<i>LifeScan v. Shasta Tech </i>

LifeScan gives at least 60% of its meters to healthcare providers, who then provide the meters to individuals with diabetes at no cost. Life-Scan v. Shasta Tech, No. 13-1271 (Fed. Cir. Nov. 4, 2013), slip op. at 5. LifeScan sells the remaining 40% at a loss. LifeScan's business model is based on the expectation and intent that individuals will purchase OneTouch' Ultra' test strips for use with the OneTouch' meters. Life Scan is the assignee of U.S. Patent No. 7,250,105, which includes three claims, each of which is directed to a method of measuring blood sugar using a meter and test strip, wherein the test strip has two working electrodes and one reference electrode. A test strip with two working electrodes, such as the OneTouch' Ultra' test strip, allows the meter to compare measurements at each electrode. If the measurements are appreciably different (e.g., due to inadequate sample volume or manufacturing defects), the meter discards the result, prompting the individual to check her blood sugar again. Notably, LifeScan was unable to obtain patent protection on the test strips (i.e., no product-type claims) based on the prior art. Id. at 14.

Shasta Technologies LLC, a subsidiary of Decision Diagnostics Corp., introduced GenStrip' testing strips following FDA approval. Shasta markets the GenStrip' testing strips as “the affordable alternative strip for use with OneTouch' Ultra' meters.” A recent price comparison from an online retailer found that a box of 25 OneTouch' Ultra' test strips lists for $37.99, while a box of 50 GenStrip' test strips lists for $27.99. Comparatively, 50 GenStrip' test strips are 63% less expensive than 50 OneTouch' Ultra' test strips.

District Court

LifeScan brought suit against Shasta in 2011 for induced and contributory infringement of the claims in the '105 patent in the Northern District of California. LifeScan alleged that Shasta induced individuals to infringe the method claims of the '105 patent each time an individual checked her blood sugar using a GenStrip' test strip. LifeScan also sought a preliminary injunction to prevent Shasta from selling the GenStrip' test strips. Shasta raised a defense under the doctrine of patent exhaustion, based on the holding in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). Shasta claimed that LifeScan exhausted its patent rights by giving away the meters to healthcare providers, claiming that the meters substantially embody the claimed invention in the '105 patent. District Court Judge Edward Davila granted LifeScan's motion for a preliminary injunction, finding that “patent exhaustion applies only to a 'sale' where the patentee has received 'consideration' in exchange for the patented product” and that LifeScan's meters did not substantially embody the method claims of the '105 patent. Id. at 6-7. Shasta appealed the grant of the preliminary injunction to the Federal Circuit.

Federal Circuit Opinion

The Federal Circuit panel reversed the granting of the preliminary injunction. The panel majority (Judges Dyk and Prost) first discussed patent exhaustion in light of product claims, citing precedent where “the Supreme Court [has] repeatedly held, in addressing device patents, that the sale of a patented device exhausted the patent-holder's right to exclude, and that an infringement suit would not lie with respect to the subsequent sale or use of the device.” The majority then cited Quanta for the rule that “method patents were exhausted by the sale of an item that embodied the method.” Id. at 11 (internal quotations removed). In Quanta, the Supreme Court 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.

LifeScan argued that: 1) ” Quanta is inapplicable because its meters have reasonable noninfringing uses;” 2) “ its meters do not substantially embody the claims of the '105 patent;” and 3) “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.” Id. at 12, 13, and 22, respectively.

Reasonable and Noninfringing Uses

LifeScan claimed that Quanta was not applicable because “the sale of a component does not result in exhaustion where the component has reasonable noninfringing uses,” citing the holding in Quanta. The majority noted the recent decision in Keurig, Inc. v. Sturm Foods, Inc., rejecting LifeScan's argument “where the use in question is the very use contemplated by the patented invention itself.” Id. at 12-13 (citing No. 2013-1072, slip op. at 7 (Fed. Cir. October 17, 2013)). Additionally, the majority found that “alternative uses are relevant to the exhaustion inquiry under Quanta only if they are both 'reasonable and intended ' by the patentee or its authorized licensee.” Id. at 13 (citing Quanta, 553 U.S. at 631) (emphasis in original). The majority concluded that because LifeScan admitted that it expects and intends customers to use its meters with its test strips, any noninfringing use was not “intended” as required by Quanta in a reasonable noninfringing use analysis.

Substantial Embodiment

The majority also provided public policy justifications for its determination, stating that an opposite finding would allow LifeScan to eliminate competition in the sale of the unprotected test strips. This would permit LifeScan to establish a “tying arrangement whereby the purchasers of the meters could be barred from using the meters with competing strips.” The majority noted that “[i]n 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. ' The 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.”

