DEVOTED TO INTELLECTUAL

PROPERTYLITIGATION &

ENFORCEMENTEdited by Gregory J. Battersby

and Charles W. Grimes

Litigator

JANUARY/FEBRUARY 2014

VOLUME 20 NUMBER 1

JANUARY/FEBRUARY 2014 I P L i t i g a t o r 1

Federal Circuit Report Craig Countryman

Recent Developments in Patent Exhaustion after Quanta

A pair of recent Federal Circuit cases sheds new light on whether a patent holder’s sale of a product will “exhaust” its right to enforce a pat-ent covering a method that involves using that product. The cases give those sued for infringement new ways to invoke the defense, while raising unexpected problems for pat-ent holders to consider when they price their products and write patent claims to protect their inventions.

Background on Applying Exhaustion to Method Patents

Exhaustion is straightforward when the patent covers a product. If a patent holder sells a product covered by its patent, then the pur-chaser is free to use or resell the product as it sees fit. The plaintiff can’t sue that customer (or any-one else) for use or resale of that article because it is deemed that the plaintiff has “exhausted” its rights to that product. The thought is that the plaintiff bargained for and received the full value of the product as part of the initial sale and shouldn’t be allowed to double-dip by restricting later behavior. The doctrine also allows the public to create a secondary market for used versions of the product with-out need for complicated licens-ing arrangements with the patentee. But exhaustion also is a default rule for which parties can opt-out. The law presumes that all sales are

“unrestricted,” but the patentee and the purchaser can agree to restric-tions on the buyer’s right to reuse or sell the product, which the patentee could later enforce.

Things become more complicated, however, when the patent covers a method. The Federal Circuit held for a time that exhaustion could not apply to method claims. But Quanta Computer, Inc. v. LG Elec-tronics, Inc. , [553 U.S. 617 (2008)] overruled those cases, determining that a patentee exhausted its rights to a method of synchronizing data transfers by licensing a manufacturer to produce unpatented components (such as chipsets) that performed the method when incorporated into a computer. The Court didn’t want to leave a loophole for patentees to avoid exhaustion by writing claims to a method instead of a product. [ Id . at 630.] So it found that the sale of the chipsets exhausted the patented method because “their only reasonable and intended use was to practice the patent” and they “embodied essential features of the patented invention.” [ Id . at 631.] The chipset was the “essential” or “inventive” feature because “the only step necessary to practice the pat-ent” using it “is the application of common processes or the addition of standard parts,” like connecting them to memory. [ Id . at 633.]

Quanta left many unanswered ques-tions about exhaustion of method claims. Does sale of a product exhaust method claims only when it has no noninfringing uses, or was the Court just remarking on the facts before it? Must the product be the “essential” and “inventive” part of the method to trigger exhaustion? If so, how does one determine if those requirements are met?

The Federal Circuit Expands Exhaustion after Quanta

Two new Federal Circuit decisions answer some of those questions. The first, Keurig, Inc. v. Sturm Foods, Inc. , [732 F.3d 1370 (Fed. Cir. 2013)] deals with exhaustion when the plain-tiff has patents to a product and a method of using that product. The plaintiff (Keurig) sold coffee brewers and single-use cartridges that could be used in the brewers, while the defendant (Sturm) sold cartridges that were compatible with the plain-tiff ’s brewer. Keurig had patents cov-ering the brewer and a method of using it to make coffee but not one covering the defendant’s cartridge. So Keurig accused Sturm of induc-ing and contributing to infringement by selling cartridges that Keurig’s customers could use to make coffee.

The Federal Circuit found that Keurig exhausted its patent rights to the method upon selling its brew-ers, explaining that “to rule other-wise would allow Keurig what the Supreme Court has aptly described as an ‘end-run around exhaustion’ by claiming methods as well as the apparatus that practices them” and therefore control post-sale use of its patented brewers. [ Id . at 1374.] It added that “to permit a paten-tee to reserve specific claims from exhaustion would frustrate the pur-poses of the doctrine, one of which is [to] provide an efficient frame-work for determining when a patent right has been exhausted.” [ Id .] It did not matter that the brewers had substantial noninfringing uses. The Court held that Quanta ’s comments regarding noninfringing uses apply only to determine whether sale of an otherwise unpatented component exhausts the patentee’s method pat-ent. It thus created the odd possibil-ity that Keurig may have been better off by seeking less patent protection and obtaining only claims to the method, then, at least, the existence

2 I P L i t i g a t o r JANUARY/FEBRUARY 2014

of noninfringing uses may have saved it from exhaustion.

