Case5:11-cv-04494-EJD Document246 Filed03/19/13 Page1 of 30
`
`
`
`
`
`
`
`UNITED STATES DISTRICT COURT
`
`NORTHERN DISTRICT OF CALIFORNIA
`
`SAN JOSE DIVISION
`
`
`LIFESCAN, INC. and LIFESCAN SCOTLAND, )
`LTD.,
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`)
`
`
`
`
`
` v.
`
`
`
`
`
`
`
`SHASTA TECHNOLOGIES, LLC,
`INSTACARE CORP., PHARMATECH
`SOLUTIONS, INC., and CONDUCTIVE
`TECHNOLOGIES, INC.,
`
`Case No.: 5:11-CV-04494-EJD
`
`ORDER GRANTING PLAINTIFFS’
`MOTION FOR PRELIMINARY
`INJUNCTION; DENYING
`DEFENDANTS’ MOTION TO
`DISMISS
`
`
`
`[Re: Docket Nos. 174, 176]
`
`
`
`Plaintiffs,
`
`
`
`
`
`
`Defendants.
`
`
`
`
`
`This action arises out of Defendants Shasta Technologies, LLC (“Shasta”), Instacare Corp.
`
`(“Instacare”), Pharmatech Solutions, Inc. (“Pharmatech”), and Conductive Technologies, Inc.’s
`
`(“Conductive”) (collectively, “Defendants”) development and sale of GenStrips: blood glucose test
`
`strips intended for use in Plaintiffs’ LifeScan, Inc. and LifeScan Scotland, Ltd.’s (collectively,
`
`“Plaintiffs”) OneTouch Ultra test meter. Plaintiffs allege that Defendants’ test strips infringe their
`
`U.S. Patent Nos. 6,241,862 (“the ’862 patent”) and 5,708,247 (“the ’247 patent”) and that
`
`Defendants indirectly infringe Plaintiffs’ U.S. Patent No. 7,250,105 (“the ’105 patent”). The court
`
`previously stayed this action as to the ’862 and ’247 patents. Dkt. No. 245.
`
`Presently before the court is Plaintiffs’ Motion for Preliminary Injunction (Dkt. No. 176)
`
`and Defendants’ Motion to Dismiss as to Count 3 of the First Amended Complaint (Dkt. No. 174).
`
`The court held a hearing on Plaintiffs’ Motion for Preliminary Injunction on February 21, 2013 and
`
`took Defendants’ Motion to Dismiss under submission. Having reviewed the parties’ briefing and
`
`Case No.: 5:11-CV-04494-EJD
`ORDER GRANTING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION; DENYING
`DEFENDANTS’ MOTION TO DISMISS
`
`1
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`For the Northern District of California
`
`United States District Court
`
`LIFESCAN SCOTLAND LTD. EXHIBIT 2003
`
`

`
`Case5:11-cv-04494-EJD Document246 Filed03/19/13 Page2 of 30
`
`
`
`heard the parties’ arguments, the court GRANTS Plaintiffs’ Motion for Preliminary Injunction and
`
`DENIES Defendants’ Motion to Dismiss for the reasons set forth below.
`1.
`
`TECHNOLOGY BACKGROUND
`
`The parties are competitors in the blood glucose monitoring systems industry. Since 2000,
`
`Plaintiffs have marketed and sold the OneTouch Ultra System, a glucose monitoring system used
`
`by patients with diabetes. See Pl. Mtn. for Prelim. Inj. 3-4, Dkt. No. 176; Def. Opp. 2; Dkt. No.
`
`203. Plaintiffs are the market leader in glucose monitoring systems, and generate approximately $1
`
`billion in sales annually. Dkt. No. 203 at 2. The system is composed of both a meter and
`
`disposable test strips. Dkt. No. 176 at 3. To use the system, a patient places a disposable test strip
`
`in the meter, draws a small drop of blood using a lancet, and places the blood on the test strip. Dkt.
