Managing IP So the ‘First Sale’ Is Not the ‘Last Nail’

Written by: Rex A. Donnelly

This article first appeared in the April 2, 2019 edition of the Legal Intelligencer.  

Numerous opportunities and pitfalls lay in wait along the path to launching a new product. Integrating IP into the design process from an early stage is critical.

Your company is excited to launch a new product—the feeling of anticipation is in the air! Just wait until your customers see it! But, have you done your homework? Will the first sale mark a great new era for your company? Or will it be the last nail in the proverbial coffin, eradicating potential intellectual property (IP) rights associated with the product and permitting competitors to capitalize on your hard work?

Numerous opportunities and pitfalls lay in wait along the path to launching a new product. Integrating IP into the design process from an early stage is critical. The U.S. Supreme Court recently clarified an issue relating to one of those pitfalls, namely the “first sale bar.” In Helsinn Healthcare v. Teva Pharmaceuticals USA, 586 U.S. ___ (2019), the court considered the issue of whether a commercial sale, even if kept confidential, can bar patentability. This decision provides a good opportunity to discuss IP considerations surrounding first sales and new product development, generally.

Coordination between design teams and IP counsel is key to understanding risks and opportunities. For some IP rights, the first sale is an important milestone that can either open or close a window for securing rights. For example, in some countries, the first sale bars patentability from that point forward. Under U.S. law, the first sale is typically a prerequisite for a trademark application to mature to registration.

The first sale not only implicates deadlines for obtaining IP protection, but also exposes your company to threats from others. It may mark the first time an IP rights-holder can study your new product to support an allegation of infringement. Conducting patent and trademark clearance studies early in the project life cycle can minimize exposure and can identify “white space” between the IP rights of others, where a new product can stake out strong protection (or at least avoid landmines). Such studies may also identify a need for licensing, redesign, or for an opinion of counsel that your new product does not infringe a valid right.

Before discussing Helsinn, first some background: only inventions that are new and nonobvious are eligible for patenting. While a public disclosure or a commercial sale of a new invention bars patentability in many jurisdictions on day one, a one-year grace period is available in the United States (and some other jurisdictions, under certain conditions) during which the inventors may still file a patent application without the first disclosure or sale serving as a bar to patentability.

Helsinn had developed a new medication and was conducting clinical trials of various formulations. A distributor paid Helsinn for the right to distribute that medication as soon as at least one formulation received FDA approval. Existence of the contract between Helsinn and the distributor was public knowledge, but details of the formulations under trial were not, and the distributor was obligated to preserve confidentiality. Two years after entering into the agreements, but before any delivery of product, Helsinn filed a patent application directed to the subject formulations. Teva, accused of infringing an issued patent that matured from Helsinn’s patent application, alleged the patent was invalid, because the claimed formulations were “on sale” more than one year before the filing date of the first patent application. Although Supreme Court decisions prior to implementation of the America Invents Act (2012) (AIA) had well established an “offer for sale” of an article “ready for patenting” can as a bar to patentability, even if the sale did not publicly disclose the invention, and even if no product was actually delivered, Helsinn argued the AIA changed the law. While the AIA uses the same “on sale” language as the prior statute, the relevant portion of 35 U.S.C. Section 102(a) now reads “on sale, or otherwise available to the public.” Helsinn argued this change now required the details of the invention to be public from the sale. The Supreme Court disagreed.

Filing a patent application before the first sale or public disclosure is the best practice to preserve maximum rights worldwide. But, what if you need to test a new product before you can launch it? In many cases, the inventor understands enough about the invention to describe it in enough detail for patenting, even while development is ongoing to refine a commercial embodiment or to satisfy a regulatory authority. Filing a provisional patent application can cover what the inventor knows and what he has to disclose during testing. Because a provisional application must provide sufficient disclosure to support the claims of the later nonprovisional application, careful preparation is still important. You can file supplemental provisional applications to cover refinements and can then bundle multiple provisional applications into a single nonprovisional application filed no more than a year after filing the first provisional application. Continuation-in-part (CIP) applications and new stand-alone applications can cover subsequent improvements. Because a design patent cannot claim priority from a provisional application, retaining maximum flexibility may require filing both a design patent application and a provisional utility patent application before the first sale. A strategy of filing early and often can build a strong patent portfolio.

An inventor must be “in possession of the invention” when the application is filed. If you are truly unsure whether the invention will work at all, or you still need to determine parameters critical to the functionality of the invention, you may have to rely on the “experimental use” exception to the on-sale bar. Experimental use is not public use. Assessing whether activity is “experimental use” or an invalidating “public use” involves considering the “totality of the circumstances,” including the amount of control retained by the inventor over the use, obligations of confidentiality, public aspects of the use, duration of the testing, and payments to the inventor. This is a complicated area of the law fraught with peril. Consulting with a patent attorney can help you weigh your options. In addition to the risks associated with an early public disclosure or sale being a bar to patentability, the “first-inventor-to-file” provisions of the AIA impose the additional risk that someone else may independently beat you to the patent office and foreclose your potential patent rights. A comprehensive strategy can mitigate risks while maximizing lifetime of any resulting patent. Maximizing lifetime of pharmaceutical patents often delivers extraordinary value, which perhaps prompted Helsinn to take a risk. In most industries, however, the end of patent life has less commercial significance, and typically justifies the more conservative approach of filing as soon as possible.

First sales are relevant to other types of IP law as well, warranting a holistic view of IP protection. Companies often develop branding for a new product long before the first sale. Filing an intent to use (ITU) trademark application reserves rights early, but the application cannot mature to registration until actual use of the mark begins. After receiving a notice of allowance, applicants have a limited time (three years, after filing a maximum number of extensions) to show use of the mark in commerce before an ITU application goes abandoned. Recently, as the potential abandonment date loomed, a client was still making tweaks to the commercial product relevant to an intended design patent application. By carefully coordinating the product launch, we were able to file the patent application a day before a first shipment to a customer, which was just in time to show evidence of use to preserve trademark rights.

The interplay between first sale, utility patents, design protection, trademarks, and copyrights differs from country to country. If reading this article gives you a sinking feeling your window of opportunity for IP protection has already closed, do not wait a second longer to start investigating your options. You may still be able to salvage some protection post-launch. Some grace periods may still be available. A utility patent can cover a nonobvious improvement. A small change in aesthetics may be eligible for design protection. Under the right circumstances, and given some time, the same features initially protectable via a design patent may be eligible for protection as registered trade dress. Use strengthens trademark rights. Copyright protection vests in the name of the author at creation of the work. You can typically secure trademark and copyright registrations long after first use or publication. Nonetheless, understanding your rights and securing protection early has distinct advantages over waiting until a threat prompts a need to enforce rights.

In conclusion, if you are launching a new product, investigate IP issues long before the first sale. Best practices involve understanding and preserving offensive and defensive positions as early as possible. Even if you fear you are already too late—wait no longer to investigate. Whether you are ahead of the curve or behind the eight ball, an IP attorney can help.