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Companies that regularly dream up new technologies often focus on getting those technologies into the marketplace as quickly as possible. Speed can give the innovators a jump on the competition and spark consumer demand. But when it comes to patent protection, speed can also kill. In the patent arena, timing is everything. Companies seeking to commercialize an invention prior to filing a patent application must watch the calendar: Commercial activity that comes more than one year before filing for a patent may forever bar the obtaining of a valid patent for the invention. A key question is what constitutes “commercial activity” sufficient to raise this bar. When does a company hawking its newest new thing cross the line? Does the distinction between offering to sell and offering to license the patented product matter? The courts have not been entirely clear. Section 102(b) of the Patent Act simply prohibits the patenting of an “invention” that has been “on sale” for more than one year prior to the date of filing a patent application. The date before which the product or process cannot be on sale is known as the critical date. In 1998, the U.S. Supreme Court addressed the on-sale bar in Pfaff v. Wells Electronics Inc.Describing the bar as a “limiting” provision that both excludes ideas in the public domain from patent protection and confines the duration of the patent monopoly to the statutory term, the Court announced a two-prong test for determining whether an invention has been placed on sale. The 9-0 opinion focused on the first prong, the “ready for patenting” standard. It left construction of the second prong, the “commercial offer for sale” standard, to the U.S. Court of Appeals for the Federal Circuit. The Federal Circuit has applied the “commercial offer for sale” requirement a number of times since Pfaff. In its most recent case, Group One Ltd. v. Hallmark Cards Inc., the circuit on June 15, 2001, reversed the lower court’s determination of what constitutes a “commercial offer for sale” for purposes of �102(b) and remanded the case for further proceedings. In so doing, the Group Onedecision clarified two important issues. First, Group One asked, can something less than a formal offer under contract law constitute a “commercial offer for sale” sufficient to invoke the bar? Second, does an offer to license a patent on an invention constitute a “commercial offer for sale” of the invention itself? Group One had developed a method for curling decorative ribbon and a machine for performing the method. It obtained patents on both the method and the machine, which it asserted against Hallmark based on that company’s manufacture of curled-ribbon products. Hallmark responded that Group One’s patents were invalid on the ground that the machine and method had been on sale more than one year prior to the filing of Group One’s patent application. Hallmark’s argument was based on its own correspondence with Group One. Prior to filing for a U.S. patent, Frederic Goldstein, the inventor of the Group One curling-ribbon method, “attempted to generate interest in his device, commencing a series of communications with Hallmark (and others),” according to the Federal Circuit. He wrote to Hallmark: “We have developed a machine which can curl and shred ribbon so that Hallmark can produce the product you see enclosed — a bag of already curled and shredded ribbon. … We could provide the machine and/or the technology and work on a license/royalty basis.” Goldstein and Hallmark employees also had a telephone conference “in which the parties discussed details of Group One’s machine and method.” That was the full extent of the parties’ interaction. Later Hallmark developed its own machine and began selling its “Curl Cascade” and “Curl Fill” products. Group One sued the card-maker for patent infringement. The U.S. District Court for the Western District of Missouri granted summary judgment of invalidity in favor of Hallmark (which is based in St. Louis). While the pre-critical-date communications did not constitute a formal offer “in the contract sense,” said the district court, the parties’ correspondence was sufficient to raise the on-sale bar and thus invalidate the patents. In so holding, the trial court relied on the Federal Circuit’s language in a 1989 case, RCA Corp. v. Data General Corp.: “While th[e] requirement [of a definite offer to sell] may be met by a patentee’s commercial activity which does not rise to the level of a formal ‘offer’ under contract law principles, a definite offer in the contract sense clearly meets this requirement.” MAKE ME AN OFFER Group One appealed, and the Federal Circuit reversed. The appellate court concluded that Group One had not made a commercial offer for sale, and there was thus no bar. The court first rejected the statement from RCA that an offer for sale need not “rise to the level of a formal ‘offer’ under contract law principles” as “non-binding dictum.” Then it concluded that there is no binding precedent that “something less than offer to contract” can be an offer for sale for purposes of the on-sale bar. Emphasizing the Supreme Court’s use of the term “commercial offer for sale” in Pfaff, the Federal Circuit reasoned that such language “strongly suggests that the offer must meet the level of an offer for sale in the contract sense, one that would be understood as such in the commercial community.” The appeals court concluded that such an interpretation “leaves no room for activity which does not rise to the level