Patent Exhaustion of Method Claims – Clarifying the Rights of the Patent Owner

January 21, 2014

By Eric D. Buss & Thomas R. Hipkins

What if someone sold you a product and then sued you for patent infringement because you used the product for its intended purpose? The doctrine of patent exhaustion guards against such a situation, and the Federal Circuit recently made an important clarification of that doctrine.

Patent exhaustion prevents a patent holder from controlling the use or re-sale of a patented product after an authorized sale of the product. That is, while a patent generally precludes unauthorized use or sale of a patented product, an authorized purchaser of the patented product is free to use or sell it without express permission of the patent holder.

Whether a product constitutes a “patented product” for purposes of patent exhaustion depends on whether the article “embodies essential features” of a claimed invention.

Patent exhaustion applies to method patents as well. In Quanta Computer v. LG Electronics, the US Supreme Court ruled that the issue in either a product or method patent is whether the product sold “substantially embodies the patent.”

The Federal Circuit recently clarified the Quanta decision in LifeScan v. Shasta. LifeScan owns a patent (U.S. Pat. No. 7,250,105—”the ‘105 patent”) with claims directed to a method of measuring the concentration of a substance in a sample liquid. LifeScan commercializes the ‘105 patent by manufacturing a “OneTouch Ultra” blood glucose monitoring system that includes a OneTouch meter in conjunction with OneTouch test strips for use in the OneTouch meter. As a business practice, LifeScan sells 40 percent of its meters below cost and distributes 60 percent of its meters to health care providers who distribute them to diabetic individuals free of charge. LifeScan makes its money by selling its OneTouch test strips for use in the meter. Shasta sells competing strips, “GenStrips,” which are also designed to work with LifeScan’s meters.

LifeScan asserted the ‘105 patent against Shasta, alleging that the manufacture and distribution of Shasta’s GenStrips indirectly infringed the ‘105 patent, with users of the GenStrips being the required direct infringers. Shasta argued in response that LifeScan’s distribution of the LifeScan meters exhausted the ‘105 patent. The district court ruled in favor of LifeScan, issuing a preliminary injunction against Shasta.

The Federal Circuit ruled that the “it is the meter, not the strips, which performs the ‘measuring,’ ‘comparing,’ and ‘giving an indication of an error’ steps,” claimed in the ‘105 patent. The decision turned on “whether the additional steps needed to complete the invention from the product are themselves ‘inventive’ nor ‘noninventive.’” Per the court’s ruling, because the inventive concept of the ‘105 patent was in the meter, the meter substantially embodies the method claims and is therefore, per Quanta, subject to patent exhaustion. Using strips with the meter was not additionally inventive.

The Federal Circuit rejected LifeScan’s argument that, because 60 percent of its meters were distributed for free, they were not “sold” and that therefore patent exhaustion did not apply. The court reasoned that “in the case of an authorized and unconditional transfer of title, the absence of consideration is no barrier to the application of patent exhaustion principles.” In other words, even though LifeScan received no compensation for its meter, because the meter substantially embodied the invention, its authorized distribution exhausted the ‘105 patent’s method claims.

From a strategy perspective, it is important to be aware of when patent exhaustion can limit the rights of a patent holder. In LifeScan, the Federal Circuit found that the strips were not inventive or embodied in the asserted patent, so LifeScan should not be given a monopoly over the sale of strips for use with its meter. Method patent holders should be aware of the ways that infringement (direct or indirect) of their patent might occur. In particular, holders of patents having claims directed toward a method involving a combination of articles should note in which articles “inventive” features are present. Doing so can help a patent holder strategize ways to market one or more such articles without losing patent rights based on the doctrine of patent exhaustion.