  United States Court of Appeals
      for the Federal Circuit
                ______________________

LIFESCAN SCOTLAND, LTD. AND LIFESCAN, INC.,
             Plaintiffs-Appellees,

                           v.

SHASTA TECHNOLOGIES, LLC AND CONDUCTIVE
          TECHNOLOGIES, INC.,
           Defendants-Appellants,

                         AND

      INSTACARE CORP. AND PHARMATECH
              SOLUTIONS, INC.,
             Defendants-Appellants.
             ______________________

                      2013-1271
                ______________________

   Appeal from the United States District Court for the
Northern District of California in No. 11-CV-4494, Judge
Edward J. Davila.
                ______________________

              Decided: November 4, 2013
               ______________________

    GREGORY L. DISKANT, Patterson Belknap Webb & Ty-
ler LLP, of New York, New York, argued for plaintiffs-
appellees. With him on the brief were EUGENE M.
GELERNTER and KATHLEEN M. CROTTY. Of counsel on the
2     LIFESCAN SCOTLAND, LTD.    v. SHASTA TECHNOLOGIES, LLC



brief were CHARLES HOFFMANN and SEAN MARSHALL,
Hoffmann Marshall Strong LLP, of New York, New York.

    JOHN J. SHAEFFER, Lathrop & Gage LLP, of Los Ange-
les, California, argued for defendants-appellants. With
him on the brief were ROBERT P. ANDRIS and LAEL D.
ANDARA, Roper, Majeski, Kohn & Bentley, of Redwood
City, California; and WILLIAM A. RUDY, Lathrop & Gage
LLP, of Kansas City, Missouri. Of counsel was CAROLE E.
HANDLER, Lathrop Gage LLP, of Los Angeles, California.
                  ______________________

       Before DYK, PROST, and REYNA, Circuit Judges.
      Opinion for the court filed by Circuit Judge DYK.
      Dissenting opinion filed by Circuit Judge REYNA.
DYK, Circuit Judge.
    Defendants Shasta Technologies, LLC; Conductive
Technologies, Inc.; Instacare Corp.; and Pharmatech
Solutions, Inc. (collectively, “Shasta”) appeal from a
decision of the United States District Court for the North-
ern District of California granting a preliminary injunc-
tion in favor of Plaintiffs LifeScan Scotland, Ltd. and
LifeScan, Inc. (“LifeScan”). The injunction prohibited
Shasta from making, using, or selling its blood glucose
test strips. The district court found that the making,
using, or selling of Shasta’s strips likely indirectly in-
fringes LifeScan’s U.S. Patent No. 7,250,105 (“the ’105
patent”). Because we agree that Shasta has established
that it has a patent exhaustion defense, we reverse.
                      BACKGROUND
                             I
   This case concerns blood glucose monitoring systems,
which are used by individuals with diabetes to assist
them in maintaining healthy blood glucose levels. Such
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC    3



systems typically consist of an electrochemical meter and
disposable test strips. To use the system, the user first
inserts a test strip into the meter, then uses a lancet to
draw a small drop of blood and places the drop on the test
strip. The strip contains one or more electrodes, which
may be “working electrodes” or “reference electrodes,” and
which connect to the meter during operation. Each work-
ing electrode is coated with an enzyme, such as glucose
oxidase, and a mediator, such as ferricyanide. The en-
zyme reacts with glucose in the blood sample, releasing
electrons. The mediator then transfers those electrons to
the working electrode. The working electrode is connect-
ed to the meter, which measures the resulting electric
current. Because this current correlates with the concen-
tration of glucose in the sample, the meter is thus able to
measure the user’s blood glucose level. The reaction
occurring at the working electrode does not occur at the
reference electrode because the reference electrode is not
coated with glucose oxidase. Thus, by comparing the
current at the reference electrode to the current at the
working electrode, the meter can verify that the current
produced at the working electrode is solely due to the
reaction of the enzyme and mediator with blood glucose in
the sample.
    Blood glucose meters and disposable test strips of this
general design first became available in the 1980s. The
’105 patent claims to improve upon earlier systems. It
claims a method of comparing the measurements taken by
two separate working electrodes. If the readings of the
two working electrodes differ significantly, this indicates
problems such as inadequate sample volume or manufac-
turing defects, and the readings are to be discarded. A
reference electrode on the strip serves as a common
reference for both working electrodes.
    LifeScan manufactures such a system, which it calls
the “OneTouch Ultra” blood glucose monitoring system.
According to LifeScan, its OneTouch Ultra system uses
4     LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC



the technology described in the ’105 patent. Claim 1, the
only independent claim in the ’105 patent, reads:
    1. A method of measuring the concentration of a
    substance in a sample liquid comprising the steps
    of:
    providing a measuring device[,] said device com-
    prising:
       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 pro-
          portion 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 gener-
          ated by said first working sensor[] part
          [is] substantially identical to the quan-
          tity 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 ref-
          erence sensor part and said first and
          second working sensor parts being ar-
          ranged such that the sample liquid is
          constrained to flow substantially unidi-
          rectionally across said reference sensor
LIFESCAN SCOTLAND, LTD.    v. SHASTA TECHNOLOGIES, LLC         5



            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;
    applying the sample liquid to said measuring de-
       vice;
    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
        threshold.
 ’105 patent col. 6 l. 52 to col 8 l. 4. In LifeScan’s
OneTouch Ultra system, the “sensor parts” refer to the
electrodes located on the strips. The “measuring an
electric current . . . ,” “comparing the electric current . . . ,”
and “giving an indication of an error . . .” steps are per-
formed by the meter.
     LifeScan sells 40% of its meters at below cost prices.
It distributes the remaining 60% of its OneTouch meters
through health care providers, who in turn give the
meters to diabetic individuals for free. LifeScan distrib-
utes its meters in this way “in the expectation and intent
that customers will use its OneTouch Ultra meters with
[its] OneTouch Ultra test strips, from which [it] derive[s]
a profit.” JA 319. Shasta does not sell blood glucose
meters, but competes with LifeScan in the market for test
strips. Shasta’s “GenStrip” test strips are designed to
work with LifeScan’s meters.
6       LIFESCAN SCOTLAND, LTD.    v. SHASTA TECHNOLOGIES, LLC



                              II
    On September 9, 2011, LifeScan filed suit against
Shasta. In its amended complaint, it alleged that Shas-
ta’s manufacture and distribution of GenStrips would
indirectly infringe the ’105 patent. 1 It alleged that the
users of Shasta’s GenStrips would be direct infringers.
LifeScan also sought a preliminary injunction barring
Shasta “from contributing to and inducing the infringe-
ment of [the ’105 patent] by selling or offering to sell [its]
GenStrip product in the United States.” JA 62. Shasta
argued that a preliminary injunction should not issue,
inter alia, because Shasta had a substantial defense based
on the doctrine of patent exhaustion under Quanta Com-
puter, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008).
The sale and distribution of LifeScan’s meters, according
to Shasta, exhausted LifeScan’s rights under its method
patent because the meters substantially embody the
invention.
    The district court granted LifeScan’s motion for a pre-
liminary injunction. With respect to LifeScan’s likelihood
of success on the merits, the court first addressed the
issue of patent exhaustion. It began by concluding that
LifeScan was likely to establish that its patent was not
exhausted with respect to the 60% of meters that it dis-
tributes for free. It reasoned that patent exhaustion
applies only to a “sale” where the patentee has received


    1   LifeScan’s complaint also asserted infringement of
two other patents. The District Court subsequently
granted Shasta’s motion to stay the action as to those
other patents pending the outcome of ex parte reexamina-
tion proceedings at the U.S. Patent and Trademark
Office. Order Granting in Part and Den. in Part Defs.’
Mot. to Stay, LifeScan, No. 11-cv-4494, 2013 WL 1149827,
ECF No. 245 (Mar. 19, 2013). These other patents are not
pertinent to the preliminary injunction or this appeal.
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC     7



