In a landmark ruling that will be relevant to patent owners as well as buyers and users of patented products in all industries, a narrow majority of the High Court of Australia in Calidad Pty Ltd & Ors v Seiko Epson Corporation & Anor [2020] HCA 41 has endorsed the ‘exhaustion of rights’ principle in preference to the doctrine of ‘implied licence’.

In the absence of a contractual provision to the contrary, a patentee’s exclusive rights to hire, sell, use or otherwise dispose of a patented product are exhausted after sale (while the patentee retains the exclusive rights to ‘make’ the product in the first place). In other words, those rights do not extend to allowing the patentee to control what purchasers can do with the patentee’s product after it has been sold.

This approach was found to be preferable to the ‘implied licence’ doctrine, which has been applied as the relevant doctrine in Australia for more than 100 years. By endorsing the exhaustion principle, the High Court brings this aspect of Australian patent law into line with the approach taken in the United States, and the European Union.

The High Court’s decision (including the minority judgment) suggests that it may be difficult for patentees to succeed in arguing that modifications or repair of a patented product amounts to re-making and, therefore, infringement.

Background

Seiko Epson Corporation (Seiko) manufactures and sells its patented printer cartridges under the brand name “Epson”. Seiko’s printer cartridges were sold on the open market without any contractual conditions that restricted their use after sale. The cartridges were designed to be single use cartridges.

Ninestar Image (Malaysia) SDN BHD (Ninestar) manufactures generic printer consumables, including printer cartridges. Ninestar obtained several different types of used Epson cartridges from third party suppliers and restored them to working condition by refilling them with ink and resetting the cartridge to its original condition. Calidad Distributors Pty Ltd, in connection with its related companies (together ‘Calidad’) purchased these cartridges from Ninestar and sold them in Australia. Seiko contended that Calidad infringed its patent by importing and selling these repurposed cartridges.

Earlier decisions

The Federal Court’s decision at first instance was a mixed result for Seiko.[1] Justice Burley found that some of the modifications made to the cartridges by Ninestar were within the scope of the implied licence (and therefore not infringing), while others were outside that scope (and therefore infringed).[2]

On appeal, the Full Court of the Federal Court of Australia (Full Court) unanimously found that the modifications made to all of the types of cartridges by Ninestar constituted an unlawful ‘remaking’ of the patented product, which infringed Seiko’s exclusive rights to ‘make’ the patented product.[3] The Full Court dismissed Calidad’s submission that the old cartridges were being repaired (and therefore within the scope of an implied licence). Instead, the Full Court found that what had been done constituted a ‘remaking’ of the product, which was outside the scope of any implied licence. As we explain below, that finding has now been overturned by the High Court of Australia.

High Court of Australia (majority decision)

In their majority judgment, Kiefel CJ, Bell and Keane JJ (with Gageler JJ agreeing) found that the purchaser of a patented product may prolong the life of that product through modification, without infringing the rights of a patentee.[4]

In overturning the Full Court’s decision, the majority observed that the Full Court had confused infringement by use and infringement by making. By focusing on the ‘single use’ nature of Epson’s cartridges, the Full Court failed to appreciate the difference between modifying a product and making it.[5] The majority found that what Ninestar had done was modify the original cartridges to enable their re-use, and that this was consistent with the rights of an owner to use a product, improve its usefulness and enable its re-use.[6] This did not involve a ‘making’ of those products (which was a right that only Seiko, as the patentee, could exercise).[7] The majority held:

“When all of Ninestar's modifications to each of the categories of cartridges were completed what remained were the original Epson cartridges with some modifications which enabled their re-use. The modifications did not involve the replication of parts and features of the invention claimed. There was no true manufacture or construction of a cartridge which embodied the features of the patent claim.”

The majority observed that its finding was true, whether or not the exhaustion doctrine or the implied licence doctrine is applied.[8] This was, however, the first time the High Court had the opportunity to decide which doctrine should be applied in Australia.

The majority was critical of the implied licence approach which applied in Australia for over 100 years, observing that the doctrine is a legal fiction which has been imposed by courts ‘to resolve perceived tension in the law’ and is ‘likely to cause confusion in part because it combines a fictional licence with the possibility of real restrictions’.[9] The majority also observed that the implied licence doctrine unjustifiably gives patentees monopoly rights in circumstances where a purchaser had not consented.[10] The implied licence doctrine was also not consistent with the certainty demanded by trade and commerce, or with consumer expectations.[11]

In contrast, the exhaustion principle does not prevent a patentee from imposing restrictions on after-sale use of its patented products. As the High Court observed, any such restriction would be obtained by negotiation in the usual way (rather than be implied, in the absence of any negotiations), giving certainty to the parties.[12] This was a significant factor in the majority’s preference of the exhaustion doctrine, which they found to be the most logical, simple and coherent with legal principle.[13]

Practical consequences

The majority’s decision brings Australia’s patent laws more in line with the United States and Europe, which have well established jurisprudence on the doctrine of exhaustion.

While each case turns on its facts, it may be difficult for a patentee to succeed in arguing that repairing a product to extend its life amounts to a re-making of the patented article and, therefore, infringement. Even the minority (applying the implied licence doctrine) reversed a number of findings of infringement made by the Full Federal Court.

For patentees, the decision reinforces the importance of making use of contractual provisions, where appropriate, to govern the after sales use of their products. If a patentee wishes to impose conditions or restrictions on the use of patented inventions, it will need to take into account laws that may impact on the drafting of the contract, including the ‘unfair contract term’ provisions of the Australian Consumer Law[14] and the ‘void conditions’ provisions of section 144 of the Patents Act 1990 (Cth).

While the High Court’s decision stressed that the adoption of the doctrine of patent exhaustion would provide greater certainty, the US experience suggests that a number of questions remain open including:

  • the extent to which contractual limitations on the use of patented articles are effective;
  • whether rights are exhausted where the sale is made by someone other than the patentee;
  • whether it applies on a national or international basis.