of a formal offer under contract law principles.” As for what constitutes a “commercial offer for sale,” the Federal Circuit looked to the law of contracts as “generally understood” (as opposed to the contract law of any specific state), as well as to the Uniform Commercial Code. It held that to raise the on-sale bar, an offer for sale must be one that “the other party could make into a binding contract by simple acceptance (assuming consideration).” Applying that standard, the Federal Circuit reversed the district court’s summary judgment because Group One had not made a formal offer to Hallmark. While the Federal Circuit declined “to offer rules or even binding guidance” as to what types of interactions could constitute a commercial offer to sell, noting that such an offer “would be little more than obiter dicta,” it did note “in passing” certain traditional contract principles, as set forth in the Restatement (Second) of Contracts. First, “mere advertising and promoting of a product may be nothing more than an invitation for offers, while responding to such an invitation may itself be an offer.” Second, the Federal Circuit observed, “Language suggesting a legal offer, such as ‘I offer’ or ‘I promise,’ can be contrasted with language suggesting more preliminary negotiations, such as ‘I quote’ or ‘are you interested.’ ” “ Differing phrases,” the court said, “are evidence of differing intent, but no one phrase is necessarily controlling.” TO LICENSE OR TO SELL? Group One had put forth an alternative theory for the absence of an on-sale bar — that it was only offering to license its patents to Hallmark, not to sell the patented invention. This theory elicited some dissension among the three judges in Group One. While noting precedent “to the effect that a sale of rights in a patent” does not raise the on-sale bar, Senior Judge S. Jay Plager and Judge Arthur Gajarsa concluded that the Federal Circuit need not reach this issue in view of its conclusion that there had been no commercial offer for sale. The two judges nevertheless stated that the district court had improperly resolved this licensing question on summary judgment because there were disputed issues as to whether Group One had offered to license the machine or the patent rights on the machine. Judge Alan Lourie, however, filed additional remarks to specifically validate Group One’s alternative theory. He pointed to Group One’s “frequent” references to a “license/royalty basis”: The communications from Goldstein attempting to interest Hallmark in his invention unmistakably bore the marks of an offer to license the invention rather than an offer to sell it. … There is no indication that the machine Goldstein intended to patent was to be sold. No price was specified, no date of delivery. … [Goldstein's one reference to selling the machine] does not override the frequent references to providing the machine on a license/royalty basis. The difference between a license and a sale is relevant to on-sale law, wrote Judge Lourie. And the difference is that the offering of a license does not raise the on-sale bar. The judge explained: The on-sale bar is intended to limit the time for an inventor to commercialize an invention before filing a patent application. The statute refers to a patented invention itself being on sale, not to an agreement with another party concerning the commercialization of the invention at some future time, following which the invention would then be placed on sale. … With a license, the licensee of a machine would not normally be able to immediately begin commercialization of the invention, whereas if the machine had been sold, the sale itself is the commercialization that starts the on-sale clock running. In other words, a “commercial offer for sale” constitutes the actual commercialization of an invention, and not an action taken preparatory to actual commercialization. Indeed, Judge Lourie noted that in practice, “the grant of licenses often long precedes commercialization by sale of the invention.” The judge further acknowledged that the distinction between a license and a sale is not always crystal clear: “There may be instances in which a license is tantamount to a sale, and in which a bar may arise from a license.” Judge Lourie cited the example of a computer program transferred with a shrink-wrap license, under which the buyer/ licensee is prevented from duplicating the program or distributing it to others, but where the product nevertheless is “immediately transferred to the ‘buyer’ as if it were sold,” and “it is not contemplated that the product will ever be returned to the seller.” Nonetheless, Judge Lourie found the distinction between a license and a sale clear enough in Group One. Group One was not offering to sell its machine to Hallmark. Instead, the offer “contemplated that Hallmark go into the business of using the patented machine and method to curl ribbon, which Hallmark would then sell.” For those counting down the days until the patent application is filed, the majority opinion and Judge Lourie’s additional remarks suggest that the “commercial offer for sale” standard still leaves some room to discuss future exploitation of their invention. But they might want to confine those talks to the possibilities of licensing — at least until after the patent application is filed. Elizabeth S. Weiswasser is a partner and David P. Ruschke is an associate in the patent litigation and counseling practice in the Washington, D.C., office of Covington & Burling.

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