Lifescan v. Shasta: Patent Exhaustion Applies Equally to Gifts and Sales

Category: Infringement 
By: Jesus Hernandez, Blog Editor/Contributor  
TitleLifescan Scotland, Ltd. v. Shasta Tech., LLC, No. 2013-1271 (Fed. Cir. Nov. 4, 2013).
[1] LifeScan’s primary argument is that the distribution of its meters, whether by sale or gift, does not trigger exhaustion because its meters do not substantially embody the claims of the ’105 patent [per the requirements of the Supreme Court’s decision in Quanta].
Lifescan Scotland, Ltd. at *8 (text added).
[2] LifeScan’s final argument is that even if its meters substantially embody the asserted claims, patent exhaustion is nevertheless inapplicable to the 60% of its meters that are not sold but instead distributed for free. LifeScan asserts that it received no “reward” for distributing them (because they were distributed without charge), and that the district court therefore properly found that patent exhaustion did not apply. We are therefore asked to decide, as a matter of first impression, whether patent exhaustion applies to a product distributed for free.
Id. at *22-23 (text added).
HoldingsIn summary, we hold [2] that patent exhaustion principles apply equally to all authorized transfers of title in property, regardless of whether the particular transfer at issue constituted a gift or a sale. We further conclude [1] that LifeScan’s OneTouch Ultra meters substantially embody the methods claimed in the ’105 patent [because intrinsic evidence supports that error-detecting functions are the inventive concept of the claims] and [as a result] that [the] distribution [of LifeScan’s OneTouch Ultra meters] therefore exhausts LifeScan’s patent rights.
Id. at *29 (text added).

Procedural HistoryDefendants Shasta Technologies, LLC; Conductive Technologies, Inc.; Instacare Corp.; and Pharmatech Solutions, Inc. (collectively, “Shasta”) appeal from a decision of the United States District Court for the Northern District of California granting a preliminary injunction in favor of Plaintiffs LifeScan Scotland, Ltd. and LifeScan, Inc. (“LifeScan”). The injunction prohibited Shasta from making, using, or selling its blood glucose test strips. The district court found that the making, using, or selling of Shasta’s strips likely indirectly in- fringes LifeScan’s U.S. Patent No. 7,250,105 (“the ’105 patent”).
Lifescan Scotland, Ltd. at *2.
Legal Reasoning (Prost, Dyk)
Factual Background
Claim 11. A method of measuring the concentration of a substance in a sample liquid comprising the steps of: providing a measuring device[,] said device comprising:
a first working sensor part […]; a second working sensor part […]; a reference sensor part upstream from said first and second working sensor parts which reference sensor part is a common reference for both the first and second working sensor parts […]; measuring an electric current […]; comparing the electric current […]; giving an indication of an error […]
Lifescan Scotland, Ltd. at *5.
Pertinent Facts
LifeScan sells 40% of its meters at below cost prices. It distributes the remaining 60% of its OneTouch meters through health care providers, who in turn give the meters to diabetic individuals for free. LifeScan distributes its meters in this way “in the expectation and intent that customers will use its OneTouch Ultra meters with [its] OneTouch Ultra test strips, from which [it] derive[s] a profit.” JA 319. Shasta does not sell blood glucose meters, but competes with LifeScan in the market for test strips. Shasta’s “GenStrip” test strips are designed to work with LifeScan’s meters.
Id. at *2.
In LifeScan’s OneTouch Ultra system, the “sensor parts” refer to the electrodes located on the strips. The “measuring an electric current . . . ,” “comparing the electric current . . . ,” and “giving an indication of an error . . .” steps are performed by the meter.
Id. at *5.
Legal Standard: Patent Exhaustion"Quanta confirmed that the exhaustion doctrine applies to method patents and clarified the applicable test." Lifescan Scotland, Ltd. at *10 (internal citations omitted). "The Court in Quanta thus held that the critical issue, whether a method or product patent is involved, is whether the product “substantially embodies the patent”—i.e., whether the additional steps needed to complete the invention from the product are themselves “inventive” or “noninventive.” " Id. at *11-12 (internal citations omitted).
[1] LifeScan’s OneTouch Ultra meters substantially embody the methods claimed in the ’105 patent and that their distribution therefore exhausts LifeScan’s patent rights.
