In re Kollar: A Licensing Exception to The Section 102(b) Bar for Process Patents

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1 In re Kollar: A Licensing Exception to The Section 102(b) Bar for Process Patents By Roderick M. Thompson of Farella Braun + Martel LLP Copyright 2003 Roderick M. Thompson

2 The Federal Circuit in In re Kollar stated as established law that "merely granting a license to an invention, without more, does not trigger the on-sale bar." 1 Before Kollar, few cases lent support for such a bright line, which can be read as being at odds with the policy interest served by section 102(b) to prevent the patentee from enjoying the benefits of commercialization beyond the statutory term. Kollar allows a method patentee to grant licenses and realize revenues from that exploitation of the invention without starting the one-year 102(b) clock, so long as none of the licensees sells or offers to sell a product made by the patented process or to perform the process commercially. Kollar is best understood when seen in light of a recent effort by the courts to provide greater certainty and predictability in 102(b) jurisprudence. DEVELOPMENT OF THE COMMERCIAL OFFER FOR SALE IN PFAFF AS PART OF THE QUEST FOR GREATER PREDICTABILITY Section 102(b) provides for the invalidation of a patent if the invention was "in public use or on sale in this country more than one year prior to the date of the application for patent in the United States." 2 In 1997, the U.S. Supreme Court addressed the correct test for applying the 102(b) bar in Pfaff. 3 Before the critical date, the inventor had prepared detailed engineering drawings of his invention for mounting and removing carriers for semiconductor chips, and provided the drawings to his customer. Based on the drawings, the customer issued a purchase order for 30,000 units. After the critical date, the inventor made a prototype and went into production. There was no dispute that the detailed drawings provided an enabling description of the invention but that the invention had not been reduced to practice until after the critical date. The Federal Circuit held the patent invalid as barred by the commercial offer for sale reflected in the acceptance of the purchase order, reasoning the invention was "substantially 2

3 complete" at the time. After reviewing the conflicting case law and the language of section 102(b) as to whether an invalidating offer for sale could be satisfied when there had not been a reduction to practice, the Court affirmed, holding that it was not essential that the invention be reduced to practice in order to be on sale. 4 The Supreme Court determined that the then-existing "totality of the circumstances" test was unnecessarily vague and "seriously undermine[d] the interest in certainty." 5 In Pfaff, the Supreme Court instead adopted a two-part test for invalidating a patent under the onsale bar of section 102(b). In an effort to lend more certainty to the effort, the Court held that a patent is invalid if, prior to the critical date one year before the date the patent application was filed, the invention was: (1) the subject of a commercial offer for sale; and (2) ready for patenting. 6 While Pfaff provided some degree of clarity to the law regarding the on-sale bar in application of the "ready for patenting" prong, questions remained regarding the meaning of the "commercial offer" element of the Pfaff test. The commercial offer for sale was not at issue in Pfaff, as the parties did not dispute that the requisite "offer had been made" and a sale completed before the critical date. 7 The issue facing the Court was whether the invention could have been on sale before it was reduced to practice. While Pfaff set forth the requirement that there be "a commercial offer for sale," it did not spell out what would constitute such an offer. Its focus was on trying to promote certainty and predictability in the law, reasoning that: [T]he product must be the subject of a commercial offer for sale. An inventor can both understand and control the timing of the first commercial marketing of his invention... we 3

4 perceive no reason why unmanageable uncertainty should attend a rule that measures the application of the on-sale bar of 102(b) against the date when an invention that is ready for patenting is first marketed commercially. (Emphasis added). 8 The Pfaff court thus equated the date an invention is first marketed commercially with the date that the product is the subject of a commercial offer for sale. But the Court did not otherwise define the term commercial offer for sale. GROUP ONE: THE FEDERAL CIRCUIT PURSUES THE CERTAINTY LEAD Three years after Pfaff the Federal Circuit added some additional guidance on the meaning of a "commercial offer for sale." The Federal Circuit, in a pre-pfaff case, RCA Corporation v. Data General Corporation, 9 had suggested that an offer for sale need not "rise to the level of a formal 'offer' under contract law principles." Another case had said it was enough that the offer to sell was "definite" and "objectively manifested." 10 Pfaff did not address the issue directly and did not purport to overrule prior precedent on what constitutes a "commercial offer for sale." Nonetheless in Group One, Ltd. v. Hallmark Cards, Inc., 11 applying on Pfaff, the Federal Circuit held that in order to constitute a bar under 102(b), "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." 12 In Group One, the purported "offer" for sale at issue was based upon a letter from the patentee suggesting that it "could provide the machine and/or the technology and work on a license/royalty basis," followed by preliminary oral discussions of the technology. 13 The district court found (and the Federal Circuit agreed) there was no commercial offer for sale based on "the indefinite nature of the communications between the parties and the lack of specific terms such as price and quantity, finding that these factors suggested preliminary proposals or invitations to negotiate, rather than a formal offer." 14 The district court found 4