The second case, LifeScan Scotland Ltd. v. Shasta Technologies, LLC , [734 F.3d 1361 (Fed. Cir. 2013)] deals with two parties with a similar rela-tionship to those in Keurig but with a couple different twists. The plaintiff, LifeScan, distributed equipment that diabetics use to test glucose levels: (1) disposable test strips to which the patient applies a blood sample and (2) meters that analyze the glucose content of the blood once the strip is inserted. LifeScan sold the strips, while it gave away the meters for free (or at heavily discounted prices). The defendant, Shasta, sold test strips that could be used with LifeScan’s meter. LifeScan sued Shasta for infringing a patent to testing glucose levels with the meters and strips on the theory that Shasta’s sale of strips induced or contributed to infringe-ment by patients who used the strips with a LifeScan meter.

The Court held that LifeScan’s transfer of meters exhausted its pat-ent rights. The meter embodied the essential features of the patented method (triggering exhaustion under Quanta ) because it “control[s] and carr[ies] out the inventive function of the method claims.” [ Id . at 1370.] Explaining that “[w]hat is ‘inventive’ about patent claims in the patent exhaustion context is what distin-guishes them from the prior art,” [ Id . at 1369] the Court concluded that “the meter alone … performs [the] key inventive steps of the claimed method” because, among other things, the Patent Office’s reasons for allowance had identified these steps as distinguishing the prior art, [ Id . at 1371] and the Patent Office had repeatedly rejected separate appara-tus claims that were directed solely to the test strips. Exhaustion applied

despite the patentee’s argument that the meters had noninfringing uses because (1) the meters are intended to be used in an infringing manner, (2) there was no evidence anyone had actually used them in a non- infringing way, and (3) it was irrel-evant whether the strips could be redesigned for use in a noninfringing manner because this had not actually been done. [ Id . at 1368-1369.]

Finally, the Court held that exhaus-tion applied even to those meters given away for free by the patentee where there is “an authorized and uncondi-tional transfer of title.” [ Id . at 1374.] The LifeScan’s transfer of its meters was “unrestricted” even though it marked their packaging with instruc-tions telling customers to use the meter with only LifeScan’s test strips the purchasers made no “express con-tractual undertaking” agreeing to that restriction. [ Id . at 1375 & n.8.]

Future Consequences

The Federal Circuit’s aggressive application of exhaustion in Keurig and LifeScan may require patent holders to rethink their strategy. The decisions apply most directly to companies who sell a long-term product ( e.g. , the brewers or meters) along with disposables to be used with it ( e.g. , the cartridges or strips). LifeScan is an example of the patent holder planning to make its money on sales of the disposable—it gave away the long-term product for free. But this left an opening for a compet-itor (Shasta) to enter the market for the disposable and undercut the pat-ent holder’s prices, which were higher to recoup the cost of the meters. The patent holder may have thought its method patent would protect its right to recover its investment through sales of the disposable, but the Court dis-

agreed. Similarly situated companies should take this into account when setting the relative prices of their long-term products and disposables.

The decisions also further weaken method patents, which are becom-ing more difficult to assert after decisions that have tightened the requirements for proving indirect infringement, such as Commil USA, LLC. v. Cisco Systems, Inc., [720 F.3d 1361 (Fed. Cir. 2013)] and Global-Tech Appliances, Inc. v. SEB S.A. [131 S.Ct. 2060 (2011)]. Patent hold-ers will want to protect themselves by writing claims to products that are directly infringed by competitors. They also will want to right claims to every product they sell—both long-term products and disposables—because they cannot count on using method patents to pursue competi-tors who sell components that can be used with their system.

Although somewhat surprising, the Federal Circuit’s new approach to exhaustion may prove to be the cor-rect one once patentees adjust their expectations. After all, if a company cannot obtain a patent on a dispos-able product, such as the patentee in LifeScan whose patent application directed to the strips was rejected, then why should it be permitted to use a method patent to control the market for the disposable? It will be interesting to see whether subsequent cases provide an answer to this ques-tion, or whether some other new argument causes the court to moder-ate its approach.

Craig Countryman is an attorney with Fish & Richardson P.C. in San Diego, CA. His practice focuses on patent litigation involving a variety of technologies, including pharmaceuticals, medical devices, computer software, and electronics.

Copyright © 2014 CCH Incorporated. All Rights Reserved.Reprinted from IP Litigator, January/February 2014, Volume 20, Number 1, pages 36–38,

with permission from Aspen Publishers, Wolters Kluwer Law & Business, New York, NY, 1-800-638-8437, www.aspenpublishers.com