In any case where modification and resale of a patented article is proposed, a careful technical analysis will need to be made to assess the extent of the modifications and the extent to which they alter the elements of the article that are the subject of the patent claims.

An Australian standard patent gives the inventor of new technology a 20 year monopoly on the "exploitation" of that technology in Australia. This includes both the manufacture and sale of patented articles. But does a patent ‒ or indeed any other intellectual property right ‒ allow the patentee to prevent the activities of a business that legitimately obtains a patented article, alters it, and then resells it second hand in competition with the patentee's product?

This was the question for the Federal Court in Seiko Epson Corporation v Calidad Pty Ltd [2017] FCA 1403 (29 November 2017). Seiko sold EPSON branded printers and printer cartridges. Calidad (a competitor of Seiko) refurbished EPSON cartridges that had originally been sold by Seiko. These were obtained as spent cartridges, refilled and modified by a third party overseas so that they would work again, and then sold in Australia as refills. Calidad claimed, in essence, that the sale of refurbished cartridges did not infringe Seiko's patent rights because, once a patented article is sold, the purchaser has the right "to treat it as an ordinary chattel".

Seiko alleged that the sale of the refurbished cartridges not only infringed its patent rights but also infringed its trade marks, involved an offence under the Trade Marks Act relating to unauthorised tampering with trade marked goods, and contravened the Australian Consumer Law. In a detailed judgment considering all these issues, Justice Burley held that some, but not all, of the refurbished cartridges infringed Seiko's patent rights ‒ the difference was in the extent of the changes made to the technology in the cartridges. In reaching this conclusion, the decision addresses questions about the alteration and resale of patented articles that had not previously been the subject of extensive consideration by an Australian court.

In Seiko Epson, Justice Burley held that, when a patentee sells a patented article, the patentee also grants a licence to the purchaser, as part of that sale, to use and deal with the product in future as the purchaser sees fit. This is referred to as an "implied licence" from the patentee to the purchaser. (A slightly different approach is taken in US law, where the doctrine of "exhaustion of rights" sets out when the patentee's exclusive rights are "exhausted" upon the sale of a product or obtaining of a royalty.) An implied licence may be overridden by imposing contractual obligations on the purchaser, but in most cases it will be difficult to show that any such conditions passed to a subsequent purchaser.

A further question to be answered was what (if any) limits exist on the scope of the permission given by the implied licence. In other words, could the refurbishment of a product for reuse be so extensive that it would be outside the terms of the implied licence? If so, this would effectively mean that a new, infringing product was taken to be created in the course of the refurbishment ‒ in which case, the act of refurbishment may infringe the patent (since it would involve "making" a patented article).

Refurbishment = extinguishment of implied licence

After a comprehensive review of the authorities, Justice Burley held that the refurbishment of the product could be so extensive as to extinguish the implied licence.

In deciding whether a refurbishment is significant enough to extinguish the implied licence, Justice Burley held that "to assess whether or not the implied licence continues after modifications are made one must consider the significance of modification work done on a product and how the modifications in question relate to the features of the patented product that are defined by the claim". So, the question to be answered is whether the refurbishment is such that it "results in a material alteration to the product, insofar as it is an embodiment of the invention as claimed".

In Seiko Epson, the refurbishment took place outside Australia, so there could be no infringement by "making" a patented article in Australia. However, the subsequent importation and sale of the refurbished cartridges in Australia could still constitute an infringement. The Court considered a number of different categories of potentially infringing articles and concluded that in some cases the modifications were sufficiently material to amount to an infringement, whereas others were not. By way of example, a modification that resulted in the licence being extinguished consisted of the replacement of an inbuilt memory chip that had (among other things) operated to prevent the cartridge from being refilled and reused. However, where alternation involved changing the data on the memory chip, or the physical interface patterns changed to allow operability with different printers, those changes were not sufficient to result in the implied licence being extinguished (and were therefore non-infringing).

The assessment of the significance of the various categories of alteration was made by close reference to the claims of the patent. This is because the exclusive rights of the patentee can only ever extend to the invention as defined in the patent claims. Justice Burley said:

"In my view the threshold question to consider is whether or not the modified product is materially the same embodiment of the invention as claimed as the product that the patentee sold without restriction. That is not an inquiry that is at large. The right of the patentee to impose restrictions upon sale arises because the product is an embodiment of an invention as claimed. The question is not whether or not the product was altered or repaired, but whether the product, insofar as it is an embodiment of the invention as claimed, was materially altered, such that the implied licence can no longer sensibly be said to apply."

So what does this mean in practice?

In practice, this will mean that in any case where modification and resale of a patented article is proposed, a careful technical analysis will need to be made to assess the extent of the modifications and the extent to which they alter the elements of the article that are the subject of the patent claims. For patentees, the extent to which their patent rights can be relied on to restrict any "after market" for refurbished products will depend very much on the particular technology that is claimed in the patent, and how it interacts with the way the refurbishment is done.