“consideration” in exchange for the patented product. It
concluded that because LifeScan “receive[s] no remunera-
tion at the moment [it] part[s] with [its] patented inven-
tion,” LifeScan could likely show that patent exhaustion is
inapplicable to the meters distributed for free. JA 9. The
court also concluded that patent exhaustion would not
apply to LifeScan’s sale of the remaining meters because
“the ’105 patent is a method patent that requires both a
meter and a test strip for an individual to practice it.” JA
10. Although the court acknowledged that, under Quan-
ta, a method claim is exhausted by the sale of a product
that “‘substantially embodies’” the invention, JA 11
(quoting Quanta, 553 U.S. at 633), it concluded that
LifeScan’s meters “likely do not embody the inventive
feature of the ’105 patent.” JA 14. The district court also
rejected Shasta’s other noninfringement and invalidity
arguments. Finally, the district court concluded that the
remaining preliminary injunction factors favored
LifeScan.
    Shasta appeals. We have jurisdiction pursuant to 28
U.S.C. § 1292(c)(1). “[T]o the extent that a district court’s
decision to grant a preliminary injunction hinges on
questions of law, our review is de novo.” Nat’l Steel Car,
Ltd. v. Can. Pac. Ry., Ltd., 357 F.3d 1319, 1325 (Fed. Cir.
2004) (quotation marks and alteration omitted). On April
29, 2013, we granted Shasta’s motion for stay, staying the
injunction “pending further order of the court.” LifeScan
Scot., Ltd. v. Shasta Techs., LLC, No. 2013-1271 (Fed. Cir.
Apr. 29, 2013).
                        DISCUSSION
    A preliminary injunction is “an extraordinary remedy
that may only be awarded upon a clear showing that the
plaintiff is entitled to such relief.” Winter v. Natural Res.
Def. Council, Inc., 555 U.S. 7, 22 (2008) (citing Mazurek v.
Armstrong, 520 U.S. 968, 972 (1997) (per curiam)). “A
plaintiff seeking a preliminary injunction must establish
8      LIFESCAN SCOTLAND, LTD.    v. SHASTA TECHNOLOGIES, LLC



that he is likely to succeed on the merits, that he is likely
to suffer irreparable harm in the absence of preliminary
relief, that the balance of equities tips in his favor, and
that an injunction is in the public interest.” Id. at 20; see
also Titan Tire Corp. v. Case New Holland, Inc., 566 F.3d
1372, 1375–76 (Fed. Cir. 2009). If the accused infringer
“raises a substantial question concerning either infringe-
ment or validity,” then the patentee has not established
that it is likely to succeed on the merits, and a prelimi-
nary injunction is not appropriate. See Amazon.com, Inc.
v. Barnesandnoble.com, Inc., 239 F.3d 1343, 1350–51
(Fed. Cir. 2001); Oakley, Inc. v. Sunglass Hut Int’l, 316
F.3d 1331, 1340 (Fed. Cir. 2003). Because we conclude
that Shasta has established a patent exhaustion defense
as a matter of law, we reverse the grant of a preliminary
injunction without reaching other issues in this case.
                              I
    LifeScan’s primary argument is that the distribution
of its meters, whether by sale or gift, does not trigger
exhaustion because its meters do not substantially em-
body the claims of the ’105 patent. Because the ’105
patent is a method patent, the parties agree that this
issue is governed by the Supreme Court’s decision in
Quanta.
    Before Quanta, the Supreme Court had repeatedly
held, in addressing device patents, that the sale of a
patented device exhausted the patent-holder’s right to
exclude, and that an infringement suit would not lie with
respect to the subsequent sale or use of the device. In
Adams v. Burke, for example, the accused infringer ar-
gued that the sale of patented coffin lids exhausted the
patentee’s rights in the lids throughout the United States
even though the assignee from whom the accused infring-
er purchased the lids was only authorized to sell the lids
in a limited geographical area. 84 U.S. (17 Wall.) 453
(1873). The Court explained that “the sale by a person
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC    9



who has the full right to make, sell, and use such a ma-
chine carries with it the right to the use of that machine
to the full extent to which it can be used.” Id. at 455. The
Supreme Court applied the patent exhaustion doctrine in
many other cases involving product patents. See, e.g.,
Keeler v. Standard Folding Bed Co., 157 U.S. 659 (1895);
Bloomer v. Millinger, 68 U.S. (1 Wall.) 340 (1864).
    The Court applied the exhaustion doctrine to method
as well as product patents in United States v. Univis Lens
Co., an antitrust case. 316 U.S. 241 (1942). The patent-
holder operated an eyeglass lens business. Id. at 243–45.
The patent-holder’s licensee sold “lens blanks” to whole-
salers and finishing retailers, who then ground and
polished the lens blanks into finished lenses that could be
used in eyeglasses. Id. at 244. The patent-holder owned
numerous patents related to eyeglass lenses. See id. at
246–47; United States v. Univis Lens Co., 41 F. Supp. 258,
262–63 (S.D.N.Y. 1941) (listing and describing many of
the patents-in-suit), aff’d in part and rev’d in part, 316
U.S. 241 (1942). Of the patents at issue in the case, eight
were product patents describing the “shape, size, composi-
tion and disposition of . . . pieces of glass of different
refractive power in [lens] blanks.” Univis, 316 U.S. at
247. The other relevant patents were method patents.
See id. at 246–47. The Supreme Court “assume[d] . . .
that sale of the [lens] blanks by an unlicensed manufac-
turer to an unlicensed finisher” to be ground and polished
into finished lenses “would constitute contributory in-
fringement by the seller.” Univis, 316 U.S. at 248–49.
    The Court held that once the lens blanks were sold by
a licensed manufacturer, the patent-holder’s rights in
them were exhausted. Id. at 249–52. The Court reasoned
that “[a]n incident to the purchase of any article, whether
patented or unpatented, is the right to use and sell it,”
and that “the authorized sale of an article which is capa-
ble of use only in practicing the patent is a relinquish-
ment of the patent monopoly with respect to the article
10    LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC



sold.” Id. at 249. Thus, the Court held that the sale of an
article which “embodies essential features” of a patented
invention exhausted the patent-holder’s rights in that
article. Id. at 250–52. The patent-holder conceded that
“each [lens] blank . . . embodies essential features of the
patented” invention. Id. at 249. The Court viewed the
method patents as presenting the same question as the
device patents, holding that the sale of the blanks ex-
hausted the method patents as well. See id. at 246–49;
see also Quanta, 553 U.S. at 629 (“Univis held that the
sale of optical lens blanks that partially practiced a pa-
tent exhausted the method patents that were not com-
pletely practiced until the blanks were ground into
lenses.”).
    Quanta confirmed that the exhaustion doctrine ap-
plies to method patents and clarified the applicable test.
553 U.S. at 628–35. Quanta involved several patents
containing method claims directed to functions performed
by computer processors and chipsets in conjunction with
other computer components, such as memory and buses.
Id. at 621–23. LGE, the patent-holder, licensed Intel to
manufacture and sell processors and chipsets embodying
the patented technology. Id. at 623, 631. Intel, in turn,
sold its processors and chipsets to computer manufactur-
ers such as Quanta Computer, who combined the proces-
sors and chipsets with unpatented components to create
finished computer systems that practiced the method
patents. Id. at 624. A separate agreement between LGE
and Intel required Intel to instruct purchasers of those
processors and chipsets that Intel’s license to make and
sell the processors and chipsets “d[id] not extend . . . to
any product [the purchasers] ma[d]e by combining an
Intel product with any non-Intel product.” Id. at 623–24
(quotation marks omitted). Nevertheless, Quanta Com-
puter manufactured computers in which Intel processors
and chipsets were combined with non-Intel parts. Id. at
624. LGE contended that Quanta’s combination of the
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC   11



Intel processors and chipsets with non-Intel memory and
buses infringed the method claims of LGE’s patents. Id.
    The Supreme Court held that LGE’s suit was barred
by patent exhaustion. The Court first rejected LGE’s
argument that patent exhaustion did not apply to method
patents. The Court stated that it had “repeatedly held
that method patents were exhausted by the sale of an
item that embodied the method,” and pointed to Univis as
an example of such a prior holding. Id. at 629. 2
    The Court next addressed “the extent to which a
product must embody a patent in order to trigger exhaus-
tion.” Id. at 630. It concluded that the issue was gov-
erned by Univis. Id. at 631. As discussed above, the
Supreme Court’s finding of exhaustion in Univis was
based on the patentee’s concession that its lens blanks
“embodie[d] essential features” of the patented invention.
Univis, 316 U.S. at 250–51. The Court in Quanta thus
held that the critical issue, whether a method or product
patent is involved, is whether the product “substantially


