To Avoid the On-Sale Bar, Patent Applicant’s “Experimental Use” Should be Unmistakable
A recent Federal Circuit opinion casts fresh light on two aspects of patent strategy: the experimental use exception to the on-sale bar to patent validity; and the role of a non-infringement legal opinion in defeating an award of treble damages.
The On-Sale Bar
The on-sale bar prevents an inventor from obtaining a patent on an application filed more than a year after the date of first sale of the product or, if later, the date when the invention is “ready for patenting.”
The inventors in Sunoco Partners Marketing & Terminals L.P. v. US Venture, Inc. controlled MCE Blending (MCE), which had a long-standing relationship with Equilon Enterprise LLC. Equilon agreed to be the first commercial customer for MCE’s new product, which automatically blends gasoline and butane when the blend is loaded onto trucks for delivery. The contract called for the product to be tested twice – once before delivery and once afterward.
The inventors filed a patent application covering the product one year and two days after entering into the Equilon contract. Thus, the one-year period allowed for filing a patent application may have expired. However, the Supreme Court has ruled that inventors may delay filing a patent application in order to engage in bona fide efforts to perfect an invention or to determine whether it works. The inventors testified that they viewed this installation as experimental.
MCE was eventually bought by Sunoco, which later sued US Venture for using a product that infringed the patent that had issued to MCE’s inventors. US Venture argued that the patent was invalid because the patent application was filed more than one year after the execution of the Equilon contract. Sunoco countered by saying that the contract involved experimental use. The trial court accepted Sunoco’s argument and ruled that the on-sale bar did not apply.
On appeal, the Federal Circuit panel ruled otherwise. The contract with Equilon was not only styled as a sales contract, the court noted, but stated that MCE “has developed” (rather than “is developing”) equipment for blending gasoline and butane at terminal facilities. The contract called for a transfer of title to the equipment upon completion of the on-site testing, which the Federal Circuit took to mean that the contract was not for experimentation, but was for a commercial sale.
As for the pre-installation testing, the court noted that it was not a necessary part of the contract and was done without the involvement of the customer. The court viewed the post-installation testing as ordinary acceptance testing that would be done in any sale of complex equipment. The testing protocols set forth in the contract were designed, said the court, to confirm that the equipment satisfied contractual warranties of performance, not to conduct experimentation.
The Legal Opinion and Treble Damages
U.S. Venture was aware of Sunoco’s patent when it ordered the allegedly infringing equipment and appears to have had the supplier attempt to design around it by adding a tank between the blending unit and the “rack,” the equipment that dispenses gasoline to trucks. U.S. Venture asked a patent attorney to render a clearance opinion addressing whether the apparatus as so designed infringed the Sunoco patent. The attorney asked for technical information about the system that was never provided. Eventually, however, he gave an opinion that the U.S. Venture system did not infringe the Sunoco patents.
The trial court found the opinion insufficient for two reasons. First, the opinion described the U.S. Venture system as involving manual adjustment of the butane mix, even though its automatic blending was a key feature of both the U.S. Venture equipment and the Sunoco patent. Second, the attorney was unaware that blended gasoline might be flowing into and out of the added tank at the same time, apparently making that tank unimportant. (Its potential importance was that further adjustments to the blend could be made at the tank, which seems unlikely if gasoline is flowing right through the tank to the rack.)
The trial court ruled that the opinion letter was not based upon the best information known to U.S. Venture, and that U.S. Venture failed to review the letter for accuracy. Thus, U.S. Venture’s claim to good-faith reliance on the opinion was rejected, rendering U.S. Venture vulnerable to an award of enhanced damages. The trial court then trebled the $2 million damages award, largely on the basis of perceived misbehavior during the course of the litigation, including failure to produce documents during discovery and providing declarations with misrepresentations.
On appeal, the Federal Circuit contradicted the trial court’s finding that the lawyer rendering the non-infringement opinion did not know that blended gasoline might be flowing into and out of the tank at the same time. It referred to his deposition testimony to make the point, even though at trial he seemed confused about this issue. The Federal Circuit made no mention of the trial court’s point that the non-infringement opinion described the U.S. Venture system as one that accomplished the blending manually, rather than automatically.
Having thus rehabilitated the non-infringement opinion, the Federal Circuit ruled that U.S. Venture had a good faith belief that its product was non-infringing. With that conclusion, the trail court’s other reasons for the award of enhanced damages melted away because they were unrelated to the underlying act of infringement.
The Federal Circuit remanded the case to the trial court for a further review of the on-sale bar, particularly to determine whether the “ready for patenting” prong of the on-sale bar had been met when the U.S. Venture sales contract was signed. The Federal Circuit’s opinion allowed for the possibility that the invention was not ready for patenting until the pre-installation testing described in the sales contract had been conducted, in which case the patent application would have been timely filed.
Lessons to be Learned
The most obvious lesson from this case is to file patent applications as early as possible so that the on-sale bar does not emerge as an issue. This begs the question, however, of what “as early as possible” means. If the invention is not fully developed, the patent application may fail to adequately describe the technology as it eventually emerges in the form of a product or service.
This takes us to the next precaution: to emphasize in all dealings with third parties the experimental nature of ongoing work to test and develop a new technology. If the language of the contract with Equilon had been called “Experimental Installation Contract” and included provisions contemplating that MCE would tweak the hardware and software on the basis of the acceptance test results, the Federal Circuit might have accepted the experimental use theory as a way to avoid the on-sale bar.
In addition, there is the precaution that U.S. Venture took: getting a non-infringement opinion when the success of designing around a patent was at stake. That step appears to have saved U.S. Venture $4 million, the enhanced damages award taken away by the Federal Circuit. With huge damages awards becoming more commonplace, avoiding the risk of treble manages is worth far more than the cost of the opinion.
Even with that success, however, there are ways in which U.S. Venture might have lessened its risk. The failure to provide the patent attorney with the information that he requested so that he could get a proper description of the U.S. Venture product hurt U.S. Venture at the trial court. So too did U.S. Venture’s failure to review the opinion to make sure that it had the correct facts. In the end, none of this mattered to the Court of Appeals, but those seeking to insulate themselves from treble damages for willful infringement should be more careful.
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