A. Alternative Non-Infringing use Does not Prevent ExhaustionAlternative uses are relevant to the exhaustion inquiry under Quanta only if they are both “reasonable and intended” by the patentee or its authorized licensee. […] LifeScan admits that it distributes its meters “in the expectation and intent that customers will use its OneTouch Ultra meters with [its] OneTouch Ultra test strips,” JA 319 (emphasis added), and that such use practices the ’105 patent. Thus, even if LifeScan’s proposed alternative uses for its meters were reasonably available to users, they were plainly not intended, and are therefore not relevant to the issue of patent exhaustion.
Lifescan Scotland, Ltd. at *13 (internal citations omitted).
B. The Inventive Aspect (Meters) was Embodied In LifeScan's Product
Legal StandardIn Quanta, the Supreme Court emphasized that “[e]verything inventive about each patent [was]embodied in the Intel [processors and chipsets]” because they “control[led]” and “carr[ied] out” the functions described in the patents. Quanta, 553 U.S. at 633–34. Similarly, the question here is whether the meters “con- trol” and “carry out” the inventive functions described in the method claims of the ’105 patent.
Id. at *13-14.
Intrinsic Record: PatentThe text of the ’105 patent itself strongly supports the conclusion that the meter’s error-detecting functions are its inventive concept. Its abstract describes the invention by stating that “[i]n accordance with the present invention a measuring device compares the current generated by two working sensor parts and gives an error indication if they are too dissimilar.” [...] The specification likewise emphasizes error detection by the meter, stating that inaccuracies can arise from “insufficient sample liquid” or “defects in the production of test strips,” [...].
Id. at *15 (internal citations omitted).
Intrinsic Record: Prosecution HistoryThe prosecution history in particular confirms that the meter’s comparing function is the key to the invention reflected in the method claims. […] The examiner thus found that the “measuring,” “comparing,” and “giving an indication of an error” steps distinguished the method claims from the prior art, not the arrangement of the electrodes. Therefore, those steps, and not the configuration of the electrodes on the strips, were the inventive features of the method claims.
Id. at *15-16.
C. Policy considerationsThe basic principle underlying the Supreme Court’s exhaustion cases is that the authorized transfer of ownership in a product embodying a patent carries with it the right to engage in that product’s contemplated use. […] Here, barring the use of the meter with strips manufactured by the accused infringer would bar the use of the meters for their contemplated function and extend the patent monopoly improperly as we recently held in Keurig, No. 13-1072, slip op. at 7 (Fed. Cir. Oct. 17, 2013).
Id. at *22 (some internal citations omitted).
[2] Patent Exhaustion Applies Equally to All Authorized Transfers, Regardless Whether Gift or Sale.
A. Basic Principles of Patent ExhaustionThe [Supreme] Court held [in McQuewan] that “the purchaser of the . . . machine for the purpose of using it in the ordinary pursuits of life” was entitled to continue using the machine during the extended term. Id. at 549. The Court explained that [:] when the machine passes to the hands of the purchaser, it is no longer within the limits of the [patent] monopoly. It passes outside of it, and is no longer under the protection of the act of Congress. . . . The implement or machine becomes [the purchaser’s] private, individual property, not protected by the laws of the United States, but by the laws of the State in which it is situated. Id. at 549–50 (emphases added). In other words, the patentee’s transfer of the right to use the machines “exhaust[ed]” his rights as to those machines. See Univis, 316 U.S. at 250 (citing McQuewan, 55 U.S. (14 How.) at 549–50).
Lifescan Scotland, Ltd. at *23 (text added).
B. Patentee Cannot Evade Patent Exhaustion by Giving Away Encompassed ProductAt bottom, a patentee has a choice as to how to secure its reward. A patentee may “demand[]” a particular price in exchange for an “article and the invention which it embodies.” See Univis, 316 U.S. at 251; see also McQuewan, 55 U.S. (14 How.) at 552. Alternately, a patentee may choose to give that article away for free in the hope of obtaining a future benefit, as LifeScan did here. But a patentee cannot evade patent exhaustion principles by choosing to give the article away rather than charging a particular price for it. Where a patentee unconditionally parts with ownership of an article, it cannot later complain that the approach that it chose results in an inadequate reward and that therefore ordinary principles of patent exhaustion should not apply. Id. at *25.