`
`No. 176 at 3-4. The meter then determines the glucose level in the blood by measuring the
`
`electrical current produced when an electrochemical reaction is triggered in the strip by the
`
`glucose. Id. at 4.
`
`Plaintiffs’ competitive advantage appears to be in its DoubleSure Technology, which is the
`
`subject of the ’105 patent. Id. DoubleSure Technology is a method designed to improve the
`
`reliability and accuracy of glucose measurements. Id. It uses a self-testing strip design, using
`
`multiple sensors in a downstream configuration. Id. at 6. Figure 2 depicts the test strip design:
`
`
`
`A drop of blood applied to the top of the test strip flows downstream by capillary action.
`
`Id. The test strip has two working sensors (6b and 8b), with one sensor downstream from the
`2
`
`Case No.: 5:11-CV-04494-EJD
`ORDER GRANTING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION; DENYING
`DEFENDANTS’ MOTION TO DISMISS
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`For the Northern District of California
`
`United States District Court
`
`

`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`Case5:11-cv-04494-EJD Document246 Filed03/19/13 Page3 of 30
`
`
`
`other. Id. This design ensures that the first sensor is completely covered in blood before the
`
`second sensor is reached, allowing for more accurate results. Id. The currents are measured at
`
`each sensor, and if the values are within a pre-determined range of one another, the reading is
`
`accurate. Id. If the difference in values is outside of the acceptable range, the reading may not be
`
`accurate and the test strip can be discarded. Id. at 6-7.
`
`Defendants’ GenStrips are nearly identical to Plaintiffs’ test strips, and are designed
`
`specifically to work with the OneTouch Ultra meter. See id. at 5. GenStrips received FDA
`
`approval in January of this year, but are not approved for use in any device other than the
`
`OneTouch Ultra meter. Id. While GenStrips have not been on the market for the majority of this
`
`litigation, Defendants confirmed at the preliminary injunction hearing that their product is now
`
`available for purchase. Prelim. Inj. Hr’g Tr. (Rough) 80:20-21 (Feb. 21, 2013).
`2. PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION
`2.1 Legal Standard
`Because this motion for preliminary injunction arises in the context of a patent infringement
`
`action, the court will apply Federal Circuit law. See Hybritech Inc. v. Abbott Labs., 849 F.2d
`
`1446, 1450, n. 12 (Fed. Cir. 1988). The Federal Circuit requires the court to consider four factors
`
`of “universal applicability” in determining whether a grant of a preliminary injunction is
`
`appropriate: (1) reasonable likelihood of success on the merits; (2) irreparable harm; (3) the
`
`balance of hardships tips in the plaintiff’s favor; and (4) the injunction is in the public interest.
`
`Titan Tire Corp. v. Case New Holland, Inc., 566 F.3d 1372, 1375-76 (Fed. Cir. 2009) (citing
`
`Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7 (2008)). Each of these four factors must be
`
`weighed and assessed against the others and against the form and magnitude of the relief requested.
`
`Hybritech, 849 F.2d at 1451.
`2.2 Likelihood of Success on the Merits
`In a patent infringement case, “reasonable likelihood of success on the merits” means that a
`
`patentee must show (1) it will likely prove infringement; and (2) its infringement claim will likely
`
`withstand challenges to the patent’s validity and enforceability. Purdue Pharma L.P. v. Boehringer
`
`Case No.: 5:11-CV-04494-EJD
`ORDER GRANTING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION; DENYING
`DEFENDANTS’ MOTION TO DISMISS
`
`3
`
`For the Northern District of California
`
`United States District Court
`
`

`
`Case5:11-cv-04494-EJD Document246 Filed03/19/13 Page4 of 30
`
`
`
`Ingelheim Gmbh, 237 F.3d 1359, 1363 (Fed. Cir. 2001). Even at this stage, the court must
`
`consider the evidence in light of the presumptions and burdens that will apply at trial. Titan Tire,
`
`566 F.3d at 1376.