   2    The Court in Quanta also cited Ethyl Gasoline
Corp. v. United States, 309 U.S. 436 (1940) as a case
where it had applied patent exhaustion to method pa-
tents. Quanta, 553 U.S. at 629, 629 n.4. Ethyl Gasoline
was an antitrust suit by the government against a pa-
tentee that owned both product and method patents
relating to tetraethyl lead for use in motor fuel. Ethyl
Gasoline, 309 U.S. at 445–46. The patentee argued that
its allegedly anticompetitive licensing agreements were
within the scope of its patent monopoly. Id. at 456–57.
The Court held that “by the authorized sales of the fuel by
refiners to jobbers the patent monopoly over it is exhaust-
ed, and after the sale neither appellant nor the refiners
may longer rely on the patents to exercise any control
over the price at which the fuel may be resold.” Id. at
457.
12    LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC



embodies the patent”—i.e., whether the additional steps
needed to complete the invention from the product are
themselves “inventive” or “noninventive.” 553 U.S. at
633–34. Applying that test to the case before it, the
Supreme Court found that the authorized sale of Intel’s
processors and chipsets exhausted LGE’s patent rights.
Id. at 631–34. It explained that the processors and chip-
sets had no reasonable noninfringing use because they
“cannot function until . . . connected to buses and
memory” and because “the only apparent object of Intel’s
sales to Quanta was to permit Quanta to incorporate the
Intel [processors and chipsets] into computers that would
practice the patents.” Id. at 632. The Court further held
that Intel’s products substantially embodied the patents
because “[e]verything inventive about each patent [was]
embodied in the Intel [processors and chipsets]” and
“because the only additional step necessary to practice the
patent[s was] the application of common processes or the
addition of standard parts.” Id. at 633.
                            A
    The facts relevant to the patent exhaustion issue here
are undisputed. Shasta argues that under Quanta and
other Supreme Court cases, the transfer of the meters to
health care providers and users exhausts LifeScan’s
patent rights. LifeScan disagrees. It first contends that
Quanta is inapplicable because its meters have reasona-
ble noninfringing uses. Relying on language from Quanta
noting that the Intel processors and chipsets “had no
reasonable noninfringing use,” 553 U.S. at 638, LifeScan
argues that the sale of a component does not result in
exhaustion where the component has reasonable nonin-
fringing uses. LifeScan’s theory appears to be that if the
meters had a reasonable noninfringing use, then the
transfer of the meters would not necessarily imply that
the recipient was authorized to practice the claimed
invention as opposed to the noninfringing alternative. We
have recently rejected the contention that a potential non-
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC     13



infringing use prevents exhaustion where the use in
question is the very use contemplated by the patented
invention itself. Keurig, Inc., v. Sturm Foods, Inc., No. 13-
1072, slip op. at 7 (Fed. Cir. Oct. 17, 2013).
    Even if a showing of reasonable noninfringing uses of
a product could alone be sufficient to avoid exhaustion
here, we would find no merit in LifeScan’s argument.
LifeScan bases this argument on expert testimony that
Shasta could have designed new strips that would work
with LifeScan’s meter in a noninfringing way. But the
question is not whether Shasta could design a noninfring-
ing use for LifeScan’s meters, it is whether the individual
users (the alleged direct infringers) have a noninfringing
use for the meters. Here, there is no suggestion that the
users can put LifeScan’s meters to noninfringing uses.
    In any event, alternative uses are relevant to the ex-
haustion inquiry under Quanta only if they are both
“reasonable and intended” by the patentee or its author-
ized licensee. Quanta, 553 U.S. at 631 (emphasis added);
see also Univis, 316 U.S. at 249 (noting that “the only
object of the sale is to enable [purchasers] to grind and
polish [the lens blanks] for use as a lens by the prospec-
tive wearer” (emphasis added)). LifeScan admits that it
distributes its meters “in the expectation and intent that
customers will use its OneTouch Ultra meters with [its]
OneTouch Ultra test strips,” JA 319 (emphasis added),
and that such use practices the ’105 patent. Thus, even if
LifeScan’s proposed alternative uses for its meters were
reasonably available to users, they were plainly not
intended, and are therefore not relevant to the issue of
patent exhaustion.
                              B
    LifeScan next argues that exhaustion is inapplicable
because the meters do not embody the essential features
of the ’105 patent. In Quanta, the Supreme Court empha-
sized that “[e]verything inventive about each patent [was]
14     LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC



embodied in the Intel [processors and chipsets]” because
they “control[led]” and “carr[ied] out” the functions de-
scribed in the patents. Quanta, 553 U.S. at 633–34.
Similarly, the question here is whether the meters “con-
trol” and “carry out” the inventive functions described in
the method claims of the ’105 patent. See id.
     As originally filed, the application that led to the ’105
patent claimed two separate inventions—the comparing
method performed by the meter and the configuration of
electrodes on the test strips. Thus, the specification
describes a “method” in which “the measuring device
compares the current generated by two working sensor
parts and gives an error indication if they are too dissimi-
lar,” ’105 patent col. 2 ll. 27–31, 33, and separately de-
scribes the originally-claimed arrangement of electrodes
on the test strip so that the “two working sensor parts are
arranged one downstream of the other,” see id. col. 3 ll.
43–44. However, while the claims directed to the compar-
ing method were allowed, the claims directed to the test
strips themselves were rejected. The question is what the
inventive features of the method claims were. What is
“inventive” about patent claims in the patent exhaustion
context is what distinguishes them from the prior art. See
Univis, 316 U.S. at 248–49.
    Contrary to the dissent, a biosensor with multiple
electrodes was known in the prior art, as LifeScan’s own
expert admitted. JA 1459. See also U.S. Patent No.
5,120,420, col. 3, ll. 19–30. Here, the undisputed facts,
the specification of the patent, and the prosecution history
all suggest that the claimed inventive concept of the
method claims of the ’105 patent lies in the meter, rather
than the strips, because the meters “control” and “carry
out” the inventive functions of the method claims in
LIFESCAN SCOTLAND, LTD.     v. SHASTA TECHNOLOGIES, LLC            15



comparing the readings of the two working electrodes. 3
The text of the ’105 patent itself strongly supports the
conclusion that the meter’s error-detecting functions are
its inventive concept. Its abstract describes the invention
by stating that “[i]n accordance with the present inven-
tion a measuring device compares the current generated by
two working sensor parts and gives an error indication if
they are too dissimilar.” ’105 patent, at [57] (emphasis
added). The abstract makes no mention of the configura-
tion of the test strips. See id. The specification likewise
emphasizes error detection by the meter, stating that
inaccuracies can arise from “insufficient sample liquid” or
“defects in the production of test strips,” id. col. 1 ll. 39–
64, and that the invention can detect both types of errors
by “compar[ing] the current generated by two working
sensor parts,” id. col. 2 ll. 27–39. Indeed, discussion of
this comparison function performed by the meter and its
error-detecting benefits is found throughout the specifica-
tion. See, e.g., id. col. 3 ll. 3–17; id. col. 3 l. 59 to col. 4 l. 6;
id. col. 5 ll. 26–63. LifeScan itself argued to the district
court that “the idea of comparing the currents from the
two working sensors and seeing if they’re in substantial
agreement or not . . . . is the crux of the invention.” JA
2108–09. The district court, too, found that the invention
of the ’105 patent was directed to addressing the problem
of inaccurate readings by comparing the results from two
working sensors and displaying an error message if
necessary. The prosecution history in particular confirms
that the meter’s comparing function is the key to the
invention reflected in the method claims. During prosecu-
tion of the application that led to the ’105 patent,
LifeScan attempted to obtain apparatus claims directed to


    3   Shasta argues that the claims of the ’105 patent
are invalid as obvious.       Because we conclude that
LifeScan is not likely to prevail on the patent exhaustion
issue, we do not reach Shasta’s validity arguments.
16       LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC



the disposable test strip with two working electrodes. In
response to a final rejection of its apparatus claims on the
strips as anticipated, LifeScan amended its claims to the
strips by adding the limitation that the second working
electrode is “downstream from [the] first working [elec-
trode].” However, the examiner once again rejected those
claims as anticipated, and LifeScan abandoned them. 4
Despite finding LifeScan’s test strips unpatentable, the
examiner allowed the method claims of the ’105 patent to
issue, explaining that the method claims were distin-
guishable from the prior art because they
     require[] the steps of “measuring an electric cur-
     rent 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 prede-
     termined threshold.”
JA 1849. The examiner thus found that the “measuring,”
“comparing,” and “giving an indication of an error” steps
distinguished the method claims from the prior art, not
the arrangement of the electrodes. Therefore, those steps,
and not the configuration of the electrodes on the strips,
were the inventive features of the method claims. Having
secured a patent premised on the inventive quality of the
comparing function, rather than the particular strip