5 that while these communications "did not constitute a formal offer for sale in the contract sense, they did constitute an offer for sale in the 102(b) on-sale bar context," relying on the language in RCA set forth above. 15 The Federal Circuit reversed the district court as there was no "commercial offer for sale" that could have resulted in a binding contract by simply accepting the offer. 16 The court went on to note that "the question of whether an invention is the subject of a commercial offer for sale is a matter of Federal Circuit law, to be analyzed under the law of contracts as generally understood." 17 In reaching that holding, the Court rejected the "dictum" in RCA. 18 offer: The Group One court provided some guidance as to what is required by a formal [c]ontract law traditionally recognizes that 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. In any given circumstance, who is the offeror, and what constitutes a definite offer, requires looking closely at the language of the proposal itself. 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." 19 The Federal Circuit cited with approval the UCC, as well as the Restatement (Second) of Contracts ("Restatement") and other established contract treatises as representative of the "substantial body of general contract law, widely shared by both state and federal courts, to which courts can resort in making these determinations." 20 The Group One requirement that there be a formal offer has narrowed the scope of conduct that will result in the application of the on-sale bar. In subsequent cases, conduct that almost certainly would have triggered the on-sale bar prior to Group One has been found not to be a commercial offer for sale under the principles of contract law. 5

6 KOLLAR: THE FEDERAL CIRCUIT PROVIDES MORE CERTAINTY BY ANNOUNCING LICENSING EXCEPTION In re Kollar held that licensing a process that is later patented does not trigger the onsale bar. 21 The sale of the "right to commercialize" an invention by itself is insufficient to constitute a commercial offer for sale under 102(b). 22 This decision involved an inventor's pro se appeal from a patent office decision of unpatentability. The Federal Circuit agreed with the patent office that Mr. Kollar's invention, a process for the preparation of dialkyl peroxide, was ready for patenting at the time of his commercial activities. However, the court held the patent office had erred in finding that the invention was the subject of a commercial offer for sale based on an agreement by the inventor's company to provide know-how and to license future patents to Celanese Corporation. The Court explained: A tangible item is on sale when, as we held in Group One, the transaction 'rises to the level of a commercial offer for sale' under the Uniform Commercial Code. When money changes hands as a result of the transfer of title to the tangible item, a sale normally has occurred. A process, however, is a different kind of invention; it consists of acts, rather than a tangible item. It consists of doing something, and therefore has to be carried out or performed. A process is thus not sold in the same sense as is a tangible item. "Know-how" describing what the process consists of and how the process should be carried out may be sold in the sense that the buyer acquires knowledge of the process and obtains the freedom to carry it out pursuant to the terms of the transaction. However, such a transaction is not a "sale" of the invention within the meaning of 102(b) because the process has not been carried out or performed as a result of the transaction. (citation omitted) 23 The Federal Circuit reasoned in Kollar that the know-how license of to-be-patented technology, contained within the broader Celanese research and development agreement, was not a commercial offer for sale or a sale under Group One. The court left open the 6