`
`A patent is presumed valid at trial. 35 U.S.C. § 282. Thus, the alleged infringer bears the
`
`burden of proving an affirmative defense of invalidity by clear and convincing evidence. Titan
`
`Tire, 566 F.3d at 1376. If the accused infringer successfully meets its burden, the plaintiff then
`
`must come forward with contrary evidence sufficient to overcome the accused infringer’s showing.
`
`Id. At the preliminary injunction stage, a patent is also presumed to be valid. Similarly, the
`
`accused infringer bears the burden to present evidence of invalidity. However, unlike at trial, the
`
`accused infringer need only raise a “substantial question” regarding validity. Sciele Pharma Inc. v.
`
`Lupin Ltd., 684 F.3d 1253, 1263 (Fed. Cir. 2012); Abbot Labs. v. Sandoz, Inc., 544 F.3d 1341,
`
`1364 (Fed. Cir. 2008); Amazon.com, Inc. v. Barnesandnoble.com, Inc., 239 F.3d 1343, 1359 (Fed.
`
`Cir. 2001) (finding that the defendants’ burden to raise a “substantial question” did not equate to
`
`the “clear and convincing” standard required at trial, but instead could be met by showing
`
`“vulnerability”). Notwithstanding the accused infringer’s duty to bring forward evidence of
`
`invalidity, the ultimate burden remains on the plaintiff to show that the alleged infringer’s defense
`
`“lacks substantial merit,” and that plaintiff is likely to succeed at trial despite the validity
`
`challenge. Titan Tire, 566 F.3d at 1377 (quoting New England Braiding Co. v. A.W. Chesterton
`
`Co., 970 F.2d 878, 883 (Fed. Cir. 1992)). In determining the likelihood of success on the validity
`
`issue, the court must “weigh the evidence both for and against validity that is available at this
`
`preliminary injunction stage…[t]hen…if the [court] concludes there is a ‘substantial question’
`
`concerning the validity of the patent, meaning that the alleged infringer has presented an invalidity
`
`defense that the patentee has not shown lacks substantial merit, it necessarily follows that the
`
`patentee has not succeeded in showing it is likely to succeed at trial on the merits of the validity
`
`issue.” Id.
`
`
`
`Case No.: 5:11-CV-04494-EJD
`ORDER GRANTING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION; DENYING
`DEFENDANTS’ MOTION TO DISMISS
`
`4
`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`For the Northern District of California
`
`United States District Court
`
`

`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`Case5:11-cv-04494-EJD Document246 Filed03/19/13 Page5 of 30
`
`
`
`2.2.1 Patent Exhaustion
`Before reaching the issues of infringement and invalidity, the court must first consider
`
`whether Plaintiffs are likely to show that the ’105 patent has not been exhausted. “The declared
`
`purpose of the patent law is to promote the progress of science and the useful arts by granting to
`
`the inventor a limited monopoly, the exercise of which will enable him to secure the financial
`
`rewards for his invention.” Univis Lens Co. v. United States, 316 U.S. 241, 250 (1942) (citing
`
`U.S. Const. Art. I, § 8, cl. 8). To strike the proper balance between the public’s interest in
`
`innovation and an inventor’s need for remuneration, the law extends to patentees a monopoly for a
`
`limited period of time, during which the patentee maintains the exclusive “right to make, use, and
`
`sell” the invention. See Bauer & Cie v. O’Donnell, 229 U.S. 1, 10 (1913). However, that
`
`monopoly is not unlimited. Once a patentee sells the patented invention in whole or, under certain
`
`circumstances, in part, the monopoly is exhausted. Univis, 316 U.S. at 249. This principle of
`
`patent exhaustion is also called the first sale doctrine. See Static Control Components, Inc. v.
`
`Lexmark Int’l Inc., 615 F.Supp.2d 575, 578 (E.D. Ky. 2009).
