In LifeScan Scotland, Ltd. V. Shasta Technologies, LLC, the Federal Circuit found that LifeScan’s distribution of its One-Touch Ultra glucose meters exhausted its patent rights such that it could not prevent Shasta from selling disposable test strips for use in the meters. In so doing, the court reversed the district court’s grant of a preliminary injunction that was based in part on the fact that LifeScan gave away at least 60% of its glucose meters and on its determination that the glucose meters likely did not embody the methods claimed in the patent at issue, which required both the meters and the test strips. Several aspects of this case are troubling, including the court’s emphasis on LifeScan’s failure to obtain a patent on its test strips when determining that the glucose meters alone substantially embody the claimed methods.

The Patent at Issue

The patent at issue was LifeScan’s U.S. 7,250,105, which includes the following independent claim:

1. 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 for generating charge carriers in proportion to the concentration of said substance in the sample liquid;
a second working sensor part downstream from said first working sensor part also for generating charge carriers in proportion to the concentration of said substance in the sample liquid wherein said first and second working sensor parts are arranged such that, in the absence of an error condition, the quantity of said charge carriers generated by said first working sensor[] part [is] substantially identical to the quantity of said charge carriers generated by said second working sensor part; and
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, said reference sensor part and said first and second working sensor parts being arranged such that the sample liquid is constrained to flow substantially unidirectionally across said reference sensor part and said first and second working sensor parts;
wherein said first and second working sensor parts and said reference sensor part are provided on a disposable test strip;
applying the sample liquid to said measuring device;
measuring an electric current at each working sensor part proportional to the concentration of said substance in the sample liquid;
comparing the electric current from each of the working sensor parts to establish a difference parameter; and
giving an indication of an error if said difference parameter is greater than a predetermined threshold.

(emphasis added)

The LifeScan Business Model

As summarized by the Federal Circuit, “LifeScan sells 40% of its meters at below cost prices” and “distributes the remaining 60% of its OneTouch meters through health care providers, who in turn give the meters to diabetic individuals for free.” It does so “‘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.’”

Shasta’s Activities

According to the Federal Circuit, “Shasta does not sell blood glucose meters, but competes with LifeScan in the market for test strips.” In particular, “Shasta’s ‘GenStrip’ test strips are designed to work with LifeScan’s meters.”

The District Court Decision

LifeScan sued Shasta for indirect patent infringement on the theory that Shasta’s sale of GenStrips constituted induced and/or contributory infringement. Shasta raised the defense of patent exhaustion, based on LifeScan’s distribution of its glucose meters.

The district court granted LifeScan’s motion for a preliminary injunction, on two grounds discussed in the Federal circuit opinion. First, the district court concluded that LifeScan was likely to prevail on the issue of exhaustion “with respect to the 60% of meters that it distributes for free,” because “patent exhaustion applies only to a ‘sale’ where the patentee has received ‘consideration’ in exchange for the patented product.” Second, the district court determined that LifeScan likely could show that exhaustion would not even arise from the sale of the glucose meters because the claimed method “requires both a meter and a test strip for an individual to practice it.”

The Federal Circuit Opinion

The Federal Circuit opinion was authored by Judge Dyk and joined by Judge Prost. Judge Reyna wrote a dissenting opinion.

According to the Federal Circuit, Supreme Court precedent holds that rights in a method patent are “exhausted” by the sale of a product that “substantially embodies” the patented method. The Federal Circuit explained that one relevant inquiry is “whether the additional steps needed to complete the invention from the product are themselves ‘inventive’ or ‘noninventive.’”

Judge Dyk and Judge Prost determined that the glucose meters substantially embodied the claimed methods, while Judge Reyna disagreed. In reaching their decision, the majority noted the following:

• The original application included claims to two inventions: the methods and the configuration of the test strips, but the test strips claims were rejected.
• The application (including the abstract) emphasizes the contribution of the error-detecting functions of the meter, not the configuration of the test strips.
• The prosecution history … confirms that the meter’s comparing function is the key to the invention reflected in the method claims.
• After the test strip claims were finally rejected, LifeScan abandoned them.
• The USPTO examiner allowed the method claims even after rejecting the test strip claims.

Thus, the majority concluded:

Because it is the meter alone that performs these key inventive steps of the claimed method, the meter substantially embodies the method claims of the ’105 patent.

On the other hand, the majority acknowledged that “if a patent had actually issued on the strips, the patentability of the strips could be relevant to exhaustion.”

The majority rejected LifeScan’s arguments that exhaustion could not be found because the glucose meters have non-infringing uses:

[A]lternative 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.”… 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.

The majority also rejected LifeScan’s arguments that exhaustion could not be found with regard to the glucose meters that LifeScan gave away, focusing on the authorized transfer rather than the lack of remuneration:

We conclude that, in the case of an authorized and unconditional transfer of title, the absence of consideration is no barrier to the application of patent exhaustion principles.

The majority opinion also discusses tying concerns that it says would arise if exhaustion were not found here:

Allowing LifeScan to control sale of the strips would be akin to allowing a tying arrangement whereby the purchasers of the meters could be barred from using the meters with competing strips. … In both the tying and exhaustion cases, the Supreme Court has expressed particular concern with extension of the patent monopoly to items that must be renewed periodically and that are not themselves patentable.

Having concluded that “LifeScan’s OneTouch Ultra meters substantially embody the methods claimed in the ’105 patent and that their distribution therefore exhausts LifeScan’s patent rights,” the majority held that “Shasta has established a patent exhaustion defense as a matter of law,” and so reversed the district court’s grant of a preliminary injunction.

Judge Reyna’s Dissent

Judge Reyna dissented from the majority opinion, criticizing the majority for “conflating the patentability of a product with the product’s ability to substantially embody the essential features of a patented method.” In particular, Judge Reyna does not agree that Supreme Court precedent supports the majority’s reasoning “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.” Rather, according to Judge Reyna, “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.’”

Judge Reyna also disagreed on the fundamental question at issue:

[T]his case turns on the question of whether LifeScan’s meters or its test strips substantially embody the essential features of the patent. I conclude that the test strips, and not the meters, embody those essential features.

Judge Reyna also questions the logic of the majority opinion, asking how, if the unpatented test strips could not substantially embody the claimed methods, could the unpatented glucose meters? According to Judge Reyna, “the majority’s decision to make inventiveness for exhaustion purposes coextensive with patentability … cannot be squared with Supreme Court precedent.”

An Interesting Case That Raises Other Concerns

On its surface, this case looks like a simple patent exhaustion case, but the opinions raise other important issues.

• When reading both the majority’s and the dissent’s analysis of the “substantially embody” issue, I can’t help but wonder if the court was delving into questions of fact. Even though the majority held that Shasta had established its defense “as a matter of law,” the holding seems to rest on a number of inferences and conclusions the Federal Circuit judges themselves drew from the record.
• Is parsing the claims into inventive and non-inventive limitations part of a standard exhaustion analysis, or does it reflect a recent trend that we also see in patent-eligibility cases?
• Should Applicants consider revising their specifications and abstracts to conform to allowed claims, similar to the practice required in European patent applications? While such amendments typically are viewed as narrowing the scope of the disclosure, this case illustrates how a broader (or different) disclosure can be used against the patent holder.
• Judge Reyna expresses concerns that the result here will decrease the value of LifeScan’s patented methods, but my first reaction is that they may start charging more for their OneTouch Ultra meters.