7 possibility that the licensee, through a sale of a product made by the licensed process, might have invalidated the patent and remanded. 24 That result can be contrasted with Scaltech, Inc. v. Retec/Tetra, LLC, which held that the on-sale bar applies when a inventor offers to use the patented process for the benefit of a third party. 25 In Scaltech, a patentee's offer to process petroleum waste for another using the process embodied in the patent was found to constitute an offer for sale under 102(b). 26 Kollar distinguished Scaltech as involving "an offer to perform the process commercially for consideration," and not "merely the transfer of a license to practice the invention" in exchange for future royalties. 27 To reconcile the cases, courts may focus on whether the offer involves the inventor s actually using the process (as in Scaltech ) or merely licensing the process know-how that will enable others to use it (as in Kollar). The Kollar court suggested an offer by a licensee to perform the process commercially would also constitute a "commercial offer for sale" under Pfaff. KOLLAR MAY CONFLICT WITH THE OVERRIDING POLICY INTEREST BEHIND SECTION 102(B): PREVENTING COMMERCIALIZATION BEYOND THE STATUTORY TERM Federal Circuit cases have identified the purpose of discouraging attempts to extend the length of the effective patent monopoly by commercially exploiting a new invention and only applying for a patent when faced with competition as the most important policy interest served by section 102(b). 28 In particular, "the overriding concern of the on-sale bars [is discouraging] an inventor's attempt to commercialize his invention beyond the statutory term." 29 The Kollar court reasoned that "exempting licenses under a patent from the on-sale bar is not inconsistent" with this policy. The court emphasized that the patent in question was a method patent, covering a process for the preparation of a dialkyl peroxide used to manufacture ethylene glycol. In contrast to the situation involving the sale or offer for sale 7

8 of an apparatus, "the issue concerning the on-sale bar is not whether the process is physically represented or enabled by a written description, but whether the process has been commercialized." As noted, the court emphasized that a process "is not sold in the same sense as is a tangible item." A sale of the know how to perform the process even in written form is not a sale for 102(b) purposes "because the process has not been carried out or performed as a result of the transaction." Although "an inventor may economically benefit somewhat" from by upfront fess or advance royalties, the court explained the "real benefit from commercializing an invention" comes later when "the invention is actually utilized commercially." The court concluded without further explanation that "the grant of a license" is "part of the pre-commercialization process aimed at making the invention commercial." The court noted that its ruling "exempting licenses under a patent from the on- sale bar" would delay occurrence of the event triggering Section 102(b), but reasoned that the ruling would encourage making inventions available to the public, placing them into the hands of the person best able to commercialize them. The Kollar court suggested a rationale to protect small inventors without the means to produce commercial embodiments of the products that can be made from the patented processes. "Many inventors do not have the resources to produce commercial embodiments of their inventions, and therefore the ability to license or assign without fear of triggering the on-sale bar facilitates providing the public with the benefit of their inventions under circumstances in which they might not otherwise have the ability or the incentive to do so." Nonetheless, the Kollar licensing exception is not limited to small inventors. 1 In re Kollar 286 F.3d 1326, (Fed Cir. 2002) U.S.C. 102(b). 3 Pfaff v. Wells Electronics, Inc, 525 U.S. 55, 119 S.Ct. 304 (1998). 8

9 4 Pfaff, 525 U.S. at Pfaff, 525 U.S. 55, 66 &, 525 U.S. 55, 66 & n Id.at Pfaff, 525 U.S. at Pfaff, 525 U.S. at 67 (emphasis added). 9 RCA Corp., 887 F.2d 1056 (Fed. Cir. 1989). 10 See, e.g., Envirotech Corp. v. Westech Engineering Inc., 904 F.2d 1571, 1575 (Fed. Cir. 1990). 11 Group One, 254 F.3d 1041 (Fed. Cir. 2001). 12 Id. at Id. at Id. at 1047 (emphasis added). 15 Id. at Id. at Id. 18 Id. 19 Id. at 1048 (citations omitted). 20 Id. At Id. In re Kollar, 286 F.3d 1326 (Fed. Cir. 2002). 22 Id.at Id. at Id. at Scaltech, 269 F.3d 1321, 1328 (Fed. Cir. 2001). 26 Id. 27 In re Kollar, 286 F.3d at See Note, "New Guidelines for Applying the "On Sale" Bar to Patentability, 24 Stan. L. Rev. 730, (1972). See also Joy Technologies Inc. v. Flakt Inc., 820 F.Supp. 802, 810 (D. Del. 1993). 29 STX, LLC v. Brine, Inc., 211 F.3d 588, 590, 54 USPQ 2d 1347, 1349 (Fed. Cir. 2000) (emphasis added). 9