`
`As the Supreme Court recently articulated, the first sale doctrine provides that “the initial
`
`authorized sale of a patented item terminates all patent rights to that item.” Quanta Comp., Inc. v.
`
`LG Electronics, Inc., 553 U.S. 617, 625 (2008). In operation, the doctrine “prohibits patent
`
`holders from selling a patented article and then ‘invoking patent law to control postsale use of the
`
`article.’” Excelstor Tech., Inc. v. Papst Licensing GmbH & Co. KG, 541 F.3d 1373, 1376 (Fed.
`
`Cir. 2008) (citing Quanta, 553 U.S. at 638). Because application of the doctrine extinguishes a
`
`patentee’s monopoly right over the patented item, “[e]xhaustion is triggered only by a sale
`
`authorized by the patent holder.” Quanta, 553 U.S. at 636.
`
`The parties dispute whether an “authorized sale” has occurred such that the ’105 patent
`
`could be deemed exhausted. Plaintiffs first distribute their OneTouch Ultra products either by (1)
`
`having doctors distribute a free OneTouch Ultra kit, comprised of a meter and 10 test strips, to
`
`diabetic patients, or (2) selling the OneTouch Ultra meter alone at a reduced price. Defendants
`
`contend that under either distribution scheme, Plaintiffs have transferred ownership of their
`
`Case No.: 5:11-CV-04494-EJD
`ORDER GRANTING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION; DENYING
`DEFENDANTS’ MOTION TO DISMISS
`
`5
`
`For the Northern District of California
`
`United States District Court
`
`

`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`Case5:11-cv-04494-EJD Document246 Filed03/19/13 Page6 of 30
`
`
`
`patented invention, thus extinguishing their right to control consumers’ use of the product.
`
`Plaintiffs, however, contend that because they have not received their “reward” for the free kits and
`
`because the meter alone does not “substantially embody” the inventive aspects of the ’105 patent,
`
`exhaustion cannot apply.
`
`2.2.1.1 Free Distribution of OneTouch Ultra Kits
`First, the court must consider whether distributing a patented article for free constitutes an
`
`“authorized sale.” Plaintiffs argue that their free distribution scheme cannot trigger the first sale
`
`doctrine because they have not received their “reward” for the patented article. Defendant
`
`contends that a free distribution triggers the first sale doctrine because it is the transfer of
`
`ownership, not the adequacy of Plaintiff’s remuneration, which creates an “authorized sale.”
`
`The question presented by the parties—whether it is the transfer of title and ownership or
`
`rather the purchase and sale of a patented article that triggers the first sale doctrine—has not been
`
`directly addressed by courts of higher authority. In most cases, courts need not consider this
`
`distinction because the transfer of ownership is typically accomplished through a traditional sale or
`
`licensing agreement. However, in a case such as this where the patented article primarily enters the
`
`stream of commerce through a free distribution system, the distinction is a crucial one that must be
`
`examined.
`
`In 1859, the Supreme Court considered the question of whether patent exhaustion applied
`
`during an extended patent term. Chaffee v. The Boston Belting Co., 63 U.S. 217 (1859). In doing
`
`so, the Court reiterated the principles of patent exhaustion, holding that
`
`[w]hen the patented machine rightfully passes to the hands of the purchaser from the
`
`patentee, or from any other person by him authorized to convey it, the machine is no longer
`
`within the limits of the monopoly…By a valid sale and purchase, the patented machine
`
`becomes the private individual property of the purchaser, and is no longer protected by the
`
`laws of the United States, but by the laws of the State in which it is situated.
`
`Id. at 223.
