June 25, 2013
LES Insights
Authored by D. Brian Kacedon, Kassandra M. Officer, and John C. Paul
Under the doctrine of patent exhaustion, the initial authorized sale of a patented product exhausts the patent rights to that product. A recent decision by the Northern District of California, LifeScan, Inc. v. Shasta Technologies, LLC,1addressed the first-sale doctrine by considering whether it is invoked by either (1) the transfer of title and ownership or (2) the purchase and sale of a patented product. The court also addressed the circumstances under which the first-sale doctrine should be applied to the sale of part of a patented product.
LifeScan markets and sells its OneTouch Ultra system, a glucose-monitoring system that uses LifeScan's patented method to improve the accuracy of glucose measurements. Practicing this method requires both a meter and a disposable test strip. The disposable test strip is designed with two sensors in a downstream configuration, ensuring that blood completely covers the first sensor before reaching the second sensor and thereby getting more accurate results. Each sensor measures the current produced by an electrochemical reaction caused by glucose in the blood. If the measurements fall within a predetermined range of one another, then the reading is considered accurate; if not, the reading is discarded.
LifeScan distributes the OneTouch Ultra systems either by having doctors give them to diabetic patients for free or by selling the meters alone, without the test strips. LifeScan then sells its disposable test strips designed for use in the OneTouch Ultra meter. The defendants sell GenStrips that are "nearly identical" to LifeScan's test strips and are FDA-approved for use only in the OneTouch Ultra meter. LifeScan, claiming that the defendants' GenStrips indirectly infringe LifeScan's patented method, sought a preliminary injunction.
When determining whether to grant a preliminary injunction, courts consider four factors: (1) whether the patentee had a reasonable likelihood of success on the merits; (2) whether irreparable harm would result in the absence of preliminary relief; (3) the balance of hardships between the parties; and (4) whether the public interest favors an injunction. The court found for LifeScan on all four factors and granted the preliminary injunction.
The bulk of the court's opinion addressed whether the defendants' various defenses had a likelihood of success. Regarding these defenses, the first involved whether the first-sale doctrine applied. As expressed by the Supreme Court in Quanta Comp., Inc. v. LG Electronics, Inc., the first-sale doctrine provides that the initial authorized sale of a patented item terminates all patent rights to that item. At issue in this case was whether LifeScan's distribution of its OneTouch Ultra products constituted an "authorized sale," which would terminate LifeScan's patent rights to the distributed products.
First, the court considered whether the first-sale doctrine was invoked by freely distributing kits containing the OneTouch Ultra system and test strips. The court began its analysis by assessing whether there was a distinction between the transfer of title and ownership versus the purchase and sale of a patented product. Analyzing the case law, the court noted the shift in the exhaustion inquiry from whether a valid sale and purchase had occurred to whether the patentee had received his reward in any form. Although subsequent case law did not develop this "reward" inquiry further, the court recognized that reward was a common theme in patent-exhaustion cases. As a result, the court concluded that the first-sale doctrine cannot not apply if the patentee has not received a reward. When LifeScan gave away its OneTouch Ultra kits free of charge, it received no immediate reward; rather, the reward came later, when LifeScan sold additional disposable test strips. Because LifeScan received no reward at the time of distribution, the court determined that the first-sale doctrine did not apply to distribution of free kits.
Second, the court addressed LifeScan's sale of the OneTouch Ultra meter alone, without the test strips. The court explained that the first-sale doctrine applies to the sale of a component of a patented method only when the component substantially embodies the patented method—in other words, when the component is an "essential, or inventive, feature" of the patented method. Here, the court determined that the OneTouch Ultra meter did not substantially embody the patented method because the claims required both the meter and test strips. Moreover, the disposable test strips provide the novelty of the patented method. The court relied on evidence that the patent examiner considered the test-strip sensors to be an important component of the patented method. For example, the examiner noted that the particular design and arrangement of the sensors on the test strips contribute substantially to the novelty of the patented method. In addition, the court found it telling that the patent's specification and claims emphasized the importance of the test strips. Indeed, no figure related to the meter or any other measuring device. To the court, this evidence suggested that the OneTouch Ultra meter alone cannot embody an essential or inventive feature of the patented method, and therefore, the court determined that the first-sale doctrine did not apply. It is important to note here that the court's determination was in no way final—because it was considering only whether to issue a preliminary injunction, the threshold was whether LifeScan had shown it was likely to succeed in overcoming the defendants first-sale defense.
The defendants also sought to convince the court that they could not infringe because the patent requires an electrical current proportional to the amount of glucose in the blood. Under the defendants' interpretation, because the current was not linearly related to the blood glucose, they could not infringe. The court rejected this view and instead agreed with LifeScan that the patent permitted processing of the electrical current to obtain a signal proportional to the blood glucose, using a number of system and environmental factors. The court seemed particularly troubled by the fact that the defendants used "proportional" in a different way when discussing invalidity as opposed to infringement. It held that LifeScan was likely to prevail on the issue of infringement.
When it considered the defendants' invalidity arguments, the court concluded that the prior-art references they raised did not adequately teach the elements of LifeScan's claims and that combining the references would have been unpredictable. It also weighed the fact that many of the references had already been considered by the USPTO during prosecution and that LifeScan's success in the market tended to show that the patented method was not obvious.
Following its determination that LifeScan would likely prevail in showing that first-sale doctrine did not terminate LifeScan's patent rights to the distributed OneTouch Ultra products, and would likely prevail on infringement and invalidity, the court addressed the other factors for a preliminary injunction.
Because the parties were direct competitors, and because the defendants sold their test strips at approximately half the price of LifeScan's strips, the court held that LifeScan had proved it would be irreparably harmed without a preliminary injunction. One factor here was the court's conclusion that the test strips "embody a substantial part of the patented feature and not much else." Accordingly, it rejected the defendants' argument that customers buy the strips for something other than the patented feature.
Regarding the balance of hardships, the court noted that the defendants had entered the market after LifeScan brought suit and thus had taken a calculated risk. Finally, the court found that the public's interest in protecting patent rights—thus incentivizing innovation—outweighed its interest in low cost alternatives. Accordingly, the court granted LifeScan's motion for a preliminary injunction.
Here, the court found that the patent exhaustion under the first-sale doctrine would likely not apply to LifeScan's kits, which were distributed for free. It also held that it would not likely apply to LifeScan's sale of meters alone, which it did not view as an essential or inventive feature of the patented method. This order suggests that companies might be able to distribute promotional products while maintaining the ability to enforce their intellectual property. It also highlights the importance of careful drafting as the relationship of the promotional goods to the claims at issue was important to the court.
Endnotes
1The LifeScan order can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2013/LifeScan_v_Shasta.pdf
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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