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The patent exhaustion doctrine says that the sale of a patented device exhausts the patent rights and, therefore, an infringement suit cannot be brought against one who subsequently sells or uses the device. The doctrine applies to method patents as well.

In LifeScan v. Shasta, LifeScan held a method patent that covered its blood glucose monitoring meter. To use the meter, test strips are needed. LifeScan sold 40% of its meters below cost and distributed for free a majority of its meters to health care providers who, in turn, gave the meters free to patients. LifeScan expected patients to buy LifeScan test strips for use with LifeScan meters and thereby derive a profit.

Shasta did not sell blood glucose meters but did sell test strips that could be used with LifeScan meters.

LifeScan filed suit against Shasta alleging indirect infringement based on Shasta's sales of test strips. LifeScan sought a preliminary injunction which the district court granted. The patent exhaustion applied only to "sales", according to the district court. Further, according to the district court, patent exhaustion did not apply to LifeScan's sale of meters because the patent-in-suit required both a meter and a test strip.

On appeal, LifeScan argued that patent exhaustion does not apply — both to sales or gifts — of its meters because they do not "substantially embody" the patent claims. The Federal Circuit disagreed.

The Federal Circuit referred to the earlier US Supreme Court decision in Quanta. The Supreme Court held that method patents were exhausted by the sale of a product that "substantially" embodied the method. In Quanta, a product substantially embodies the patent when "everything inventive" about the patent was embodied in the product.

LifeScan argued that Quanta was inapplicable because LifeScan's meters had reasonable noninfringing uses. The Federal Circuit countered that noninfringing uses are relevant only if they are both "reasonable and intended" by the patentee/licensee. Here, LifeScan intended that its customers use both the meter and test strips; thus, noninfringing uses were not relevant.

The Federal Circuit further found that the "inventive concept" of the method claims was in the meter, not the test strips.

Finally, the Federal Circuit reasoned that if exhaustion did not apply here, LifeScan could eliminate competition in the sale of test strips even though the strips do not embody the invention and even though the strips themselves are not patentable.

Medical device companies should be wary of business models that give away something in order to rely on sales of something else. Doing so may be giving away your patent rights.

© Michael Shimokaji 2013
The contents of this article represent the opinions of the author and not those of the author's law firm or clients.

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