`
`However, the court went on to declare that
`
`Case No.: 5:11-CV-04494-EJD
`ORDER GRANTING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION; DENYING
`DEFENDANTS’ MOTION TO DISMISS
`
`6
`
`For the Northern District of California
`
`United States District Court
`
`

`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`Case5:11-cv-04494-EJD Document246 Filed03/19/13 Page7 of 30
`
`
`
`it is obvious[] that if a person legally acquires a title to that which is the subject of letters
`
`patent, he may continue to use it…as he pleases, in the same manner as if dealing with
`
`property of any other kind.”
`
`Id.
`
`Because the record did not reflect that the defendants had legally licensed the machine at issue, the
`
`Court found them to be “naked infringers” who could not be saved by the principles of patent
`
`exhaustion. Id. at 224.
`
`The language used by the Chafee Court in describing the point at which “the machine is no
`
`longer within the limits of the monopoly” would seem to support either party’s argument in the
`
`present case. On the one hand, the Court looked to a “valid sale and purchase” to trigger
`
`exhaustion, whereas on the other, the Court pointed to a person’s “legally acquir[ing] a title” as the
`
`exhaustive moment. A close reading of the opinion would seem to suggest that the way in which a
`
`person would “legally acquire[] title” would be through a “valid sale and purchase;” however, the
`
`Court did not so explicitly state the principle, leaving the door open for arguments such as
`
`Defendants’ here.
`
`As the Supreme Court’s exhaustion jurisprudence evolved, the Court did not directly
`
`address the difference between a “valid sale and purchase” and “legally acquir[ing] a title;”
`
`however, the distinctions it has drawn in other areas prove useful to the analysis. In Univis, the
`
`Court considered the question of whether the first sale doctrine applied when the patentee, a lens
`
`company, sold its patented lens blanks to a wholesaler, who then was required to grind the blanks
`
`down to finish them using a standard process cited in the patentee’s method patents. 316 U.S. 241
`
`(1942). Because the lens blanks themselves “embodie[d] essential features of [the] patented
`
`invention” the court determined that their sale also embodied the “reward” to which the patentee
`
`was entitled. 316 U.S. at 251. The Court explained that “the purpose of the patent law is fulfilled
`
`with respect to any particular article when the patentee has received his reward for the use of his
`
`invention by the sale of the article” and that beyond that sale, the patentee had no further right to
`
`control use of the article. Id.
`
`Case No.: 5:11-CV-04494-EJD
`ORDER GRANTING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION; DENYING
`DEFENDANTS’ MOTION TO DISMISS
`
`7
`
`For the Northern District of California
`
`United States District Court
`
`

`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`Case5:11-cv-04494-EJD Document246 Filed03/19/13 Page8 of 30
`
`
`
`On its face, the Univis opinion suggests that it is a traditional sale of a patented invention
`
`that triggers exhaustion. However, the same day the Court issued its Univis decision, it also issued
`
`an order in United States v. Masonite Corp., which steered the exhaustion inquiry away from a
`
`focus on traditional sales. 316 U.S. 265 (1942). According to the Masonite Court, the form of the
`
`sale of the patented article has no impact on the application of exhaustion; rather, the test simply is
`
`“whether or not there has been such a disposition of the article that it may fairly be said that the
`
`patentee has received his reward for the use of the article.” 316 U.S. at 278 (finding exhaustion
`
`where patentee “disposed” of the patented product to a del credere agent with which patentee had
`
`“no intimate relationship” and with whom patentee competed, because the arrangement, without
`
`more, enlarged the patentee’s privilege to fix prices in violation of the Sherman Act). The inquiry
`
`thus shifted from whether a “valid sale and purchase” had occurred to whether the patentee had
`
`received his “reward” in any form. After Univis and Masonite, the Court did not develop the
`
`“reward” inquiry further. Nor did it address any major patent exhaustion issue until 2008, when it
`
`issued its opinion in Quanta. In that case, which will be discussed in detail in the following
`
`section, the Court acknowledged that an “authorized sale” was required to trigger the first sale
`
`doctrine, but did not address the issue of reward in any substantial detail.
