Johnson & Johnson (NYSE:JNJ) and its LifeScan subsidiary took a major hit in an ongoing feud with Shasta Technologies when a court ruled this week that Shasta may develop and distribute glucose testing strips that work with LifeScan’s OneTouch blood glucose meters.
In a split decision, the panel reversed a lower court’s decision and wiped out an injunction preventing Shasta from selling its glucose testing strips. The court warned that preserving LifeScan’s test strip injunction would give the company too much monopoly power over the market.
"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," the majority judges wrote in the 2-to-1 ruling. "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.
Shasta worldwide sales and regulatory agent Decision Diagnostics Corp. (OTCBB: DECN) was quick to declare victory, issuing a press release titled "DECN Wins Only Case That Matters in Federal Circuit Court" and calling the new court ruling a "seminal day" in the company’s history.
"The Circuit Court’s ruling, reversed a lower court ruling (Northern California) and has put to rest a substantial part of J&J/LifeScan’s lawsuit," Decision Diagnostics principal executive officer Keith Berman said in prepared remarks. "With this court decision, our company can move forward and complete the branding of our Genstrip."
LifeScan owns patents that cover the combined use of the meters and the strips and Shasta has tried and failed to file patents for its knock-off Genstrip products. LifeScan earlier this year won a preliminary injunction preventing Shasta from selling its strips, and the company further sued Shasta for logo infringement, saying problems with Shasta’s products are harming the Lifescan brand.
With the injunction lifted, Shasta and Decision Diagnostics are set to "fully implement its rollout strategy for GenStrip," the companies said. With a new line of credit and its legal win in hand, Decision Diagnostics estimates that it could begin bagging annual revenues of more than $250 million.
The could be a major blow to LifeScan’s business model, which relies for revenue more on sales of the strips than on the OneTouch meters themselves. LifeScan sells about 40% of its meters at below cost pricing, giving the rest out for free through healthcare providers, according to court documents. The company’s model relies on profits derived from sales of the test strips.
Decision Diagnostics says its strips cost up to 50% less than rival strips, and its management says it’s confident that it can capture market share.