Sales are generally a good thing. A startup company’s first sales of a new technology, “must-have” product, or innovative service are proof that the company has arrived. They can initiate a steady source of income and signal legitimacy to creditors, including friends and family who have kept the venture afloat through its early days. Most importantly, sales validate founders’ excitement for sharing their passion with the world.
But sales can also spell disaster. Due to a pitfall built into United States patent law, first sales of a product or service can prevent a startup from pursuing patent protection on its key technologies. Startup founders should be aware of the “on-sale bar” to patentability, which can kill an early-stage venture’s ability to attract investors and ground the company just as it about to take flight.
Getting to Know the On-Sale Bar
Patent protection is not usually the first thing on busy entrepreneurs’ minds. That is, until they begin seeking funds from investors. Venture capital firms, especially those investing in tech startups, often insist on robust patent protection before bankrolling a small company’s growth. This makes sense when one considers what a patent is: the right to exclude others from practicing the subject technology. Investing in startups is risky and expensive. Exclusivity reassures investors that they have a chance of recuperating their investments if the company ever gets up and running full tilt. That is why, for many, lack of patent protection is a deal killer.
As it turns out, those celebrated initial sales can doom the startup. Under American patent law, certain acts by an inventor can prevent him or her from ever patenting his or her invention. The Patent Act reads, in relevant part:
A person shall be entitled to a patent unless . . . the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention.
35 U.S.C. § 102(a)(1) (2012). There is a one-year grace period built into this law. The upshot is that an inventor who places his invention “on sale” anywhere in the world one year or less before filing a patent application cannot obtain a patent on that invention. This means losing the exclusivity some investors demand.
Furthermore, the Supreme Court and the Federal Circuit have interpreted the law to mean that the on-sale bar applies where the claimed invention (1) is the subject of a commercial offer for sale and (2) is ready for patenting. With respect to the second prong, we can assume for our purposes that if a startup is selling its product or service, the technology at issue is mature and “ready for patenting.” But what about the first prong? When is a product or service “on sale” under the law? Startups should familiarize themselves with what constitutes an “offer for sale” and why our laws discourage patenting an invention that has been on sale for too long.
How Can Sales Be a Bad Thing?
Patent law reflects a quid pro quo between the inventor the public. In exchange for full public disclosure of new technology, the inventor gets a temporary exclusive right. The idea is that we can incentivize rapid technological innovation by granting a temporary “monopoly,” while the public receives technological knowledge and the certainty that comes with legal notice as to what it can and cannot do. The public also gets freedom to practice the technology after the patent term expires, when the invention becomes part of the public domain.
Once something is in the public domain, it is unfair to remove it. Imagine the uncertainty that would surround any new technology if it could be given to the public, then taken back. Anybody building upon known technologies to create the next big thing would be on shaky ground if an inventor could remove that technology from the public domain at any time, then threaten an infringement action. Such a policy would discourage the technological progress that the patent system was designed to promote.
Although we like the idea of incentivizing innovation, we are also fond of concepts like certainty and notice. This is where the on-sale bar comes in. Selling a patented widget to the public is, in effect, putting it out there for the public to see. And the business community wants to know what it can do with the widget. Can innovators invest huge sums of money around using the widget to make the next next big thing, or are their resources better spent on alternative approaches? The longer the widget is on sale, the more patenting it feels like taking it out of the public domain. Therefore, United States patent law does not allow inventors to commercially exploit their inventions for long before public policy demands they patent it or dedicate it to the public.
What the Startup Should Know
With the above discussed public policy in mind, below are some helpful guidelines entrepreneurs should remember to avoid falling prey to the on-sale bar:
- Courts have signaled that they will look to the Uniform Commercial Code (UCC) when determining whether a communication rises to the level of a commercial offer for sale. A key feature of such an offer is that acceptance by the other party would create a contract transferring title of the goods. If the seller retains title to the goods themselves, a transaction might not constitute an offer for sale.
- The invention itself must be the subject of the offer for sale. Offering to sell rights to the invention or promotional items related to the technology at issue won’t trigger the on-sale bar.
- A finalized sale is not required. A mere offer for sale is enough to spell trouble. In fact, even a rejected offer has been held sufficient to bar a patent. Similarly, delivery is not required. For example, courts have held that a signed purchase agreement is enough to bar a patent, even when the subject goods or services are never delivered.
- Conditional sales count too. The fact that a sale is conditioned upon the buyer’s satisfaction, for example, does not get around the on-sale bar.
- The on-sale bar applies anywhere in the world. Under the old U.S. patent laws, which applied to patent applications filed before March 16, 2013, only offers to sell within the United States would trigger the on-sale bar. Today’s startups must proceed more cautiously. Under the America Invents Act (AIA), passed in 2011, the on-sale bar now has no geographic limitation. Offering to sell your widget in Nepal or on the internet can trip you up as easily as selling it from a booth down the street.
- Secret sales may trigger the on-sale bar. Under the old patent laws, the “on sale” provision was interpreted as including secret or private commercial activity. It remains unclear whether the courts will interpret the “on-sale” provision in the same way following enactment of the AIA.
- Even unauthorized third party sales may trigger the on-sale bar. This is important for a startup to keep in mind when entering into a manufacturing or distribution agreement.
Although these guidelines do not outline all the contours of the “on sale” provision, the take home point is clear. Startups with patentable technologies should not offer goods or services for sale to anyone, anywhere, before filing for patent protection.
Startup companies considering patenting their products or processes should be cautious about offering to sell their products or services, in public or in secret. More precisely, if a startup’s founders envision fundraising through investors, they should make sure a patent application is on file before putting their company’s goods or services on the market, whether that be through a brick-and-mortar operation or, more likely, the internet. Taking precautions to secure patent protection now can help the tech startup avoid pitfalls, like the on-sale bar, that could keep it from realizing its long-term fundraising and development goals.