     4  LifeScan also attempted to patent its strips in a
continuation application, U.S. Patent Application Serial
No. 11/772,714.     There too, the examiner rejected
LifeScan’s attempts to obtain a patent on its test strips,
finding that its strips were both anticipated by U.S.
Patent No. 6,258,229 and obvious in light of U.S. Patent
No. 5,120,420.
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC   17



configuration, LifeScan cannot now argue the contrary for
purposes of exhaustion.
     There is also no dispute that in LifeScan’s blood glu-
cose testing system, it is the meter, not the strips, which
performs the “measuring,” “comparing,” and “giving an
indication of an error” steps. LifeScan concedes in its
brief that its meters “determine[] the blood glucose level
in the sample by measuring the electrical current pro-
duced.” Appellee’s Br. at 6. Similarly, LifeScan stated to
the district court that “[t]he separate electrical currents
measured at each working sensor are compared by the
meter.” JA 69 (emphasis added). Finally, LifeScan’s
expert testified that it is the meter that “will display an
error indicating that the strip is defective.” JA 1484.
Because it is the meter alone that performs these key
inventive steps of the claimed method, the meter substan-
tially embodies the method claims of the ’105 patent. See
Quanta, 553 U.S. at 633–34.
    LifeScan also appears to argue that its meter does not
embody its patented methods because its strips them-
selves are inventive and should have been found separate-
ly patentable. LifeScan bases this argument on expert
testimony asserting that the patent examiners erred in
repeatedly rejecting its attempts to patent its strips, and
that the strips would indeed have been separately patent-
able. But the question here is not whether the strips
would have been separately patentable or whether the
United States Patent and Trademark Office erroneously
denied a patent on the strips. 5 The question is whether
the strips embodied the inventive features of the claims
that were actually allowed by the examiner. In allowing


   5    The dissent’s statements that the majority’s deci-
sion “make[s] inventiveness for exhaustion purposes
coextensive with patentability,” Dissent at 8, are demon-
strably inaccurate.
18    LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC



the method claims, the examiner did not attribute an
inventive feature to the strips themselves. Having ac-
cepted the rejection of its claims drawn to the strips
themselves by abandoning those claims in both its origi-
nal and continuation applications, LifeScan cannot now
argue that the strips themselves were the invention. The
fact that the specification may have described the strips
in considerable detail and as “inventive” is of no conse-
quence in view of the facts that the claims covering the
strips were not allowed, and that the meter rather than
the strips performs the inventive feature of the patent
claims that were actually allowed.
     To be sure, if a patent had actually issued on the
strips, the patentability of the strips could be relevant to
exhaustion. That principle was announced in Morgan
Envelope Co. v. Albany Perforated Wrapping Paper Co.,
152 U.S. 425 (1894). There, unlike here, a patent had
actually issued on a subsidiary element (toilet paper rolls)
of a patented combination. Id. at 427, 430. The patentee
had obtained patents on a particular type of roll of toilet
paper and on the combination of those toilet paper rolls
with a fixture on which the roll was mounted. Id. at 427,
430–31. After concluding that the rolls themselves were
not patentable over the prior art, see id. at 427–30, the
Court considered whether the sale of the fixture exhaust-
ed the patent rights in the combination. See id. at 431–
32. The accused infringer apparently conceded that the
fixtures “involve[d] a patentable novelty,” but argued that
the mere sale of new rolls of toilet paper to those who had
previously purchased fixtures from the patentee did not
constitute infringement because of exhaustion by sale of
the fixtures. See id. at 430–31. The Court agreed, con-
cluding that the sale of the fixtures exhausted the patent-
ee’s rights. Id. at 431–35. The Court noted that the sale
of one element of a patented combination could in some
instances constitute indirect infringement, id. at 433, but
it found that principle inapplicable
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC        19



   where the element made by the alleged infringer
   is an article of manufacture perishable in its na-
   ture, which it is the object of the mechanism to de-
   liver, and which must be renewed periodically,
   whenever the device is put to use. Of course, if
   the product itself is the subject of a valid patent, it
   would be an infringement of that patent to pur-
   chase such product of another than the patentee;
   but if the product be unpatentable, it is giving to
   the patentee of the machine the benefit of a patent
   upon the product, by requiring such product to be
   bought of him.
Id. (emphasis added).      The Court explained that, for
example,
   [i]f a log were an element of a patentable mecha-
   nism for sawing such log, it would, upon the con-
   struction claimed by the plaintiff, require the
   purchaser of the sawing device to buy his logs
   [from] the patentee of the mechanism, or subject
   himself to a charge of infringement. This exhibits
   not only the impossibility of this construction of
   the patent, but the difficulty of treating the paper
   of an element of the combination at all.
Id. Morgan Envelope therefore confirms that if one item
in the patented combination is either unpatented or if the
patent on it is invalid, and the inventive concept resides
in a second item, then the sale of the second item ex-
hausts a product patent in the combination. See id. at
432–33, 435. The same principle is equally applicable to
method claims, Quanta, 553 U.S. at 628–29, as is con-
firmed by our recent decision in Keurig, No. 13-1072, slip
op. at 7 (Fed. Cir. Oct. 17, 2013), where we held that a
method of using a coffee brewer in combination with
disposable cartridges was exhausted by the sale of the
brewer.
20       LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC



    However, LifeScan argues that exhaustion does not
apply because the strips here are not “standard” parts.
Although the Supreme Court in Quanta referred to the
other computer components that were combined with
Intel’s processors and chipsets as “standard parts,” 553
U.S. at 633, Quanta does not suggest that only standard
parts can be viewed as noninventive. Rather, the Court
focused on the fact that “[e]verything inventive about each
patent [was] embodied in the Intel [processors and chip-
sets].” Id. (emphasis added). Moreover, the Court’s
reference to “standard parts” did not imply that those
parts were configured identically in the prior art, but
rather refers to the fact that standard parts could be
easily adapted to work with the Intel processors and
chipsets. Indeed, it was undisputed in Quanta that the
computer manufacturers specifically designed the re-
mainder of their computer systems for compatibility with
Intel’s processors and chipsets according to Intel’s specifi-
cations. 6 Here, strips with two working electrodes were
disclosed by the prior art. The fact that the prior art
strips might have required some reconfiguration to use
with LifeScan’s meters is irrelevant. There is no sugges-
tion that prior art strips with two working electrodes




     6  See, e.g., Decl. of Raymond Chen in Supp. of Mot.
by Asustek and Asus for Partial Summ. J. at 1–2, ¶¶ 10–
13, LG Elecs., Inc. v. Asustek Computer Inc., No. 01-cv-
326, ECF No. 163 (N.D. Cal. May 3, 2002) (stating that
“Asustek specifically designs and makes the Asustek
Products to use the functionalities and processes in the
Intel chipsets and microprocessors” and that “[d]eviations
from [Intel] specifications relating to functions controlled
or performed by the [processor] and/or memory would
render Asustek Products technically inoperable”).
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC       21



could not be easily configured to work with meters per-
forming a comparing function. 7
                              C
      Rejecting a claim of exhaustion in this case would be
particularly problematic because LifeScan would be
permitted to eliminate competition in the sale of the
strips even though the strips do not embody the claimed
invention and are themselves not patentable. Allowing
LifeScan to control sale of the strips would be akin to
allowing a tying arrangement whereby the purchasers of
the meters could be barred from using the meters with
competing strips. See Motion Picture Patents Co. v. Uni-
versal Film Mfg. Co., 243 U.S. 502, 517 (1917) (holding
unlawful a patentee’s attempt to “under color of its patent
. . . derive its profit . . . from the unpatented supplies with
which [the patented product] is used”); Carbice Corp. of
Am. v. Am. Patents Dev. Corp., 283 U.S. 27, 33 (1931)
(“Control over the supply of . . . unpatented material is
beyond the scope of the patentee’s monopoly . . . .”).
    In both the tying and exhaustion cases, the Supreme
Court has expressed particular concern with extension of
the patent monopoly to items that must be renewed
periodically and that are not themselves patentable.
Carbice, 283 U.S. at 31 (“The limited monopoly to make,
use, and vend an article may not be expanded by limita-
tions as to materials and supplies necessary to the opera-
tion of it.” (quotation marks omitted)); Morgan Envelope,



    7   The parties have not argued, and therefore we do
not decide, whether there would be any impact on exhaus-
tion principles if a strip were “especially made or especial-
ly adapted for use in an infringement of such patent, and
not a staple article or commodity of commerce suitable for
substantial noninfringing use” within the meaning of 35
U.S.C. § 271(c).
22     LIFESCAN SCOTLAND, LTD.    v. SHASTA TECHNOLOGIES, LLC



152 U.S. at 433 (finding no indirect infringement “where
the element made [and sold] by the alleged infringer . . .
must be renewed periodically, whenever the device [sold
by the patentee] is put to use”).
      The basic principle underlying the Supreme Court’s
exhaustion cases is that the authorized transfer of owner-
ship in a product embodying a patent carries with it the
right to engage in that product’s contemplated use. See
Quanta, 553 U.S. at 631 (noting that the intended use of
the Intel processors and chipsets was to be combined and
used with other computer components so as to practice
the patent); Univis, 316 U.S. at 249 (“[T]he only object of
the sale is to enable the [purchaser] to grind and polish
[the lens blank] for use as a lens by the prospective wear-
er.”); Adams, 84 U.S. at 455 (“The true ground on which
[the Supreme Court’s early exhaustion cases] rest is that
the sale by a person who has the full right to make, sell,
and use such a machine carries with it the right to the use
of that machine to the full extent to which it can be used
. . . .”). Here, barring the use of the meter with strips
manufactured by the accused infringer would bar the use
of the meters for their contemplated function and extend
the patent monopoly improperly as we recently held in
Keurig, No. 13-1072, slip op. at 7 (Fed. Cir. Oct. 17, 2013).
We hold that the sale of the meter exhausted LifeScan’s
patent rights.


