Recent district court and U.S. Court of Appeals for the Federal Circuit decisions highlight the importance of carefully drafted procurement contracts when there is a possibility that patent rights may attach to the item being procured. At the beginning of the product development cycle, engineers and inventors typically test the concept with early prototypes and modify the item until it appears ready for commercialization. After the item clears this early testing phase, it typically enters a development phase where there may be further refinements and, if it appears to have market value at that stage, it enters the manufacturing stage. If a company does not have the ability to manufacture it (which is often the case for startups, entrepreneurs, individual inventors or small businesses), does not want to burden its own capacity with a noncommercial product, or if it is simply more economically feasible to outsource the production, then a procurement order is sent to an outside party. Care should be taken at this stage to avoid characterizing the “procurement order” as a purchase order for reasons that will become clear later.
The exchange of information between the IP owner and the potential manufacturer can be critical to determinations that are central to the right to secure patent protection for the item if it does in fact become a commercially successful product. While the above does not seem unusual as a business practice, the Federal Circuit recently determined, in Hamilton Beach Brands v. Sunbeam Products, 726 F.3d 1370 (Fed. Cir. 2013), that the activities associated with this common scenario can amount to a bar against obtaining patent protection for the item.
