Offer or Quote – Contract Question Remains the Source of Patent Peril

March 1, 2023
Publications

by Shawn Leppo and Yangmo “Harvey” Ahn

Innovators are often anxious to get a new product to market but moving too quickly can expose a major consequence lurking behind what might have seemed like a trivial distinction at the time.

In principle, an inventor loses the right to seek a patent if the invention is put into public use before filing a patent application. U.S. patent law provides a one year grace period for a number of activities that seeks balance between the public’s right to retain knowledge already in the public domain with the inventor’s right to control whether and when to patent an invention.

One such grace period is often referred to as the “on-sale bar,” which renders an invention unpatentable if it was sold or offered for sale more than one year before the patent application’s filing date. In Pfaff v. Wells Elecs., Inc., 525 U.S. 55 (1998), the Supreme Court articulated a two-prong test, holding the on-sale bar applies when, before the critical date (one year prior to the filing date of a patent application), the claimed invention was (1) the subject of a commercial offer for sale and (2) ready for patenting.

The Supreme Court explained the “ready for patenting” prong of Pfaff in detail, but it provided less input on “commercial offer for sale”. The Court of Appeals for the Federal Circuit has periodically provided guidance for that prong over the past twenty years. In doing so, the Federal Circuit has applied traditional contract law principles, often relying on the Uniform Commercial Code, Restatement (Second) of Contracts, and other similar treatises. Thus, only an offer that the other party could make into a binding contract by simple acceptance constitutes an offer for sale. However, as a recent case demonstrates, that determination often still leaves room for interpretation based on the underlying facts. Moreover, by the time the relevance of the activity comes into question many years later, the relative importance of the outcome is likely to far outweigh what might or might not have been intended by the parties at the time.

In Junker v. Med. Components, Inc., 25 F.4th 1027 (Fed. Cir. 2022), cert. denied, 143 S. Ct. 205 (2022), the Federal Circuit examined whether a communication was a commercial offer for sale or a mere invitation for an offer or further negotiation. The former would invoke the first prong of Pfaff, while the latter would not.

In this case, the inventor developed a new design of a handle for a medical device. By January 1999, in cooperation with the inventor, a newly formed manufacturing company developed a prototype that included all of the features of the inventor’s new design. The inventor’s representative thereafter began communicating with a potential customer regarding products bearing the new design. The potential customer in turn requested a quotation. In response, on January 8, 1999, the representative sent a letter (“January 1999 letter”) detailing bulk pricing information for variously sized products, including a price chart for each size, using the phrase “this quotation.” The January 1999 letter also specified that the prices were for shipment in bulk, non-sterile, FOB Athens, Texas, on a net 30-day basis. The representative concluded the letter by noting his appreciation for the opportunity to provide the quotation and that he looked forward to discussing the potential customer’s requirements in person.

About 13 months later, on February 7, 2000, the inventor filed a design patent application. Many years later, after the patent was granted, the patent became the subject of an infringement action against Medical Components, Inc. (MedComp), which was accused making and selling an infringing product. In its defense, MedComp asserted the patent was invalid based on the on-sale bar. The core issue was whether the January 1999 letter was a commercial offer for sale.

At trial, the District Court initially determined the January 1999 letter was a preliminary negotiation, not a definite offer. The District Court focused on the letter’s multiple references to the word “quotation” and the concluding invitation to further discuss specific requirements. The Federal Circuit subsequently reversed, holding that the letter was a commercial offer for sale, and the design patent was thus invalid because the offer occurred more than one year before the application was filed.

The Federal Circuit distinguished between an offer—an invitation to act—and a quote—an invitation to negotiate. The Federal Circuit found the letter contained sufficiently detailed terms such that the prospective customer could have formed a contract by simply accepting the letter’s terms, which rendered it an offer. The court focused on (1) the letter was specifically addressed to the prospect and therefore was not an unsolicited price quotation, and (2) the letter contained necessary terms for a commercial contract, such as prices, specific delivery conditions (“shipment in bulk, non-sterile”), allocation of risks and responsibilities (“FOB Athens, Texas”), a payment term (“net 30-day basis”), and multiple different purchase options for the products.

In supporting its conclusion, the Federal Circuit referred to previous decisions in Merck & Cie v. Watson Lab’ys, Inc., 822 F.3d 1347 (Fed. Cir. 2016) and Cargill, Inc. v. Canbra Foods, Ltd., 476 F.3d 1359 (Fed. Cir. 2007). In Merck, the Federal Circuit found a fax from one party to the other rose to the level of a commercial offer for sale of the claimed invention. Specifically, (1) the fax was sent in direct response to a buyer’s request to purchase the product at issue; therefore, it was not an unsolicited price quote sent to numerous potential customers, and (2) the fax contained necessary terms for a commercial contract, such as price, delivery, and payment terms.

Likewise, in Cargill, the Federal Circuit found a letter was a commercial offer for sale because (1) the letter was sent to confirm a request for a certain amount of canola oil and not an unsolicited price quotation, and (2) the letter set forth an amount to be delivered, at a specified unit price, and under a standard contract designation, FOB.

The Federal Circuit, in determining whether a communication constitutes a commercial offer for sale and applying traditional contract law principles, thus considers whether (1) a communication was unsolicited and sent to numerous potential customers and (2) the communication included essential terms, such as price, delivery, and payment terms. Though using a specific term, such as “quotation” or “offer,” is relevant in determining whether a communication was a commercial offer for sale, it is not controlling. The Federal Circuit explained that a quotation typically leaves many terms necessary to a contract unexpressed, but if a communication contains enough specificity and completeness of the commercial terms, the specificity and completeness outweigh the references to the quotation.

Importantly, the Federal Circuit also held that when the plain language in a communication is clear on its face, whether both parties considered the communication an offer for sale was irrelevant.

In all three cases referenced above, the Federal Circuit found communications were commercial offers for sale and the on-sale bar invalidated the patents at issue. Still, whether terms are specific enough to convert a quote (even if intended as such) to an offer may not always be predictable ahead of time. As a result, the Junker case and others like it provide a continuing reminder that the best practice remains to file for patent protection as early as possible after the inventive concept is complete and before commencing any kind of commercial activity. That can reduce the subsequent risk of invalidation many years later over language that at the time might have seemed an inconsequential difference in phrasing, particularly in dealings between unsophisticated parties.