C. Common Policies of Patent Exhaustion and Copyright First SaleThe common policies underlying patent exhaustion and the first sale doctrine would be significantly undermined by the rule LifeScan advocates in this case. Absent a valid contractual restriction, restraints upon the downstream use or sale of a patented product “offend against the ordinary and usual freedom of traffic in chattels,” […], and that is so regardless of the amount of consideration demanded by the patentee when it originally parted with the product. Indeed, conditioning patent exhaustion on the adequacy of the patentee’s reward “would cast a cloud of uncertainty” over every transaction and every patented product. […] That result would be “wholly inconsistent with the fundamental purpose of patent exhaustion—to prohibit post[-]sale restrictions on the use of a patented article.” Id. […].
Id. at *28 (internal citations omitted).
We therefore reverse the district court’s grant of a preliminary injunction and remand for further proceedings consistent with this opinion.
Lifescan Scotland, Ltd. at *29.
REYNA, Circuit Judge, dissenting. Lifescan Scotland, Ltd., Reyna Op., at *1.
General PositionThe majority reaches its result by conflating the patentability of a product with the product’s ability to substantially embody the essential features of a patented method. The majority reasons that because LifeScan did not obtain a patent on its test strips, those strips could not substantially embody the essential features of its method patent. Yet, the Supreme Court has recognized that it makes “no difference as to the infringement or non-infringement of a combination that one of its elements or all of its elements are unpatented.”
Lifescan Scotland, Ltd., Reyna Op., at *2.
I. That the inventive aspect are the 'test strips', not the 'meters'
A. The Steps Performed by the 'meter' are NOT Essential to Achieving the Stated Objective.
But for the specialized test strips required by LifeScan’s patented method, the blood glucose meter alone could not perform the “comparing” and “giving an indication of an error” steps viewed by the majority as essential to the patented method.2 Accordingly, LifeScan’s test strips substantially embody the essential features of its patented method.
Lifescan Scotland, Ltd., Reyna Op., at *5.
LifeScan’s blood glucose meter does not embody the essential fea- tures of its patented method because the steps it performs are common and noninventive. In fact, the meter is more fairly characterized as a standard component in the system and only involves the application of common processes.
Reyna Op., at *6.
B. No Showing that LifeScan's Meter is Separately Patentable[W]hile the majority devotes significant attention to the patentability of the test strip, it fails to demonstrate that LifeScan’s meter is separately patentable. The evidence suggests that it is not. [...] By assuming that the meter was patentable by finding it essential to the patented method in this case, the majority, in effect, allows LifeScan to sue competitors that employ any blood glucose reader that measures electric currents, compares the electric currents, and give an error indication if they differ. This overextension of the patent grant violates the principles of every exhaus- tion and combination case decided by this court and the Supreme Court.
Id., Reyna Op., at *8.
II. It is Inappropriate to Limit a Patentee to a Single Reward Where the Essential Component is Consumed in the Patented Process
In a case such as this one where the essen- tial component is consumed in the patented process, it is inappropriate to limit that patentee to a single reward for the sale or giveaway of the first component. See id. (“[T]he patent holder has ‘received his reward’ only for the article sold, and not for subsequent recreations of it.” (quoting Univis, 316 U.S. at 251)). Each successive performance of the method would be an infringement unless licensed by the patentee, either explicitly or implic- itly. On the facts of this case, the only means for a pa- tient to obtain a license for subsequent performances of LifeScan’s patented method would be through purchasing additional LifeScan’s OneTouch® Ultra® test strips, but based on the majority’s conclusion, the fact that no license flows from the purchase of Shasta’s generic test strips is rendered meaningless because use of those strips are held not to be infringing.
Lifescan Scotland, Ltd., Reyna Op., at *10-11.
Image Attribution Statement: Blair Snow, "Gift Wrapping," available under a  Creative Commons Attribution-Share Alike 3.0 Unported license, http://commons.wikimedia.org/wiki/File:Gift-wraping.jpg (Last visited Nov. 7, 2013). 
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