                             II
    LifeScan’s final argument is that even if its meters
substantially embody the asserted claims, patent exhaus-
tion is nevertheless inapplicable to the 60% of its meters
that are not sold but instead distributed for free.
LifeScan asserts that it received no “reward” for distrib-
uting them (because they were distributed without
charge), and that the district court therefore properly
found that patent exhaustion did not apply. We are
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC       23



therefore asked to decide, as a matter of first impression,
whether patent exhaustion applies to a product distribut-
ed for free. We conclude that, in the case of an authorized
and unconditional transfer of title, the absence of consid-
eration is no barrier to the application of patent exhaus-
tion principles.
    Although the Supreme Court has often discussed ex-
haustion in terms of a “sale” and a “purchaser,” see, e.g.,
Bowman v. Monsanto Co., 133 S. Ct. 1761, 1766 (2013);
Adams, 84 U.S. at 456, the Court has never confined the
application of patent exhaustion to that context. The
Court explained the rationale underlying the doctrine of
patent exhaustion in Bloomer v. McQuewan, 55 U.S. (14
How.) 539 (1853). See also Quanta, 553 U.S. at 625.
McQuewan involved the effect of a patent term extension
on patent licensees holding licenses to use the patented
planing machine during the original patent term. 55 U.S.
(14 How.) at 547–48. The Court held that “the purchaser
of the . . . machine for the purpose of using it in the ordi-
nary pursuits of life” was entitled to continue using the
machine during the extended term. Id. at 549. The Court
explained that
    when the machine passes to the hands of the pur-
    chaser, it is no longer within the limits of the [pa-
    tent] monopoly. It passes outside of it, and is no
    longer under the protection of the act of Con-
    gress. . . . The implement or machine becomes [the
    purchaser’s] private, individual property, not pro-
    tected by the laws of the United States, but by the
    laws of the State in which it is situated.
Id. at 549–50 (emphases added). In other words, the
patentee’s transfer of the right to use the machines “ex-
haust[ed]” his rights as to those machines. See Univis,
316 U.S. at 250 (citing McQuewan, 55 U.S. (14 How.) at
549–50).
24    LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC



    Thus, despite frequent references to “sales” and “pur-
chasers,” the Court has more fundamentally described
exhaustion as occurring when the patented product
“passes to the hands” of a transferee and when he “legally
acquires a title” to it. Millinger, 68 U.S. (1 Wall.) at 351
(“legally acquires a title”); Chaffee v. Boston Belting Co.,
63 U.S. (22 How.) 217, 223 (1859) (“passes to the hands,”
“legally acquires a title”); McQuewan, 55 U.S. (14 How.)
at 549–50 (“passes to the hands”). Similarly, the Court
has stated that exhaustion can occur by a transfer “from
any other person . . . authorized [by the patentee] to
convey it.” Millinger, 68 U.S. (1 Wall.) at 351 (emphasis
added); Chaffee, 63 U.S. (22 How.) at 223 (same); see
Black’s Law Dictionary 273 (1st ed. 1891) (defining “con-
vey” to mean “[t]o pass or transmit the title to property
from one to another”). So too, in Univis, the Court stated
that the patentee’s “monopoly remains so long as he
retains the ownership of the patented article.” 316 U.S. at
250 (emphasis added). Each of these formulations is
broad enough to include a transfer of title that does not
amount to a sale. A “sale” limitation would indeed be
inconsistent with the Supreme Court’s decision in
McQuewan, where the particular machines at issue had
never been sold, but had instead been manufactured by
the accused infringer with the permission of the patentee.
See 55 U.S. (14 How.) at 548. Yet that lack of a “sale” was
no barrier to the application of patent exhaustion. See id.
at 549–50. Because the machines had been constructed
with the patentee’s authorization and were the “private,
individual property” of the accused infringer, they were
“no longer under the protection of” the Patent Act. Id.
The narrow application of patent exhaustion urged by
LifeScan would be inconsistent with the doctrine’s under-
lying rationale—to permit the owner of an item who
received it in an authorized transfer to use it.
   LifeScan relies on language in Supreme Court ex-
haustion decisions mentioning the receipt of “considera-
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC       25



tion” or “reward” by the patentee as supporting exhaus-
tion. See, e.g., Univis, 316 U.S. at 251 (“[T]he patentee
has received his reward for the use of the invention by the
sale of the article . . . .”); Adams, 84 U.S. (17 Wall.) at 456
(“[W]hen the patentee . . . sells a machine . . . whose sole
value is in its use, he receives the consideration for its use
and he parts with the right to control that use.”). But
none of the cases cited by LifeScan involved any sugges-
tion that exhaustion could be avoided by showing the
absence or inadequacy of the patentee’s reward in a
transfer by gift.
     At bottom, a patentee has a choice as to how to secure
its reward. A patentee may “demand[]” a particular price
in exchange for an “article and the invention which it
embodies.” See Univis, 316 U.S. at 251; see also McQue-
wan, 55 U.S. (14 How.) at 552. Alternately, a patentee
may choose to give that article away for free in the hope of
obtaining a future benefit, as LifeScan did here. But a
patentee cannot evade patent exhaustion principles by
choosing to give the article away rather than charging a
particular price for it. Where a patentee unconditionally
parts with ownership of an article, it cannot later com-
plain that the approach that it chose results in an inade-
quate reward and that therefore ordinary principles of
patent exhaustion should not apply. 8



    8   To be sure, the amount of compensation received
by the patentee may in some instances be relevant to the
question of whether a particular transaction is indeed an
unconditional transfer of ownership as opposed to a
conditional sale or license. See Princo Corp. v. Int’l Trade
Comm’n, 616 F.3d 1318, 1328 (Fed. Cir. 2010) (en banc).
No such inquiry is necessary here. Although LifeScan
points to a notice on its meters’ packaging that purported-
ly requires customers to use LifeScan’s test strips and
appears to argue that it has provided users with “only a
26     LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC



    Additionally, while not “controlling” regarding issues
of patent law, see Bobbs-Merill Co. v. Straus, 210 U.S.
339, 346 (1908) (quotation marks omitted), copyright
cases further reinforce our conclusion that patent exhaus-
tion applies to gifts. 9 In the Supreme Court’s recent
decision in Kirtsaeng v. John Wiley & Sons, Inc., the
Court held that the first sale doctrine in copyright law
(comparable to the patent exhaustion doctrine) applies
equally whether the copyrighted work is manufactured in
the United States or abroad. 133 S. Ct. 1351, 1355–56
(2013). Although copyright’s first sale doctrine, unlike
patent exhaustion, has been codified by statute, see 17


conditional grant of use rights,” Appellee’s Br. at 11, 36,
our cases make clear that such notices are relevant only if
they are “in the form of a contractual agreement,” Jazz
Photo Corp. v. Int’l Trade Comm’n, 264 F.3d 1094, 1108
(Fed. Cir. 2001). Unless the purchaser has made an
“express contractual undertaking,” the transfer is an
unconditional sale, not a conditional sale or license. Id. at
1107–08; Hewlett-Packard v. Repeat-O-Type Stencil, 123
F.3d 1445, 1453 (Fed. Cir. 1997) (“[A] seller’s intent,
unless embodied in an enforceable contract, does not
create a limitation on the right of a purchaser to use, sell,
or modify a patented product.”). Here, LifeScan expressly
states that it “does not contend that the notice forms a
binding contract.” Appellee’s Br. at 45. Accordingly,
LifeScan’s contention that its transfer of the meters to
health care providers and patients was “conditional” or a
mere “license” is meritless.
    9    The Supreme Court has frequently explained that
copyright cases inform similar cases under patent law.
See, e.g., Bauer v. O’Donnell, 229 U.S. 1, 13–14 (1913) (“In
providing for grants of exclusive rights and privileges to
inventors and authors we think Congress had no inten-
tion to use the term ‘vend’ in one sense in the patent act
and ‘vending’ in another in the copyright law.”).
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC          27



