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IP Alert: Following Keurig, Federal Circuit Again Applies Patent Exhaustion Doctrine to Method Claims

November 14, 2013

On November 4, 2013, in LifeScan Scotland, Ltd. v. Shasta Technologies, LLC, the Court of Appeals for the Federal Circuit issued an opinion clarifying the doctrine of patent exhaustion in the context of method claims in patents. This is the court’s second recent opinion on this subject; please see the recent Fitch Even IP Alert on Keurig, Inc. v. Sturm Foods, Inc.

LifeScan Scotland holds a patent (U.S. Patent No. 7,250,105) related to a method for using blood glucose measuring devices. These devices typically include an electrochemical meter and use disposable test strips. LifeScan distributes its “OneTouch Ultra” meters for free or at a price below cost, with the expectation that the recipients of the meters will buy test strips from LifeScan. 

Other companies have begun selling test strips that can be used in LifeScan’s meters, including the accused infringer, Shasta. LifeScan filed suit against Shasta and asserted that purchasers of Shasta’s test strips directly infringed the patent claims by using the OneTouch Ultra meter with Shasta test strips, and that Shasta induced and contributed to that infringement by selling the test strips. LifeScan sought and obtained a preliminary injunction, which the district court granted over Shasta’s argument that LifeScan had exhausted its rights in the patented method via distribution of its meters.

On appeal, the Federal Circuit reversed. The parties agreed that the case was governed by the Supreme Court’s 2008 decision Quanta Computer, Inc. v. LG Electronics, Inc. Under Quanta, a method patent is exhausted by the sale of an item that "substantially embodies” the patented method. LifeScan argued that its meters had reasonable noninfringing uses. Specifically, LifeScan argued that Shasta could have designed new strips that would work with LifeScan’s meter in a noninfringing way. Accordingly, argued LifeScan, distribution of the meters did not exhaust LifeScan’s patent rights in the method since their meters have reasonable noninfringing uses.

The Federal Circuit rejected this argument. First, the court held that the focus of the alternative use inquiry should be on the end users, not on Shasta: “[The question] is whether the individual users (the alleged direct infringers) have a noninfringing use for the meters.” Answering this question in the negative, the court held that “there is no suggestion that the users can put LifeScan’s meters to noninfringing uses.” 

Second, the court held that alternative uses under Quanta are relevant if the alternative use was both “reasonable and intended.” Here, LifeScan had admitted that it distributes its meters with the expectation and intent that the recipients would use LifeScan’s test strips in a manner that practiced the ’105 patent. As such, even if there were alternative uses available to the meter users, they were not the intended uses and so were not relevant to the exhaustion inquiry.

LifeScan also argued that the exhaustion doctrine did not apply because its meters did not embody the essential features of the patented method claims. The court disagreed. The court characterized the relevant inquiry as “whether the meters ‘control’ and ‘carry out’ the inventive functions described in the method claims of the ’105 patent.” In this regard, the court relied on the inability of LifeScan to obtain patent protection for the strips to be used with its meters. The court then held “the undisputed facts, the specification of the patent, and the prosecution history all suggest that the claimed inventive concept of the method claims of the ’105 patent lies in the meter, rather than the strips, because the meters ‘control’ and ‘carry out’ the inventive functions of the method claims.” The court held that its recent Keurig decision was consistent with and bolstered its analysis. As earlier discussed, in Keurig, the court held that the sale of a coffee brewer exhausted a patent that included both claims to the brewer and claims to a method of using the brewer. 

Finally, LifeScan alleged that patent exhaustion could not apply to that portion of its meters that it distributed for free. The Federal Circuit decided, as a matter of first impression, that so long as the transfer of title was authorized and unconditional, it did not matter that LifeScan had not received any payment for the meters, and its rights were still exhausted. Analyzing Supreme Court precedent, the court found that patent exhaustion was never confined to a “sale” and “purchaser” context. The court held that a patentee cannot “evade patent exhaustion principles by choosing to give the article away rather than charging a particular price for it.” 

Judge Reyna dissented. He argued that the majority misapplied the exhaustion standard set forth in Quanta by conflating the patent exhaustion analysis with a patentability analysis. He further argued that it was the test strips, and not the meter, that embodied the features of the patented method. He found the Keurig case distinguishable on the grounds that the Keurig brewer performed every step of the claimed method, with the cartridge merely serving as a “passive participant.” Additionally, he found it significant that Keurig had patents on its brewer and cartridges, whereas LifeScan did not have apparatus patents on its meters or strips. Also, he particularly disagreed that LifeScan had exhausted its rights in the meters given away for free. 

Like Keurig, the LifeScan decision raises certain questions and strategic considerations for patentees with method patents, especially where the patentee sells a product that constitutes a component of the patented method. The LifeScan decision also is important for those evaluating a possible charge of infringement of a method patent, particularly where only indirect infringement is alleged. 

If you would like to discuss the implications of the LifeScan decision, please contact Fitch Even partner Stephen S. Favakeh.

Written by Fitch Even attorney Nicole L. Little


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