In its November 4, 2013 opinion in LifeScan Scotland, Ltd. v. Shasta Technologies, LLC, the US Court of Appeals for the Federal Circuit reversed the US District Court for the Northern District of California's grant of a preliminary injunction in favor of LifeScan Scotland, Ltd. and LifeScan, Inc. (LifeScan). The Federal Circuit found that the district court had erred because defendants Shasta Technologies, LLC, Conductive Technologies, Inc., Instacare Corp. and Pharmatech Solutions, Inc. (Shasta) had established a patent exhaustion defense. Significantly, in a matter of first impression, the Federal Circuit held that the distribution of a product for free is not a barrier to the application of the patent exhaustion doctrine.

LifeScan manufactures a blood glucose monitoring system comprising a blood glucose meter and disposable test strips. LifeScan sells 40% of its meters at below cost prices and distributes the remaining 60% of its meters for free to health care providers. By contrast, LifeScan earns a profit from the sale of the disposable test strips used with the meters. Shasta does not sell blood glucose meters, but instead sells competing disposable test strips that are designed to work with LifeScan's meters.

LifeScan argued that its blood glucose monitoring system uses technology disclosed in its US Patent No. 7,250,105 ('105 patent). The asserted claims of the '105 patent cover a method of measuring the concentration of blood glucose in a sample liquid by using a test strip with two working sensors, which are designed to generate a similar electrical current from the sample. The patented method allegedly improved on prior blood glucose monitors because it compared the electrical currents from the two working sensors and generated an error if the difference was greater than a predetermined threshold. In LifeScan's system, the sensors are located in the disposable test strip, and the measuring, comparing and error generation steps are performed by the meter.

In 2011, LifeScan filed suit against Shasta alleging that Shasta's manufacture and sale of its disposable test strips indirectly infringed the methods claimed in LifeScan's '105 patent. LifeScan also sought a preliminary injunction barring Shasta from selling or offering to sell its disposable test strips in the US. In opposing LifeScan's request for a preliminary injunction, Shasta argued that LifeScan's sale and distribution of its blood glucose meters exhausted LifeScan's rights under the '105 patent because the meters substantially embody the claimed invention.

The district court granted LifeScan's motion for a preliminary injunction, finding that the '105 patent was not exhausted because:

On appeal, the Federal Circuit applied the patent exhaustion doctrine test, clarified in Quanta Computer, Inc. v. LG Electronics, Inc., to determine whether the LifeScan meter substantially embodies the patent. Under this test, the authorized sale of an item that substantially embodies a claimed method exhausts the method claim if the item both:

The Federal Circuit rejected LifeScan's arguments that the doctrine of patent exhaustion does not apply, finding:

LifeScan also argued that the doctrine of exhaustion does not apply to the 60% of its meters that were distributed for free, which was a matter of first impression. The Federal Circuit rejected this argument and held that in the case of an authorized and unconditional transfer of title, the absence of consideration is not a barrier to the application of the doctrine of patent exhaustion.

Circuit Judge Reyna issued a dissent because he concluded that the test strips, and not the meters, embody the essential features of the patented method. In particular, Judge Reyna found that the test strips significantly contributed to the patented method because they contained the two working probes that were essential to the comparison step.