When Outsourcing Manufacturing Can be a Patent Killer

26 September 2013 Dashboard Insights Blog

In recent decades, companies seeking to reduce manufacturing costs and improve profit margins have increasingly employed contract manufacturing – that is, the outsourcing of partial or complete manufacturing of products to third party producers, particularly those in countries with lower labor costs such as China, India, and the like.

More recently, next generation manufacturers have explored the possibility of bringing manufacturing back in-house in an effort to better control quality and to take advantage of the noticeably softened U.S. labor market (colloquially referred to in manufacturing circles as “reshoring”).

Last month, the U.S. Court of Appeals for the Federal Circuit provided yet another reason to consider rethinking the use of contract manufacturing. The Court provided a sobering lesson for patent owners that under certain circumstances, relying on contract manufacturing can be fatal to the validity of a patent. Unfortunately for the plaintiff in this case, that lesson wasn’t learned until after it had likely incurred substantial costs associated with procuring and asserting its patent.

In Hamilton Beach Brands, Inc., v. Sunbeam Products, Inc. (Fed. Cir. 2013), the plaintiff (Hamilton Beach) produced slow cookers for kitchen use. The invention at issue related to a device that was intended to keep the lid on the slow cooker when the slow cooker was moved between locations, such as when the user wanted to transport food to a party or other remote location. Marketed as the “Stay or Go(R)” slow cooker, Hamilton Beach enjoyed significant commercial success that it attributed primarily to the patented technology. After Sunbeam released a slow cooker that included a similar feature, Hamilton Beach brought suit to enforce its patents.

In response, Sunbeam asserted that the Hamilton Beach patent was invalid because of prior commercial activity by Hamilton Beach. Specifically, Sunbeam claimed that Hamilton Beach’s outsourcing of the manufacturing of the slow cooker to a third party Chinese manufacturer constituted an on-sale bar that was sufficient to invalidate the Hamilton Beach patent.

Under then-current U.S. patent laws, the sale of a product embodying a patented invention – or even the mere offer to sell such a product – served as a complete bar to patentability if that activity took place more than one year before the patent application was filed. This one-year “grace period” was a unique aspect of U.S. patent law; other countries are more severe in their treatment of pre-filing date activities, and as a result, many international companies have adopted practices of filing patent applications before any outside disclosure of technology.

A notable point in the Hamilton Beach case is how the Court interpreted the interaction between Hamilton Beach and its contract manufacturer. Hamilton Beach had provided specifications to the manufacturer more than one year before its patent application was filed. In response, the contract manufacturer sent an email indicating that it had received the order “and was ready to fulfill it upon Hamilton Beach’s ‘release.’” Hamilton Beach did not immediately issue its “release” to instruct the contract manufacturer to fulfill the request, but instead waited until a later date that would have been within the one-year grace period.

Hamilton Beach argued that because the order wasn’t fulfilled until a point within the grace period, the pre-filing date sale should not constitute a bar to patentability. In contract law parlance, Hamilton Beach argued that the “offer for sale” in this context should have been the “release” that Hamilton Beach issued to begin the manufacturing process (which would have been the grace period), and the “acceptance” of that offer didn’t occur until the contract manufacturer began filling that order (again, within the grace period).

The Court disagreed, however, and instead interpreted the contract manufacturer’s email as the commercial offer for sale. In the Court’s view, the email from the contract manufacturer served as the “offer” to produce and sell the product to Hamilton Beach, and all Hamilton Beach had to do to accept that offer was to give its “release” to the contract manufacturer to begin production. Because the email “offer” occurred more than one year prior to the patent application filing date, the patent was declared invalid, and all claims against Sunbeam were immediately moot. Notably, this result would have occurred regardless of whether there was a non-disclosure or other confidentiality agreement in place between Hamilton Beach and the contract manufacturer, since the public use and on-sale bars are two entirely separate grounds for patent invalidation.

Of course, Hamilton Beach could have avoided this result. Most obviously, it could have filed its patent application prior to or very soon after sending the specifications to the contract manufacturer. It might also have contractually constrained the contract manufacturer from presenting commercial offers for sale by dictating the terms of the commercial relationship. Of course, the entire issue would have been eliminated had contract manufacturing not been employed in the first place.

As mentioned previously, the Hamilton Beach decision was decided under the law as it existed when the relevant events occurred. As has been well-publicized, the March 2013 implementation of the America Invents Act radically changed the U.S. patent laws, and in particular redefined what constitutes prior art and which types of activities may serve as later bars to patentability. How various aspects of the law will be interpreted remains to be seen, and we may not have clarity on numerous issues for many years. For example, while a modified form of the one-year grace period does remain, there is ambiguity as to when and under what types of circumstances the grace period may apply. Further, there is a question as to whether “sales” must be “public sales” to constitute a patentability bar, what it means to be a “public sale” versus a “private sale,” and how this impacts “offers” for sale in similar contexts. In view of the uncertainty facing companies going forward, it will remain a best practice to file patent applications prior to any outside disclosures of an invention, regardless of whether the recipient is bound by a confidentiality agreement. Hamilton Beach provides a stark example of what can happen to companies who do not tightly control their proprietary information.

Opinion: Hamilton Beach

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