In Lifescan v. Shasta (Fed. Cir. 2013), the patent owner sold machines and consumables separately. The machines were blood glucose meters, while the consumables were test strips for the blood glucose meters. The patent owner sold the machine at a loss (40% of the time) or gave them away for free (60% of the time) expecting that they would profit on the sales of the test strips. The marketing structure provided a low up-front cost to the consumer to reduce financial risks to the consumer. However, this opened the door for competitors to sell competing test strips without having to bear the costs of manufacturing and distributing the blood glucose meters.
Shasta did just that. They do not sell blood glucose meters, but do sell test strips designed to work with LifeScan’s meters. LifeScan filed a patent infringement lawsuit and moved for a preliminary injunction against Shasta to enjoin them from selling the test strips.
The issue in the LifeScan case concerns patent exhaustion. When a patent owner sells a product, then the patent owner has exhausted its patent rights as to that particular product., and cannot sue the purchaser of the product for patent infringement based on the purchaser’s use of the product.
Shasta argued that the preliminary injunction should not be granted against it based on the doctrine of patent exhaustion. Shasta argued that the sale and distribution of LifeScan’s meters (i.e., apparatus) exhausted LifeScan’s patent rights under the method claims of LifeScan’s patent because the meters (i.e., apparatus) substantially embodied the claimed method invention.
For those meters which LifeScan sold to customers for money, the district court explained that the patent rights were exhausted. However, for those meters given away for free, no remuneration was received by the patent owner, and thus LifeScan’s patent rights were not exhausted. The district court granted the preliminary injunction and Shasta appealed to the Federal Circuit.
The Federal Circuit analyzed and rejected the arguments of LifeScan as to why patent exhaustion should not apply. LifeScan argued that patent exhaustion should not apply because (1) the Lifescan meters have reasonable non-infringing uses and (2) the meters do not embody the essential features of the claimed invention. The Federal Circuit explained that if patent exhaustion did not apply, control of the test strips would be akin to an improper tying arrangement.
The Federal Circuit also addressed whether the meters provided by LifeScan to customers for free implicate patent exhaustion. As a matter of first impression, the Federal Circuit held that, in the case of an authorized and unconditional transfer of title, the absence of consideration (e.g., money) is no barrier to the application of patent exhaustion principles. Simply put, LifeScan exhausted its patent rights when it sold or transferred title of the meters.
What are the work-arounds to this case? What changes to the business model could be made to allow LifeScan to have its cake and eat it too? Potentially, the patent owner may sell the blood glucose meters for a higher cost and give away the test strips for free. Alternatively, the patent owner could lease the blood glucose meters to consumers with a use restriction.
More importantly, it is crucial to understand how you are making money with your products (e.g., glucose meters v. test strips) so that your patent is directed to the product you are selling (i.e., test strips) and not to the method of using the product (e.g., meter and test strips) or to an ancillary product (e.g., glucose meter). During prosecution, the patent examiner may allow the method claims or claims to an ancillary product first. However, it is important to understand the scope of protection you are receiving to understand the limitations of what is actually being protected. For example, if profits are made through sales of the test strips, then it is generally a good idea to keep on pursuing patent protection for the test strips and not settle for method claims or apparatus claims on other components.
If you are in the same or similar situation, I recommend seeking the advice of your patent counsel to determine the best course of action.
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