`
`In the years since Univis, the Federal Circuit has shed some light on what forms of
`
`“reward” trigger exhaustion. In 1993, the court considered the question of whether a licensed
`
`seller of a patented product must own the patent rights to that product in order for there to be a sale
`
`sufficient to trigger exhaustion. Intel Corp. v. ULSI Sys. Tech., Inc., 995 F.2d 1556, 1569-70 (Fed.
`
`Cir. 1993). In holding that the patentee-assignee’s rights terminated with the sale of the patented
`
`product by a licensee acting within the scope of its license, the court noted that
`
`[w]hile Intel may not in retrospect be pleased with the deal that it made permitting HP to
`
`make unrestricted sales, it nevertheless granted HP that right in 1983, presumably for
`
`consideration it believed to be of value at that time. It cannot now renege on that grant to
`
`avoid its consequences.
`
`Id. at 1569.
`
`Case No.: 5:11-CV-04494-EJD
`ORDER GRANTING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION; DENYING
`DEFENDANTS’ MOTION TO DISMISS
`
`8
`
`For the Northern District of California
`
`United States District Court
`
`

`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`Case5:11-cv-04494-EJD Document246 Filed03/19/13 Page9 of 30
`
`
`
`Later, in TransCore, LP v. Electronic Transaction Consultants Corp., the court found that a
`
`settlement agreement containing a broad covenant not to sue for future infringement constituted an
`
`“authorized sale” for purposes of patent exhaustion under Quanta. 563 F.3d 1271, 1276-77 (Fed.
`
`Cir. 2009). In that case, the plaintiff had received $4.5 million from a competitor in exchange for
`
`an unconditional covenant not to sue and a release of all existing claims. When the plaintiff later
`
`sued a customer of the competitor for infringement, the Federal Circuit upheld the district court’s
`
`finding that the plaintiff’s patents had been exhausted by the settlement agreement.
`
`More recently, the court has examined the issue in the context of patented seeds. In
`
`Monsanto Co. v. Bowman, the court found that patent exhaustion may apply to the original seeds
`
`sold, but not to any subsequent generation of those seeds after they have been planted. 657 F.3d
`
`1341, 1347-48 (Fed. Cir. 2011), cert granted 133 S. Ct. 420 (Oct. 5, 2012). In so finding, the court
`
`explained that the subsequent generation of seeds constitutes a “newly infringing article” for which
`
`the patentee had not received a reward. Id.
`
`The common theme running through this line of cases is consideration. In each case where
`
`exhaustion has been found, the transfer of ownership of the patented article was accomplished by
`
`some bargained-for exchange: a traditional sale, as in Univis; a licensing agreement, as in Intel; the
`
`disposition of an article with a competitor in exchange for higher sale prices, as in Masonite; or a
`
`covenant not to sue in exchange for a cash settlement, as in TransCore. In contrast, exhaustion has
`
`not been found when the patentee has not received any consideration in exchange for the patented
`
`article, as with the second generation seeds in Monsanto.
`
`In this case, when Plaintiffs distribute their OneTouch Ultra kits for free, they receive no
`
`remuneration at the moment they part with their patented invention. Rather, Plaintiffs distribute
`
`the kits in consideration of patients’ anticipated future repeat purchases of Plaintiffs’ disposable
`
`test strips. Thus, at the moment of disposition, Plaintiffs have not received their reward for their
`
`invention. At the hearing, Defendants argued that Plaintiffs receive their reward for the ’105
`
`invention within two months of the free distribution of the meters. Hr’g Tr. (Rough) 88:21-24.