U.S.C. § 109(a), the Supreme Court looked to the doc-
trine’s common law roots to interpret that provision.
Kirtsaeng, 133 S. Ct. at 1363 (“The ‘first sale’ doctrine is a
common-law doctrine with an impeccable historic pedi-
gree.”). The Court explained that the first sale doctrine
was traceable to “the common law’s refusal to permit
restraints on the alienation of chattels.” Id. To elaborate
on that common-law policy, the Court quoted at length
from Lord Coke’s Institutes of the Laws of England,
stating:
    [If] a man be possessed of . . . a horse, or of any
    other chattell . . . and give or sell his whole inter-
    est . . . therein upon condition that the Donee or
    Vendee shall not alien[ate] the same, the [condi-
    tion] is voi[d], because his whole interest . . . is out
    of him, so as he hath no possibilit[y] of a Reverter,
    and it is against Trade and Traffi[c], and bargain-
    ing and contracting betwee[n] man and man: and
    it is within the reason of our Author that it should
    ouster him of all power given to him.
Id. (quoting 1 E. Coke, Institutes of the Laws of England
§ 360, p. 223 (1628)) (omissions and alterations in origi-
nal) (emphases added). Thus, the policy underlying the
first sale doctrine draws no distinction between gifts and
sales. The same policy undergirds the doctrine of patent
exhaustion. See Straus v. Victor Talking Mach. Co., 243
U.S. 490, 500–01 (1917) (explaining that a patentee’s
attempt “to place restraints upon [a patented product’s]
further alienation [was] such as have been hateful to the
law from Lord Coke’s day to ours”).
    The Ninth Circuit specifically addressed the applica-
tion of copyright’s first sale doctrine to gifts in UMG
Recordings, Inc. v. Augusto, 628 F.3d 1175 (9th Cir. 2011).
In that case, UMG owned a copyright in the content of
promotional CDs. Id. at 1177. It distributed these pro-
motional CDs for free to individuals such as music critics
28    LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC



and radio programmers. Id. When Augusto obtained and
sold the CDs, UMG brought suit against him for copyright
infringement, arguing that his sales constituted a viola-
tion of its exclusive rights to the content of the CDs. See
id. at 1178; see also 17 U.S.C. § 106(3). The Ninth Circuit
disagreed. It held that UMG’s free distribution of the
CDs exhausted its rights under copyright law. Augusto,
628 F.3d at 1183.             The court reasoned that
“[n]otwithstanding its distinctive name, the [first sale]
doctrine applies not only when a copy is first sold, but
when a copy is given away or title is otherwise transferred
without the accouterments of a sale.” Id. at 1179. The
court explained that “[o]nce the copyright owner places a
copyrighted item in the stream of commerce . . . , he has
exhausted his exclusive statutory right to control its
distribution.” Id. (quotation marks omitted).
     The common policies underlying patent exhaustion
and the first sale doctrine would be significantly under-
mined by the rule LifeScan advocates in this case. Absent
a valid contractual restriction, restraints upon the down-
stream use or sale of a patented product “offend against
the ordinary and usual freedom of traffic in chattels,” see
John D. Park & Sons Co. v. Hartman, 153 F. 24, 39 (6th
Cir. 1907), and that is so regardless of the amount of
consideration demanded by the patentee when it original-
ly parted with the product. Indeed, conditioning patent
exhaustion on the adequacy of the patentee’s reward
“would cast a cloud of uncertainty” over every transaction
and every patented product. Tessera, Inc. v. Int’l Trade
Comm’n, 646 F.3d 1357, 1370 (Fed. Cir. 2011) (holding
that patent exhaustion applied even though the seller
failed to pay promised royalties to the patentee). That
result would be “wholly inconsistent with the fundamen-
tal purpose of patent exhaustion—to prohibit post[-]sale
restrictions on the use of a patented article.” Id. (citing
McQuewan, 55 U.S. (14 How.) at 549). If patentees could
evade exhaustion merely by giving away one component
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC    29



of an apparatus or method claim and tying the recipient’s
ability to use that component to the subsequent purchase
of another component, then patent exhaustion would be a
dead letter and consumers’ reasonable expectations
regarding their private property would be significantly
eroded. See Quanta, 553 U.S. at 630–31; United States v.
Masonite Corp., 316 U.S. 265, 280 (1942) (“Since patents
are privileges restrictive of a free economy, the rights
which Congress has attached to them must be strictly
construed so as not to derogate from the general law
beyond the necessary requirements of the patent stat-
ute.”). We therefore conclude that patentees cannot
circumvent the application of patent exhaustion principles
by distributing a product embodying the patent for free.
                       CONCLUSION
    In summary, we hold that patent exhaustion princi-
ples apply equally to all authorized transfers of title in
property, regardless of whether the particular transfer at
issue constituted a gift or a sale. We further conclude
that LifeScan’s OneTouch Ultra meters substantially
embody the methods claimed in the ’105 patent and that
their distribution therefore exhausts LifeScan’s patent
rights. We therefore reverse the district court’s grant of a
preliminary injunction and remand for further proceed-
ings consistent with this opinion.
            REVERSED AND REMANDED
                            COSTS
   Costs to Shasta.
  United States Court of Appeals
      for the Federal Circuit
                ______________________

LIFESCAN SCOTLAND, LTD. AND LIFESCAN, INC.,
             Plaintiffs-Appellees,

                           v.

SHASTA TECHNOLOGIES, LLC AND CONDUCTIVE
          TECHNOLOGIES, INC.,
           Defendants-Appellants,

                          AND

       INSTACARE CORP. AND PHARMATECH
               SOLUTIONS, INC.,
              Defendants-Appellants.
              ______________________

                      2013-1271
                ______________________

   Appeal from the United States District Court for the
Northern District of California in No. 11-CV-4494, Judge
Edward J. Davila.
                ______________________
REYNA, Circuit Judge, dissenting.
   The majority holds that LifeScan’s sale (or promotion-
al giveaway) of its unpatented blood glucose meter1


   1     On its packaging and promotional materials,
LifeScan’s OneTouch® Ultra® blood glucose meters and
test strips list a number of patents embodied in the com-
2     LIFESCAN SCOTLAND, LTD.     v. SHASTA TECHNOLOGIES, LLC



exhausts its rights in a patented method, which requires
a specialized test strip that is consumed in practicing the
method, because the meter “controls and carries out” the
functions described in the patent and LifeScan failed to
obtain a patent for the test strip. The majority reaches its
result by conflating the patentability of a product with the
product’s ability to substantially embody the essential
features of a patented method. The majority reasons that
because LifeScan did not obtain a patent on its test strips,
those strips could not substantially embody the essential
features of its method patent. Yet, the Supreme Court
has recognized that it makes “no difference as to the
infringement or non-infringement of a combination that
one of its elements or all of its elements are unpatented.”
Aro Mfg. Co. v. Convertible Top Replacement Co., 365 U.S.
336, 375 (1961) (Harlan, J., dissenting) (quoting Leeds &
Catlin Co. v. Victor Talking Machine Co., 213 U.S. 325,
333 (1909)). The Court’s recent pronouncement in the
context of method patent exhaustion makes Justice
Harlan’s observation in Aro no less applicable today. See
Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617,
632 (2008). I disagree with the patentability gloss that
the majority casts on the otherwise straightforward
exhaustion standard expressed in Quanta. Accordingly, I
respectfully dissent.
                             I.
    The Supreme Court has held that the sale of a prod-
uct triggers exhaustion when its only reasonable and
intended use is to practice the patent and it substantially
embodies the essential features of the patented invention.
Quanta, 553 U.S. at 631 (quoting United States v. Univis
Lens Co., 316 U.S. 241, 249–51 (1942)). There is no real


bination, but the only patent applicable to the meter is a
design patent, U.S. Patent No. D546,216 (filed Jul. 11
2005), which is inapplicable to this case.
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC    3



