Unlocking Hidden Risks in Frontier Tech

How the On-Sale Bar Threatens a Startup's Control Positions

Future Frontier Capital (FFC) is a value-add investor. We offer more than just financial support to pre-seed founders. In addition to our investing experience and extensive network, we offer our startups with guidance on how to establish and implement a differentiated IP strategy.

At FFC, we prioritize educating and empowering pre-seed founders from the earliest stages of their journey. For frontier tech, one often overlooked area is the potential impact of the on-sale bar provision with respect to patents.

According to the Brave AI Summarizer, which combines text from the blog site Patentlyo, legal services provider Upcounsel, and the law firm Venable along with my own editing.

“The on-sale bar is a limitation on patentability in the United States Patent Act that prevents an inventor from patenting an invention that has been commercially sold or offered for sale before a patent application for the invention was filed. The policy rationale for the bar is that one should not be able to commercially exploit their invention by offering it to the public first, only to later exclude the public from the invention by obtaining a patent on it.

The on-sale bar includes a one-year pre-filing grace period for patents that claim priority before 2013, while for newer patents (flied after 2013), the one-year grace period is limited to pre-filing sales that can be linked-back to the inventors. The on-sale bar can make a patent invalid if the claimed invention has been the subject of an offer for sale or commercial sale and the invention is ready to be patented. Other countries have different requirements around private and public sales of patentable ideas, so putting an idea or product up for sale could prevent an inventor from protecting their invention with a patent depending on the jurisdiction.”

Along with more commonly known metrics to measure patentability such as anticipation, obviousness, and enablement, on-sale bar has the potential to significantly impact a startup's ability to safeguard their innovations.

In my experience, most startup founders are unaware of the on-sale bar issue and rely on traditional law firms to sort out these issues, often after it is too late.

Andrew Velzen from McDonnell Boehnen Hulbert & Berghoff LLP wrote an excellent, concise, three-part series on the issue of on-sale bar.

I posted a synopsis of part-1 of Velzen’s series that defines what on-sale bar is on LinkedIn earlier this week.

In part-2 of the series, Velzen outlines several examples of how companies’ activities related to selling or even offering to sell a product materially impacted their patent rights, in some cases, years after the fact.

As with all things IP, keep in mind that the details matter.

Velzen lists a few eye-popping examples where on-sale bar issues led to patentees losing their right to stop others:

1. “a “make shift” model shown to potential buyers in conjunction with an offer to sell was deemed sufficient to trigger the on-sale bar.”

2. Even if a startup makes a sale contractually, under a confidentiality agreement, i.e., the sale was not known to the public, that sale could negate patentability.

3. “if an inventor gives a prototype of the invention to her friend to help test parts of the invention and then the friend sells the prototype to a third party, this can negate patentability.”

4. And finally, even in a case where a startup ships an invention to a buyer, but the buyer never receives it, the “on sale” bar would apply.

Notably, in order to trigger the on-sale bar, it doesn’t matter if the sale or offer for sale occurs outside of the US.

Velzen lists several other seemingly harmless circumstances which can negatively affect patentability. He also provides references to the cases from which these examples stem.

The bottom line is that is extremely important for early-stage startup founders to understand the risks of losing protection on their prized innovations BEFORE selling or offering their products for sale. This goes for products and technologies with pending or granted patents, as well as those yet to be filed.

Few founders and early stage investors grasp the nuanced risks associated with on-sale bar. Determining whether something qualifies as on-sale bar is a complex matter best addressed by an attorney. Patent attorneys often inquire about this during their initial conversations with inventors and founders seeking to file patents. Failure of founders to disclose to their attorney a sale or an offer to sell a product can have severe consequences. As highlighted in Velzen's article, courts have invalidated patents due to previously undisclosed sales or offers, sometimes years after the patent was granted.

Managing these situations becomes much easier when startup founders are aware of the risks from the very beginning of their journey, preferably prior to filing IP, showing people a prototype, or selling (or offering to sell) their invention. As opposed to undertaking the the time consuming (and expensive) process of assessing the potential risks of invalidity to previously or future-filed patents.

Most VC’s including FFC agree that finding customers and making sales far outweighs the value of early filed IP. However, for frontier tech startups, it is essential to protect innovations and establish a foundational control position. When it comes to patents, it is essential to protect an innovation before you sell (or offering to sell) a product.

There is a lot of advice for startup founders to digest. We strongly encourage founders to seek guidance from knowledgeable and experienced advisors with a variety of backgrounds. By surrounding themselves with smart advisors, founders can better adapt to and navigate the complexities of evolving markets, technologies, and intellectual property circumstances.