`
`Such argument belies any suggestion by Defendants that Plaintiffs receive their reward when they
`
`Case No.: 5:11-CV-04494-EJD
`ORDER GRANTING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION; DENYING
`DEFENDANTS’ MOTION TO DISMISS
`
`9
`
`For the Northern District of California
`
`United States District Court
`
`

`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`Case5:11-cv-04494-EJD Document246 Filed03/19/13 Page10 of 30
`
`
`
`distributes the kits for free—i.e., the parties essentially agree that the “reward” comes in Plaintiffs’
`
`repeated sale of disposable test strips to diabetic patients. Because the Supreme Court and the
`
`Federal Circuit have emphasized that a patentee’s receiving of some reward for his or her invention
`
`triggers exhaustion, and because Plaintiffs here do not receive any reward at the time of
`
`distribution, Plaintiffs can likely show that patent exhaustion is not triggered by the free
`
`distribution of its OneTouch Ultra kits.
`2.2.1.2 Plaintiffs’ Sale of Meters Alone at a Reduced Price
`Having determined that the free distribution of OneTouch Ultra kits likely does not trigger
`
`patent exhaustion, the court must now consider whether the sale of the OneTouch Ultra meter alone
`
`at a reduced price is sufficient to exhaust the ’105 patent. The ’105 patent is a method patent that
`
`requires both a meter and a test strip for an individual to practice it. As such, the sale of the meter
`
`by itself does not necessarily convey the entire invention of the ’105 patent to the purchaser,
`
`casting the applicability of exhaustion into doubt.
`
`The Supreme Court recently addressed the application of patent exhaustion to method
`
`patents in Quanta. In that case, LGE licensed its computer technology patents to Intel, authorizing
`
`Intel to manufacture and sell microprocessors and chipsets under the patents. In a separate
`
`agreement, LGE required Intel to provide its customers with a written notice that the license
`
`between LGE and Intel did not extend to any product made by combining an Intel product with a
`
`non-Intel product. Quanta purchased microprocessors and chipsets from Intel and placed them in
`
`computers manufactured with non-Intel parts. LGE sued Quanta, asserting that the combination
`
`infringed its patents. See Quanta, 553 U.S. at 623-24.
`
`The district court found, and the Federal Circuit affirmed, that patent exhaustion did not
`
`apply to method patents and thus that LGE could assert its patent rights against Quanta. See LG
`
`Elec., Inc. v. Bizcom Elec., Inc., 453 F.3d 1364, 1370 (Fed. Cir. 2006). The Supreme Court
`
`reversed, holding that patent exhaustion does in fact apply to method patents, including the patents
`
`at issue in the case. 553 U.S. at 628, 638. In so holding, the Court made clear that when a
`
`component of a patented system is sold but is required to be combined with additional components
`
`Case No.: 5:11-CV-04494-EJD
`ORDER GRANTING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION; DENYING
`DEFENDANTS’ MOTION TO DISMISS
`
`10
`
`For the Northern District of California
`
`United States District Court
`
`

`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`Case5:11-cv-04494-EJD Document246 Filed03/19/13 Page11 of 30
`
`
`
`after the sale in order to fully practice the patented method, the sale of the component only triggers
`
`patent exhaustion when the component “substantially embod[ies]” the patents-in-suit. 553 U.S. at
`
`621, 633. According to the Quanta Court, an item “substantially embodies” the patent when it
`
`covers the “essential, or inventive, feature” of the patent and when the item’s only reasonable and
`
`intended use is to practice the patent. Id. at 632-33.
`
`In Quanta, LGE’s patents were found to be exhausted because “[e]verything inventive
`
`about each patent [was] embodied in the Intel Products” and “the only step necessary to practice
`
`the patent [was] the application of common processes or the addition of standard parts.” 553 U.S. at
`
`633. In making this determination, the Court relied on its prior reasoning in Univis, which found
`
`exhaustion in part because the item sold “embodie[d] essential features of [the] patented invention”
`
`whereas the finishing process required to practice the patent was a standard process barely
`
`mentioned in the patents-in-suit and thus only “incidental to the invention.” 553 U.S. at 632-33
`
`(quoting Univis, 316 U.S. at 250-51). Similarly here, to determine whether the ’105 patent has
`
`been exhausted by the sale of Plaintiffs’ OneTouch Ultra Meter alone, the court must determine
`
`whether that meter embodies the “inventive” feature of the ’105 patent, and whether the OneTouch
`
`Ultra test strips constitute anything more than “standard parts.”