dispute in this case that the only reasonable and intended
use of LifeScan’s blood glucose meter is to practice the
patent-in-suit. See Maj. Op. at 12–13. Therefore, this
case turns on the question of whether LifeScan’s meters
or its test strips substantially embody the essential fea-
tures of the patent. I conclude that the test strips, and
not the meters, embody those essential features.
    The majority apparently misapprehends the Court’s
guidance in Quanta, which causes it to incorrectly con-
clude that the meters, and not the test strips, embody the
essential features of LifeScan’s patented method. In
Quanta, the Supreme Court explained that a product
embodies the essential features of a method patent when
the product contains or is involved in the inventive, as
opposed to the standard, processes of the patented meth-
od. Quanta, 553 U.S. at 633 (“[T]he grinding process [in
Univis] was not central to the patents. That standard
process was not included in detail in any of the patents
and was not referred to at all in two of the patents.”). The
Court did not clearly demarcate a line between inventive
and standard processes, but its analysis of the facts of
that case is informative. In particular, the microprocessor
and chipset, which “constitute[d] a material part of the
patented invention and all but completely practice[d] the
patent,” substantially embodied the inventive processes of
the method patent at issue because “the only step neces-
sary to practice the patent [wa]s the application of com-
mon processes or the addition of standard parts.” Id.
(emphasis added). The addition of those standard compo-
nents, memory and buses, was common and noninventive,
and doing so required no creative or inventive decision on
the part of the accused infringer. Id. at 633–34. The
Court emphasized that it is the nature of the steps that is
the relevant characteristic, rather than the patentability
of the components themselves. Id. at 635 (“While each . . .
microprocessor and chipset practices thousands of indi-
vidual patents, including some [patents] not at issue in
4     LIFESCAN SCOTLAND, LTD.    v. SHASTA TECHNOLOGIES, LLC



this case, the exhaustion analysis is not altered by the
fact that more than one patent is practiced by the same
product.”). The Court’s analysis makes clear that the
inventive contributions of the components to the method,
as opposed to the inventiveness of the components them-
selves, determine their essentialness. The majority’s
apparent misunderstanding of the Court’s guidance in
Quanta causes it to err in two separate respects.
                            A.
     First, the majority relies on Quanta to elevate the
blood glucose meter over the test strip as the essential
feature of the patented method. Because of the majority’s
belief that LifeScan’s blood glucose meters “control and
carry out” the functions described in the patents, it rea-
sons that the meters alone embody the essential features
of the method patent. While the majority correctly identi-
fies the objective of LifeScan’s inventive method, reducing
errors in blood glucose readings caused by insufficient
sample liquid and defects in the production of test strips,
it incorrectly concludes that the “measuring,” “compar-
ing,” and “giving an indication of an error” steps per-
formed by the meter are essential to achieving the stated
objective.
    Prior art blood glucose meters relied on a test strip
with only two electrodes—one reference and one working.
U.S. Patent No. 7,250,105 col. 1 ll. 27-29 (filed May 7,
2003) (“the ’105 patent”). When the enzyme coating the
working electrode reacted with glucose in the blood sam-
ple, it would release electrons that would result in an
electrical current, which could be measured relative to the
reference electrode. In contrast, the test strip utilized by
the patented method in this case has three electrodes, two
of which are working and capable of measuring an electri-
cal current. This distinction is crucial. When the working
electrode in a prior art meter would become severed
because of a manufacturing defect or was insufficiently
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC    5



covered with blood due to an operator error, the patient
would have no way of knowing that the reading was
erroneous. See id. col. 2 ll. 27-38. Once LifeScan devel-
oped its patented method that used two working elec-
trodes, the meter could measure two separate blood
glucose readings. Id. As a result, a difference in the
readings would indicate an error condition—either insuf-
ficient blood covering one of the electrodes or a defective
electrode—and the patient could be alerted accordingly.
But for the specialized test strips required by LifeScan’s
patented method, the blood glucose meter alone could not
perform the “comparing” and “giving an indication of an
error” steps viewed by the majority as essential to the
patented method. 2 Accordingly, LifeScan’s test strips
substantially embody the essential features of its patent-
ed method.
    In contrast, the blood glucose meter cannot be fairly
viewed as embodying the essential features of LifeScan’s
patented method. The steps performed by the meter,



   2     The majority understands the examiner’s state-
ment of his reasons for allowance to be that he allowed
the method claims as distinguishable from the prior art
because they contained the “measuring,” “comparing,” and
“giving an indication of an error” steps. Maj. Op. at 16.
In fact, the examiner was commenting on the patentabil-
ity of LifeScan’s product claim, rather than distinguishing
LifeScan’s method claim from other prior art methods.
Accordingly, his statement gives no indication either way
which steps are essential to the patented method. In any
event, “[t]his court has recognized that an Examiner's
Statement of Reasons for Allowance ‘will not necessarily
limit a claim.’” Salazar v. Procter & Gamble Co., 414 F.3d
1342, 1345 (Fed. Cir. 2005) (quoting ACCO Brands, Inc. v.
Micro Sec. Devices, Inc., 346 F.3d 1075, 1079 (Fed. Cir.
2003)).
6     LIFESCAN SCOTLAND, LTD.    v. SHASTA TECHNOLOGIES, LLC



“measuring,” “comparing,” and “giving an indication of an
error,” are only made possible by the unique configuration
of the three electrode test strip, as explained above. A
diabetic patient with a LifeScan test strip, a pencil, a pad
of paper, and an ammeter (a device used to measure
electric current) could “measure an electric current at
each working sensor part,” “compare the electric current
from each working sensor parts to establish a difference
parameter,” and “give an indication of an error if said
difference parameter is greater than a predetermined
threshold,” all without the assistance of a blood glucose
meter. See Gottschalk v. Benson, 409 U.S. 63, 65 (1972)
(A digital computer . . . operates on data expressed in
digits, solving a problem by doing arithmetic as a person
would do it by head and hand.”). Accordingly, LifeScan’s
blood glucose meter does not embody the essential fea-
tures of its patented method because the steps it performs
are common and noninventive. In fact, the meter is more
fairly characterized as a standard component in the
system and only involves the application of common
processes. See Quanta, 553 U.S. at 633.
                            B.
     Second, the majority misinterprets Quanta by requir-
ing that the “essential, or inventive, features” of a method
patent be contained in a separately-patentable component
covered by a product patent. Because LifeScan aban-
doned its patent applications covering its test strip, the
majority concludes that the strip cannot embody the
essential features of LifeScan’s method patent. This
reasoning is inconsistent with the Supreme Court’s guid-
ance in Quanta. In that case, the Court focused on the
inventiveness of the steps in the claimed method, rather
than the patentability of the underlying components
themselves. Quanta, 553 F.3d at 635. The Court’s analy-
sis, as opposed to the majority’s reinterpretation of it, is
fully consistent with the statute. Section 100(b) of the
Patent Act explicitly provides that an entity like LifeScan
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC    7



can obtain a patent for its method that “includes a new
use of a known . . . machine.” 35 U.S.C. § 100(b). Accord-
ingly, the majority was incorrect to place any significance
on the patentability of LifeScan’s test strip. What matters
is whether the test strip embodies the steps that are
essential to the patented method.         As noted above,
LifeScan’s test strips are essential to the patented meth-
od. 3
    The majority relies on this court’s recent decision in
Keurig, Inc., v. Sturm Foods, Inc., No. 13-1072, __ F.3d __
(Fed. Cir. 2013), which held that the sale of a coffee
brewer exhausts the patentee’s rights in a method cover-
ing the use of the brewer with a disposable cartridge. But
that case is distinguishable from this case. Unlike this
case where the inventiveness of the method lies in the test
strip, every step of the claimed method in Keurig is per-
formed by the brewer with the cartridge merely serving as
a passive participant. Id. at 2–3. Tellingly, the panel in
Keurig focused on whether the brewers had substantial
noninfringing uses (which is not at issue here) rather
than whether it embodied the essential features of the
patented method (which is at issue here). Furthermore,
both the brewer and the cartridge are separately patented
(by apparatus patents), yet the majority in this case does
not explain the effect this has on which component em-
bodies the essential features of the method patent.