Sale or Gift

As a matter of first impression, the majority examined whether patent exhaustion applied in situations where the patentee gives a product away for free. The majority 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.” To reach this conclusion, the majority cited Supreme Court exhaustion cases that focused on whether “the patented product 'passes to the hands' of a transferee and when he 'legally acquires a title' to it.” Id. at 24. The majority found that LifeScan gave consumers legal title to the meters “in the hope of obtaining a future benefit” through the sale of OneTouch' Ultra' test strips. As a policy consideration, the majority noted that “[i]f patentees could evade exhaustion merely by giving away one component of an apparatus or method claim and tying the recipient's ability to use that component to the subsequent purchase of another component, then patent exhaustion would be a dead letter and consumers' reasonable expectations regarding their private property would be significantly eroded.”

Impact on Patentees

This case provides additional confirmation for the concept of never characterizing your invention, not only in the specification, but also during prosecution and litigation. In reaching its decision on whether the meter “substantially embodied” the method claims of the '105 patent, the majority latched onto statements made by the patentee in the district court in which the meter, as opposed to the test strips, was described as the “crux” of the invention. Such characterization often happens during prosecution of an application when distinguishing cited prior art, but provides no future benefit to the patentee. While it is difficult to predict how each statement will be depicted in later litigation, patentees have every incentive to carefully select any description of their inventions.

Additionally, patentees who give away products with the hope of future sales should assess whether such activities will exhaust product or method claims thought to protect those very products. This case provides that if a patentee transfers title of a product to another, it does not matter whether the patentee received payment regarding future patent exhaustion defenses. While the majority acknowledged that patentees may include language to create an “express contract” in order to prevent patent exhaustion, such contracts may not be practical in each situation. See, id., fn 8. The majority's statement implies that Life-Scan may have been able to avoid the doctrine of patent exhaustion by requiring consumers to agree to purchase only OneTouch' Ultra' test strips, even though enforcing such a contract would be nearly impossible. Instead, this decision will likely force patentees to evaluate their current business models. Rather than providing free products to consumers with hopes of potential future sales, it may be in the patentees' best interest to make a profit directly from the product if competitors can assert patent exhaustion as a viable defense to patent infringement.

J. Gregory Chrisman is a Partner and Christopher Meta is an Associate at Pearne & Gordon LLP in Cleveland, OH. They can be reached at 216-579-1700 or [email protected] and [email protected], respectively.

The American Diabetes Association reports that 25.8 million people in the United States have diabetes. Every day, millions of those individuals monitor their blood sugar with blood glucose meters and test strips. The test strip is discarded after each use. Depending on an individual's circumstances, she may need to test her blood sugar several times a day. For example, an individual with Type 1 diabetes may need to check her blood sugar three or more times per day, while an individual with Type 2 diabetes may need to test one or more times per day. The number of test strips consumed each day is staggering and studies indicate that the global market for diabetes diagnostic tools is projected to reach $26 billion by 2015.

Background

LifeScan is a wholly-owned Johnson & Johnson subsidiary that manufactures and sells blood glucose monitoring products, including OneTouch' Ultra' meters and test strips. According to the Wall Street Journal's MarketWatch, “Lifescan is the market share leader in the at-home glucose testing market.” This statement is corroborated by a report from the Department of Health & Human Services that found that the OneTouch' Ultra' testing strips lead the diabetic testing strip mail order market associated with Medicare, accounting for 14.9% of the claims. That figure is currently 3.8% higher than the next closest testing strip.

LifeScan gives at least 60% of its meters to healthcare providers, who then provide the meters to individuals with diabetes at no cost. Life-Scan v. Shasta Tech, No. 13-1271 (Fed. Cir. Nov. 4, 2013), slip op. at 5. LifeScan sells the remaining 40% at a loss. LifeScan's business model is based on the expectation and intent that individuals will purchase OneTouch' Ultra' test strips for use with the OneTouch' meters. Life Scan is the assignee of U.S. Patent No. 7,250,105, which includes three claims, each of which is directed to a method of measuring blood sugar using a meter and test strip, wherein the test strip has two working electrodes and one reference electrode. A test strip with two working electrodes, such as the OneTouch' Ultra' test strip, allows the meter to compare measurements at each electrode. If the measurements are appreciably different (e.g., due to inadequate sample volume or manufacturing defects), the meter discards the result, prompting the individual to check her blood sugar again. Notably, LifeScan was unable to obtain patent protection on the test strips (i.e., no product-type claims) based on the prior art. Id. at 14.

Shasta Technologies LLC, a subsidiary of Decision Diagnostics Corp., introduced GenStrip' testing strips following FDA approval. Shasta markets the GenStrip' testing strips as “the affordable alternative strip for use with OneTouch' Ultra' meters.” A recent price comparison from an online retailer found that a box of 25 OneTouch' Ultra' test strips lists for $37.99, while a box of 50 GenStrip' test strips lists for $27.99. Comparatively, 50 GenStrip' test strips are 63% less expensive than 50 OneTouch' Ultra' test strips.