`
`The ’105 patent specification describes what the inventor perceived as a problem in the art
`
`relating to the accuracy of blood glucose measuring devices: inaccurate readings caused by
`
`insufficient blood coverage of the working sensor part or by manufacturing defects. ’105 patent
`
`1:39-41; 55-58. By teaching two identical working sensor parts configured in such a way to ensure
`
`that the first sensor is completely covered in blood before the second sensor is reached, the ’105
`
`patent allows for the measurements from the two sensors to be compared. If the results from the
`
`two sensors are too disparate, the ’105 patent teaches that an error code should appear alerting the
`
`user to discard the test strip and try again. See ’105 patent, 2:27-30. In this way, the ’105 patent’s
`
`invention is self-testing for accuracy. This solution addresses the problem the inventor identified
`
`in the art while still keeping the cost of the disposable test strip low. Id. at 1:21-22, 32-38.
`
`Case No.: 5:11-CV-04494-EJD
`ORDER GRANTING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION; DENYING
`DEFENDANTS’ MOTION TO DISMISS
`
`11
`
`For the Northern District of California
`
`United States District Court
`
`

`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`Case5:11-cv-04494-EJD Document246 Filed03/19/13 Page12 of 30
`
`
`
`The specification and claims make clear that at the very least both a measuring device and
`
`two working sensor parts are required to practice the invention. Particularly, Claim 1 calls for:
`
`a measuring device said device comprising:
`
`
`
`
`
`
`
`a first working sensor part for generating charge carriers in proportion to the
`
` concentration of said substance in the sample liquid;
`
`a second working sensor part downstream from said first working sensor part also
`
` for generating charge carriers in proportion to the concentration of said substance
`
` in the sample liquid wherein said first and second working sensor parts are
`
` arranged such that, in the absence of an error condition, the quantity of said charge
`
` carriers generated by said first working sensors part are substantially identical to
`
`the quantity of said charge carriers generated by said second working sensor part;
`
`and
`
`a reference sensor part upstream from said first and second working sensor parts
`
` which reference sensor part is a common reference for both the first and second
`
` working sensor parts, said reference sensor part and said first and second working
`
` sensor parts being arranged such that the sample liquid is constrained to flow
`
` substantially unidirectionally across said reference sensor part and said first and
`
` second working sensor parts; wherein said first and second working sensor parts
`
` and said reference sensor part are provided on a disposable test strip
`
`
`
`(’105 patent 6:55-711)
`
`i.e., the two working sensor parts, as well as:
`
`
`
`applying the sample liquid to said measuring device;
`
`measuring an electric current at each working sensor part proportional to the concentration
`
` of said substance in the sample liquid;
`
`comparing the electric current from each of the working sensor parts to establish a
`
` difference parameter; and
`
`giving an indication of an error if said difference parameter is greater than a predetermined
`
`Case No.: 5:11-CV-04494-EJD
`ORDER GRANTING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION; DENYING
`DEFENDANTS’ MOTION TO DISMISS
`
`12
`
`For the Northern District of California
`
`United States District Court
`
`

`
`1
`
`2
`
`3
`
`4
`
`5
`
`6
`
`7
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`Case5:11-cv-04494-EJD Document246 Filed03/19/13 Page13 of 30
`
`
`
`
`
` threshold.
`
`(’105 patent 7:12-8:5)
`
`i.e., a measuring device—here, a meter.
`
`In allowing the ’105 patent to issue, the patent examiner highlighted the differences in
`
`Plaintiffs’ working sensor parts from the sensors present in the prior art. The examiner noted that,
`
`unlike the prior art, Plaintiffs’ two working sensors were identical in size and composition,
`
`allowing