   3     LifeScan sells 40% of its blood glucose meters be-
low cost, but without test strips. The essentialness of the
test strips is made evident by the fact that a patient could
not practice the steps of LifeScan’s patented method with
the meter alone because every step except the last re-
quires a “measuring device” (i.e., a test strip) or a “work-
ing sensor part” (i.e., an electrode) on the measuring
device. See ’105 Patent col. 6 l. 55 to col. 8 l. 4.
8       LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC



     Assuming that the patentability of the test strips in
this case was relevant to exhaustion and determined
whether that component could embody the essential
features of a patented method, since LifeScan’s blood
glucose meter is not patented, it too would not exhaust
the method patent. In brief, while the majority devotes
significant attention to the patentability of the test strip,
it fails to demonstrate that LifeScan’s meter is separately
patentable. The evidence suggests that it is not. See
supra note 1. By assuming that the meter was patentable
by finding it essential to the patented method in this case,
the majority, in effect, allows LifeScan to sue competitors
that employ any blood glucose reader that measures
electric currents, compares the electric currents, and give
an error indication if they differ. This overextension of
the patent grant violates the principles of every exhaus-
tion and combination case decided by this court and the
Supreme Court. See, e.g., Quanta, 553 U.S. at 626. Had
the majority properly focused on the inventiveness of the
method steps rather than the patentability of the underly-
ing components themselves, this misstep would have been
avoided. For the reasons given, the majority’s decision to
make inventiveness for exhaustion purposes coextensive
with patentability, see Maj. Op. at 14, cannot be squared
with Supreme Court precedent. 4



    4  The majority asserts that this formulation of its
holding is “demonstrably inaccurate.” Maj. Op. at 17 n.5.
I agree that this formulation of its holding is itself a
misstatement of the law and inconsistent with Quanta,
which is why I am perplexed that the majority would hold
that “[w]hat is ‘inventive’ about patent claims in the
patent exhaustion context is what distinguishes them
from the prior art,” i.e., makes them patentable. See id.
at 14. Perhaps the majority means “what is ‘inventive’
about method patent claims in the patent exhaustion
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC      9



                             II.
    Applying exhaustion to a case such as this one is es-
pecially inappropriate because the essential features of
the patented method are embodied in test strips that are
immediately consumed during performance of the method
even though LifeScan has received little to nothing in
return for its blood glucose meters. Despite that, the
majority concludes that patent exhaustion applies to the
meters that LifeScan sells at below cost without test
strips and that cannot practice the patented method right
out of the box, see supra note 3, as well as the promotional
meters that LifeScan distributes for free as part of a
Starter Kit. The majority reasons that LifeScan has
“received [its] reward” for its patented method even on the
meters it gives away for free because it retained the “hope
of obtaining a future benefit” on those meters. Maj. Op.
at 25 (citing Univis, 316 U.S. at 251). What benefit that
is remains a mystery. Once a patient’s use of the meter
consumes the ten free strips included in LifeScan’s Start-
er Kit, 5 the patient will be able to practice the method
with impunity using Shasta’s generic test strips that are



context is which claim steps distinguish this method claim
from other prior art method claims.” I would agree to this
formulation, but do not ascribe it to the majority because
it is inconsistent with that majority’s persistent focus on
the patentability of the strips themselves.

    5   It is immaterial that LifeScan distributes the first
ten test strips for free because it intends for the patient to
use those strips to perform its patented method. I do not
understand LifeScan to argue to the contrary. Rather,
LifeScan insists that its patent rights are not exhausted
with respect to additional strips that a patient combines
with the meter after the initial ten strips have been
consumed.
10     LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC



designed to mimic LifeScan’s OneTouch® Ultra® strip. In
such instances, LifeScan will not receive any cognizable
reward from the meters it distributes for free and, hence,
any purported “future benefit” is speculative and entirely
theoretical.
     “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 inven-
tion.” Univis, 316 U.S. at 250 (citing U.S. Const. art. I, §
8, cl. 8). A patent system premised on granting the pa-
tentee a “hope of receiving a future benefit” is one where
there is no secure benefit to be had and that does not
promote the progress of the useful arts. The majority’s
reasoning is particularly problematic in this context
where a method patent is involved. For method patent
claims, infringement occurs when a party performs all of
the steps of the claimed method. Joy Techs., Inc. v. Flakt,
Inc., 6 F.3d 770, 773 (Fed. Cir. 1993); see also Mirror
Worlds, LLC v. Apple Inc., 692 F.3d 1351, 1359 (Fed. Cir.
2012) (“Direct infringement of a method claim can be
based on even one instance of the claimed method being
performed.”). Accordingly, each time an individual prac-
tices a patented method, the individual infringes the
patent. Beedle v. Bennett, 122 U.S. 71, 78 (1887). (“The
patent covers the process of drawing water from the earth
by means of a well driven in the manner described in the
patent. The use of a well so constructed is, therefore, a
continuing infringement, as every time water is drawn
from it the patented process is necessarily used.”); see also
Bowman v. Monsanto Co., 133 S. Ct. 1761, 1766 (2013)
(“Rather, ‘a second creation’ of the patented item ‘call[s]
the monopoly, conferred by the patent grant, into play for
a second time.’” (quoting Aro, 365 U.S. at 346) (alteration
in original)). In a case such as this one where the essen-
tial component is consumed in the patented process, it is
inappropriate to limit that patentee to a single reward for
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC     11



the sale or giveaway of the first component. See id.
(“[T]he patent holder has ‘received his reward’ only for the
article sold, and not for subsequent recreations of it.”
(quoting Univis, 316 U.S. at 251)).         Each successive
performance of the method would be an infringement
unless licensed by the patentee, either explicitly or implic-
itly. On the facts of this case, the only means for a pa-
tient to obtain a license for subsequent performances of
LifeScan’s patented method would be through purchasing
additional LifeScan’s OneTouch® Ultra® test strips, but
based on the majority’s conclusion, the fact that no license
flows from the purchase of Shasta’s generic test strips is
rendered meaningless because use of those strips are held
not to be infringing. Accordingly, exhaustion should not
apply in a case such as this one where the essential
features of a patented method are embodied in a compo-
nent that is immediately consumed during performance of
the method. This is true whether the initial component is
given away for free, sold under cost, or sold at a premium.
     Although the contexts are different, the Supreme
Court’s reasoning in its recent decision in Bowman does
not support the majority’s conclusion that exhaustion
applies to method patents the practice of which consume
its essential component. 6 In Bowman, the Court refused



    6   The principle case involving consumables on
which the majority relies, Morgan Envelope Co. v. Albany
Perforated Wrapping Paper Co., 152 U.S. 425 (1894), is
inapposite. Unlike this case that involves a method
patent, which is infringed every time the method is prac-
ticed, that case dealt with an apparatus patent covering
the combination of a roll of toilet paper and a dispenser.
See Cross Med. Prods., Inc. v. Medtronic Sofamor Danek,
Inc., 424 F.3d 1293, 1311 (Fed. Cir. 2005) (“[A] rule that
governs infringement of a method claim may not always
govern infringement of an apparatus claim.”).
12    LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC



to find Monsanto’s patent rights exhausted when Mr.
Bowman purchased seeds from a grain elevator even
though those seeds were grown from patented seeds
Monsanto had sold to other farmers. While Monsanto
received its reward for the first seeds it sold, the Court
reasoned that the other seed companies (i.e., Monsanto’s
competitors) would reproduce the seeds themselves and
sell them to farmers who would only need to buy them
once and reproduce them for future plantings. Id. at
1767. Monsanto would be deprived of its exclusive rights
in all of these subsequent sales and reproductions of its
patented seeds. Id. Accordingly, the Court held that
“[t]he exhaustion doctrine is limited to the ‘particular
item’ sold to avoid just such a mismatch between inven-
tion and reward.” Id. A contrary holding would have
caused the patent to “plummet in value after the first sale
of the first item containing the invention,” and the pa-
tentee’s exclusive rights would last only one transaction.
Id. at 1768.
    The majority’s holding in this case will unquestiona-
bly cause LifeScan’s patented method to plummet in value
and result in its exclusive rights over the method lasting
only one transaction. Similar to Bowman, after patients
consume the ten test strips in the Starter Kit, or none,
they will be able to continue practicing LifeScan’s patent-
ed method using generic test strips supplied by LifeScan’s
competitors. Yet the mismatch between invention and
reward in this case is even starker than it was in Bow-
man. While Monsanto received a reward for the first set
of seeds it sold, LifeScan receives no reward whatsoever
on the Starter Kit. Additionally, LifeScan will be de-
prived of its exclusive rights in all of the subsequent
performances of its patented method after the giveaway
sample test strips are consumed. Because LifeScan’s test
strips embody the essential features of its patented meth-
od, the majority erred by finding exhaustion applied once
LIFESCAN SCOTLAND, LTD.   v. SHASTA TECHNOLOGIES, LLC   13



the meter is sold (or given away). Accordingly, I respect-
fully dissent.
