Lifescan Scotland, Ltd. v. Shasta Technologies, LLC
2013 WL 5878598, 108 U.S.P.Q. 2d (BNA) 1757, 734 F.3d 1361 (2013)
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Rule of Law:
The authorized and unconditional transfer of an item that substantially embodies a patented method exhausts the patentee's rights to control the use of that item to practice the patent. This exhaustion applies even if the item is given away for free rather than sold and requires a disposable, unpatented component to function.
Facts:
- LifeScan holds U.S. Patent No. 7,250,105 ('105 patent), a method patent for measuring blood glucose that requires both a meter and a disposable test strip.
- The patented method's inventive steps involve the meter measuring electrical currents from two separate working electrodes on the strip, comparing the currents, and indicating an error if they differ significantly.
- LifeScan manufactures and distributes the OneTouch Ultra system, which includes meters and test strips that practice the '105 patent.
- LifeScan sells 40% of its meters below cost and distributes the other 60% to consumers for free through healthcare providers.
- LifeScan's business model relies on profiting from the subsequent sale of its proprietary OneTouch Ultra test strips to users of its meters.
- Shasta Technologies produces and sells unpatented 'GenStrip' test strips that are specifically designed to be used with LifeScan's OneTouch Ultra meters.
- Shasta does not manufacture or sell blood glucose meters.
Procedural Posture:
- LifeScan sued Shasta Technologies in the United States District Court for the Northern District of California, alleging indirect patent infringement.
- LifeScan moved for a preliminary injunction to bar Shasta from selling its GenStrip product.
- The district court granted the preliminary injunction in favor of LifeScan, finding that patent exhaustion likely did not apply.
- Shasta, as the appellant, appealed the district court's grant of the preliminary injunction to the United States Court of Appeals for the Federal Circuit, with LifeScan as the appellee.
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Issue:
Does the authorized, unconditional transfer of a device that substantially embodies a patented method exhaust the patentee's patent rights for that method, even if the device is transferred for free and is intended for use with a disposable, unpatented component?
Opinions:
Majority - Dyk, Circuit Judge.
Yes. The authorized, unconditional transfer of a device that substantially embodies a patented method exhausts the patentee's rights under that method patent. The court applied the test from Quanta, holding that patent exhaustion is triggered when a product's only reasonable and intended use is to practice the patent and it 'substantially embodies' the invention. Here, the meter substantially embodies the patent because it performs all the inventive steps of the method: 'measuring,' 'comparing,' and 'giving an indication of an error.' The court determined these steps were the inventive aspect because the patent examiner had rejected claims on the test strips themselves but allowed the method claims based on these functions. The disposable strips are merely an unpatented, standard component necessary to practice the method. Furthermore, the court held that exhaustion applies to any authorized, unconditional transfer of title, including giving the item away for free, not just to sales. Allowing LifeScan to control the unpatented strips after distributing the meters would be an improper extension of its patent monopoly, akin to an unlawful tying arrangement.
Dissenting - Reyna, Circuit Judge,
No. The transfer of the meter does not exhaust patent rights because the disposable test strip, not the meter, substantially embodies the essential features of the patented method. The majority conflates the patentability of a component with whether it is the inventive feature for exhaustion purposes. The unique three-electrode configuration of the test strip is the crucial innovation that enables the meter to perform its comparison function; without the specialized strip, the meter's steps are impossible. The meter's functions are merely common, noninventive processes. Applying exhaustion is particularly inappropriate where an essential component of the method is consumed with each use, as it deprives the patentee of the ability to receive a reward for each practice of the patented method, causing the patent's value to 'plummet after the first transaction.'
Analysis:
This decision significantly clarifies and expands the patent exhaustion doctrine as applied to method patents under Quanta. It establishes that the 'inventive' aspect of a method, for exhaustion purposes, is linked to what the patent office deemed patentable, not necessarily what a party argues is the key innovation. The ruling curtails the 'razor-and-blades' business model by preventing patent holders from using a method patent on a system to control the market for unpatented, disposable components. By explicitly extending exhaustion to items given away for free, the court broadened the doctrine beyond traditional sales, impacting companies that distribute durable goods at no cost to drive profitable consumable sales.
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