Exhausting Patent Rights Without a “Sale”November 22, 2013

InLifeScan Scotland, LTD v. Shasta Technologies, LLC, the Federal Circuit clarified the ability of a patnet holder to enforce patent rights in a product it has given away, but not "sold." Defendant Shasta Technologies appealed from a decision of the United States District Court for the Northern District of California granting LifeScan Scotland a preliminary injunction. The injunction prohibits Shasta from making, using, or selling blood glucose test strips. The District Court found that Shasta's strips likely indirectly infringed LifeScan's U.S. Patent No. 7,250,105 ("the '105 patent"). The '105 patent does not cover any corresponding test strips. Rather, the technology described in the '105 patent relates to an apparatus for measuring glucose. LifeScan manufactures a system called "OneTouch Ultra" blood glucose monitoring system, which uses this technology. LifeScan distributes 60% of its patented meters through health care providers, who in turn provide the meters to diabetic individuals for free.

Shasta does not sell or make blood glucose meters, but instead competes with LifeScan in the market for test strips. Shasta's "GenStrip" test strips are designed to work with LifeScan's meters. LifeScan's suit alleged that Shasta's GenStrip test strips indirectly infringed the '105 patent. In turn Shasta claimed the sale and distribution of LifeScan's meters exhausted its rights under the method patent because the meters substantially embody the invention.

The District Court agreed with LifeScan, granting it a preliminary injunction. The District Court reasoned that patent exhaustion applies only to a "sale" where the patentee received "consideration" in exchange for the patented product. The district court concluded that because LifeScan did not receive consideration when it distributed the patented product, patent exhaustion does not apply.

On appeal, the Federal Circuit relied on Quanta Computer, Inc. v. LG Electronics, Inc., which holds that a method claim is exhausted by the sale of a product that "substantially embodies" the invention. The appellate court also held, as a matter of first impression, that "[w]here 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." As a result, LifeScan could not circumvent the application of patent exhaustion principles by distributing a product embodying the patent for free, and reversed the district court’s grant of a preliminary injunction.