District Court

LifeScan brought suit against Shasta in 2011 for induced and contributory infringement of the claims in the '105 patent in the Northern District of California. LifeScan alleged that Shasta induced individuals to infringe the method claims of the '105 patent each time an individual checked her blood sugar using a GenStrip' test strip. LifeScan also sought a preliminary injunction to prevent Shasta from selling the GenStrip' test strips. Shasta raised a defense under the doctrine of patent exhaustion, based on the holding in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). Shasta claimed that LifeScan exhausted its patent rights by giving away the meters to healthcare providers, claiming that the meters substantially embody the claimed invention in the '105 patent. District Court Judge Edward Davila granted LifeScan's motion for a preliminary injunction, finding that “patent exhaustion applies only to a 'sale' where the patentee has received 'consideration' in exchange for the patented product” and that LifeScan's meters did not substantially embody the method claims of the '105 patent. Id. at 6-7. Shasta appealed the grant of the preliminary injunction to the Federal Circuit.

Federal Circuit Opinion

The Federal Circuit panel reversed the granting of the preliminary injunction. The panel majority (Judges Dyk and Prost) first discussed patent exhaustion in light of product claims, citing precedent where “the Supreme Court [has] repeatedly held, in addressing device patents, that the sale of a patented device exhausted the patent-holder's right to exclude, and that an infringement suit would not lie with respect to the subsequent sale or use of the device.” The majority then cited Quanta for the rule that “method patents were exhausted by the sale of an item that embodied the method.” Id. at 11 (internal quotations removed). In Quanta, the Supreme Court 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.

LifeScan argued that: 1) ” Quanta is inapplicable because its meters have reasonable noninfringing uses;” 2) “ its meters do not substantially embody the claims of the '105 patent;” and 3) “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.” Id. at 12, 13, and 22, respectively.

Reasonable and Noninfringing Uses

LifeScan claimed that Quanta was not applicable because “the sale of a component does not result in exhaustion where the component has reasonable noninfringing uses,” citing the holding in Quanta. The majority noted the recent decision in Keurig, Inc. v. Sturm Foods, Inc., rejecting LifeScan's argument “where the use in question is the very use contemplated by the patented invention itself.” Id. at 12-13 (citing No. 2013-1072, slip op. at 7 (Fed. Cir. October 17, 2013)). Additionally, the majority found that “alternative uses are relevant to the exhaustion inquiry under Quanta only if they are both 'reasonable and intended ' by the patentee or its authorized licensee.” Id. at 13 (citing Quanta, 553 U.S. at 631) (emphasis in original). The majority concluded that because LifeScan admitted that it expects and intends customers to use its meters with its test strips, any noninfringing use was not “intended” as required by Quanta in a reasonable noninfringing use analysis.

Substantial Embodiment

The majority also provided public policy justifications for its determination, stating that an opposite finding would allow LifeScan to eliminate competition in the sale of the unprotected test strips. This would permit LifeScan to establish a “tying arrangement whereby the purchasers of the meters could be barred from using the meters with competing strips.” The majority noted that “[i]n 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. ' The 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.”

Sale or Gift

As a matter of first impression, the majority examined whether patent exhaustion applied in situations where the patentee gives a product away for free. The majority 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.” To reach this conclusion, the majority cited Supreme Court exhaustion cases that focused on whether “the patented product 'passes to the hands' of a transferee and when he 'legally acquires a title' to it.” Id. at 24. The majority found that LifeScan gave consumers legal title to the meters “in the hope of obtaining a future benefit” through the sale of OneTouch' Ultra' test strips. As a policy consideration, the majority noted that “[i]f patentees could evade exhaustion merely by giving away one component of an apparatus or method claim and tying the recipient's ability to use that component to the subsequent purchase of another component, then patent exhaustion would be a dead letter and consumers' reasonable expectations regarding their private property would be significantly eroded.”

Impact on Patentees

This case provides additional confirmation for the concept of never characterizing your invention, not only in the specification, but also during prosecution and litigation. In reaching its decision on whether the meter “substantially embodied” the method claims of the '105 patent, the majority latched onto statements made by the patentee in the district court in which the meter, as opposed to the test strips, was described as the “crux” of the invention. Such characterization often happens during prosecution of an application when distinguishing cited prior art, but provides no future benefit to the patentee. While it is difficult to predict how each statement will be depicted in later litigation, patentees have every incentive to carefully select any description of their inventions.

Additionally, patentees who give away products with the hope of future sales should assess whether such activities will exhaust product or method claims thought to protect those very products. This case provides that if a patentee transfers title of a product to another, it does not matter whether the patentee received payment regarding future patent exhaustion defenses. While the majority acknowledged that patentees may include language to create an “express contract” in order to prevent patent exhaustion, such contracts may not be practical in each situation. See, id., fn 8. The majority's statement implies that Life-Scan may have been able to avoid the doctrine of patent exhaustion by requiring consumers to agree to purchase only OneTouch' Ultra' test strips, even though enforcing such a contract would be nearly impossible. Instead, this decision will likely force patentees to evaluate their current business models. Rather than providing free products to consumers with hopes of potential future sales, it may be in the patentees' best interest to make a profit directly from the product if competitors can assert patent exhaustion as a viable defense to patent infringement.

J. Gregory Chrisman is a Partner and Christopher Meta is an Associate at Pearne & Gordon LLP in Cleveland, OH. They can be reached at 216-579-1700 or [email protected] and [email protected], respectively.