By Dennis Crouch
LifeScan v. Shasta Tech (Fed. Cir. 2013)
The doctrine of patent exhaustion is something of a mess following the Supreme Court case of Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). Here, the Federal Circuit relies on Quanta to find that a patented method of using a blood-glucose meter and test strips was exhausted (and therefore unenforceable) when the meters being used were received as gifts from the patentee. The case is an interesting and important read for patent strategists. Although the patentee lost here, the case implies several strategies that future patentees can use to avoid a similar outcome.
LifeScan’s business model is interesting. It essentially gives-away its OneTouch blood-glucose meters but then makes money by selling the disposable test strips required to perform the test. The company’s patent covers the combined use of the meter and the strips to measure glucose levels. U.S. Patent No. 7,250,105. Shasta sells knock-off versions of the lifeScan strips designed to be used in LifeScan OneTouch meters. LifeScan tried, but it was unable to obtain a patent on the strips themselves because of extensive prior art in the area.
Although Shasta does not actually perform the patented method, it does sell a product particularly designed to perform that method and also encourages its customers to perform the method. Thus, in 2011, LifeScan sued Shasta for inducing infringement and contributory infringement under 35 U.S.C. § 271(b) and (c). LifeScan also requested a preliminary injunction that was granted by N.D. California District Court Judge Edward Davila. The law of appellate procedure allows for immediate appeal of preliminary injunction decisions, leading to the present decision.
On appeal, the Federal Circuit reversed the preliminary injunction – finding that Shasta’s use of the patented method was excused under the principles of patent exhaustion.
A patent offers exclusive rights to control the sale of goods covered by the patent. However, long ago, courts determined that a patent right should not confer power to control the entire downstream marketplace for goods. The non-statutory patent exhaustion doctrine achieves this goal by finding patent rights are exhausted or used-up vis-à-vis a particular patented good once the patentee authorizes its original sale or release into the marketplace. This concept is codified in copyright law under 17 U.S.C. § 109 that states “the owner of a particular copy … lawfully made under this title … is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.”
Exhausting a patented method: In at least two different cases, the Supreme Court has applied the exhaustion doctrine to method-of-use claims. United States v. Univis Lens Co., 316 U.S. 241 (1942) and Quanta. Method claims are an odd-fit to the doctrine since the underlying product being sold will not necessarily be used to perform the method and may have been purchased for some other purpose. In Univis, the court wrote that the sale of an article that “embodies essential features” of a patented invention exhausted the patent-holder’s rights in that particular article. Then, in Quanta, the court particularly stated that “method patents [are] exhausted by the sale of an item that embodied the method” and confirmed the “embodies essential features” test from Univis. In particular, the Quanta court noted an important factor for determining “substantial embodiment” of the patent is whether additional “inventive” steps are required and the scope of reasonable noninfringing uses. In Quanta, additional physical hardware was required to make Intel’s chipsets into a workable system, but the court held that the chipsets exhausted LG’s patent covering a method of using the system since the “additional step necessary to practice the patent[s was] the application of common processes or the addition of standard parts.”
Here, the appellate panel found that LifeScan’s meter substantially embodies the essential features of the method-of-use patent. It turns out that this is seemingly a quite easy case because there are no “reasonable and intended” non-infringing uses of the meter. Using a clever argument, LifeScan proposed that the method-of-use claim included inventive features separate and apart from the meter’s function. However, the appellate panel rejected that argument based upon its reading of the patent and prior art – finding that the inventive “key” to the patent was the meter’s inherent comparing function. Here, the majority appeared comfortable following Supreme Court principles in this area that suggest deconstructing the patented claim into its points of novelty or inventiveness.
From a policy perspective, the court wrote that this is also the right decision:
Rejecting a claim of exhaustion in this case would be particularly problematic because LifeScan would be permitted to eliminate competition in the sale of the strips even though the strips do not embody the claimed invention and are themselves not patentable.
Killing a business model: LifeScan finally argued that exhaustion should not apply because it gives-away its meters for free and thus receives no “reward” for its patent. As a matter of first-impression for the Federal Circuit, the court held 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.” For this result, the court looked back to 17th century English Common Law principles regarding restraints on the alienation of chattels as part of a whole-interest transfer– finding that such restraints were (and are) typically barred regardless of whether the transfer was by gift or by sale. See also UMG Recordings, Inc. v. Augusto, 628 F.3d 1175 (9th Cir. 2011)(copyright).
The majority was penned by Judge Dyk who was joined by Judge Prost.
Writing in Dissent, Judge Reyna argued that essential features of the patented method were embodied by the test strips and that, as a result, sale of the meter cannot exhaust the patented method.
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Linking Exhaustion and Inducement: A commonly stated patent law linking principle is “That which infringes if later, anticipates if earlier.” Peters v. Active Manufacturing Co., 129 U.S. 530 (1889). Emerging from this case and Quanta appears to be another parallel – this time linking infringement and exhaustion. The principle could generally be stated that a patentees transfer actions exhaust a patent if those same actions, when done by another, would constitute infringement. Emerging from Quanta and LifeScan is the recognition that the principle applies even when the underlying claim is inducement and contributory infringement.