be “signed by both parties.”  However, there is no evidence of this Confidentiality Agreement, which was drafted for a possible joint venture, applying to a standalone sale.   Furthermore, even if the Confidentiality Agreement did apply to a standalone sale, the “signed by both parties” requirement only relates to a “definitive agreement,” not an offer.

Finally, Merck argued that the Confidentiality Agreement required that an offer to sell must include the signature of the offering party and an invitation for the other party to accept to form a “definitive agreement.”  However, the CAFC disagreed, and stated that the Confidentially Agreement does not require an offer for sale and a completed sales agreement to be combined in the same document.

Therefore, the CAFC held that the September 9, 1998 fax was an invalidating offer to sell, and the patent is invalid.

Take Away

Caution should be exercised when providing any written information about a potential purchase of a product which is ready for patenting.    Additionally, this case serves as a clear reminder that the on sale bar of 35 U.S.C. §102 includes two separate bars: one relating to an offer to sell and another relating to an actual sale.

Full Opinion

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