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Archived updates for Wednesday, October 05, 2005

Requirements Supply Clause Leads to On-Sale Bar

In Enzo-Biochem v. Gen-Probe, II (Fed. Cir. September 30, 3005) the court held that the following language in an agreement involving joint funding of research and development on "any human diagnostic product resulting from the program of research whether or not invented or developed by Enzo prior to the effective date of this agreement" did was insufficient to invoke the research exception to the on-sale bar.

Paragraph 2.14 of the Enzo-Ortho agreement provided the following:

ENZO shall supply to ORTHO and ORTHO shall purchase from ENZO for use in Licensed Products no less than ninety percent (90%) of ORTHO’s United States requirements or seventy-five percent (75%) of ORTHO’s worldwide requirements of Active Ingredients; provided, however, that ENZO shall have this right to supply and ORTHO shall have this obligation to purchase only with regard to Active Ingredients supplied to ORTHO at prices and time schedules which are reasonably competitive with those of other sources. . . .

The agreement also contained a paragraph 2.12 reading as follows:
ENZO shall supply ORTHO at ENZO’s fully allocated cost with all quantities of
any Licensed Product reasonably required by ORTHO or any Affiliate for its own
research, development, and test marketing, including that required to perform
all preclinical and clinical studies.

Enzo filed a patent application in January 1986, more than one year after the execution of the agreement in August 1983 and the transfer of a probe under paragraph 2.12 in December 1984. At trial, Enzo argued that the agreement was solely for research purposes, citing paragraph 2.12 as indicating the parties’ mere hope that a commercial project might result from the collaboration did not transform the research agreement into a commercial offer for sale.

However, the Federal Circuit was not convinced:

We agree with Gen-Probe that paragraph 2.14 of the Enzo-Ortho agreement created the necessary contractual obligations on the parties to constitute a commercial offer for sale. See generally Group One, Ltd. v. Hallmark Cards, Inc., 254 F.3d 1041, 1046-48 (Fed. Cir. 2001) (discussing principles useful to determine whether a communication or series of communications rises to the level of a commercial offer for sale). While it is true that the agreement states throughout its text that the parties are interested in cooperating in certain experimental work, the language of paragraph 2.14, unlike paragraph 2.12 and other provisions that explicitly refer to research and development efforts, does not purport to be for such preliminary production of the probe. Instead, paragraph 2.14 is distinctly different from those earlier sections because it relates specifically to supply of Ortho’s worldwide requirements for what are clearly commercial purposes. Supply of worldwide requirements at reasonable times and prices surely means commercial supply, and the provision constitutes an offer to sell that has been accepted.

Enzo’s reliance upon our decision in Kollar is misplaced. In that case, the research and development agreement at issue contained language that conveyed to the licensee an exclusive license under any issued patent "to design, engineer, construct, and operate a pilot plant and one or more commercial plants, to sell the resultant products, and to sublicense others." 286 F.3d at 1330. The agreement language was held to provide the "right to commercialize" the invention at issue and was essentially a license, not a sale, because it only contemplated that "resultant products" could potentially be sold, and did not offer to sell products of the claimed
process. A key fact in that case was the fact that the involved invention was a
process rather than a tangible item or product; we acknowledged that "[a]
process is . . . not sold in the same sense as is a tangible item" because only the mere transfer of the know-how to carry out a given process has taken place and "the process has not been carried out or performed as a result of the transaction." Id. at 1332. An offer to sell a claimed product in being is quite different from a license to an undeveloped claimed process.

Here, in contrast, paragraph 2.14 of the Enzo-Ortho agreement cannot be considered to be only a research and development provision relating to an undeveloped process. Unlike the invention in Kollar, Enzo’s claimed invention, the polynucleotide probe, is a tangible item or product that can be sold or offered for sale. The language of that provision clearly imposes upon Enzo the obligation to sell and on Ortho the obligation to purchase a significant percentage of its U.S. and worldwide requirements of the product labeled "Active Ingredients." There is no doubt that paragraph 2.14 constitutes a binding commitment by the parties to enter into a commercial sale and purchase relationship. Enzo’s arguments to the contrary, citing the surrounding context of the agreement and the actual transfer of material between the parties, do
little to alter the plain language of that provision in the agreement.

We have cautioned before that "[i]n any given circumstance, who is the offeror, and what constitutes a definite offer, requires looking closely at the language of the proposal itself. . . . Differing phrases are evidence of differing intent, but no one phrase is necessarily controlling." Group One, Ltd. v. Hallmark Cards, Inc., 254 F.3d 1041, 1048 (Fed. Cir. 2001) (citing Restatement (Second) of Contracts §§ 24, 26 (1981)). Here, the district court carefully considered the language of paragraph 2.14, and we discern no error in its legal interpretation or clear error in its factual findings. We thus agree with the district court that a binding contract was formed between Enzo and Ortho and that the resulting commercial offer for sale, more than one year before the application for patent, ran afoul of the § 102(b) on-sale bar.

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