A recent decision of Justice Burley of the Federal Court of Australia, Seiko Epson Corporation v Calidad Pty Ltd [2017] FCA 1403, provides clarity on trade mark and patent issues that are rarely addressed by Australian courts, and sets out a new test for when importation of a product that was originally sold by the patentee but subsequently altered by the purchaser will amount to patent infringement.

The judgment will likely prove influential on this question (subject, of course, to any contrary findings on appeal) and sheds light on patent law principles relevant to parallel importation.

Seiko's Printer Cartridges and Calidad's Business Model

Seiko Espon Corporation (Seiko) sold Epson printer ink cartridges (Epson Cartridges) having electronic components which, among other things, ensured that the cartridges could only be used in an appropriate Epson printer. Epson printers, in turn, were configured to only accept Epson cartridges which it recognised by the existence and programming of the electronic components on those cartridges. Seiko was the registered owner of various patents for this technology; however this case was confined to one claim of Australian Patent No. 2009233643 (Seiko Patent).

The Calidad group of companies (Calidad) operated a business which involved acquiring large volumes of used Epson Cartridges from outside of Australia through third party suppliers, who amassed them either by purchasing them from consumers or, in true entrepreneurial fashion, collecting them from recycling bins. Calidad undertook a complex process of refurbishing, reprogramming, rebranding, and refilling the cartridges to transform them into Calidad printer cartridges (Calidad Cartridges) which were compatible with the corresponding Epson printers. The Calidad Products were then sold in Australia.

Seiko alleged that, by selling the Calidad Cartridges, Calidad was infringing the Seiko Patent, infringing its registered trade mark for EPSON, breaching a statutory duty in the Trade Marks Act 1995 (Cth) (Trade Marks Act) by tampering with EPSON trade marks, engaging in misleading and deceptive conduct, and violating a previous settlement deed.

Infringement of the Seiko Patent

Implied Licence

Justice Burley first considered the relevant principles relating to the control a patentee has over products once sold (a matter addressed in some other countries by a doctrine of exhaustion). His Honour found that, based on previous court decisions dating back to the early 1900's, the sale of a patented product by or with the consent of the patentee includes an "implied license" that the purchaser may use the product as they see fit without infringing the rights of the patentee.

Whilst it is possible for the patentee to attach conditions to a sale to control how the product may be used, the onus is on it to demonstrate that any subsequent purchaser, took the product with notice of these restrictions. Absent this proof, the implied licence benefits the purchasers who have no notice of the restrictions.

Importantly, this implied licence arises regardless of whether the goods are sold in or outside Australia.

Calidad's Implied Licence

It follows that upon the initial sale of the Epson Cartridges to consumers overseas, Seiko granted these consumers a right to dispose of the products as they wished, including giving or selling them to another party such as Calidad. Calidad, unless it was on notice of restrictions attaching to the use of the patented products, also received an implied licence to deal with the product as it saw fit without infringing Seiko's patent rights.

Justice Burley found that Calidad was not made aware of any such restrictions. Seiko argued that information stored in the electronic components of the Epson Cartridges indicating that the cartridges were empty and unusable amounted to implicit notice of a restriction on their use, however Justice Burley said that this was not a notification of restriction on use of the products but rather a mere "technical challenge". In other words, intentional difficulties in selling a used Epson Cartridge did not amount to notice to Calidad that it was not permitted to sell used Epson Cartridges.

Modification of Patented Products

Seiko therefore would have been unable to sue Calidad for patent infringement in relation to the resale of Epson Cartridges. However Calidad was not selling the Epson Cartridges, but rather modified Epson Cartridges (i.e. Calidad Cartridges). The doctrine of the implied licence had not been applied in this context before by an Australian Court, and therefore Justice Burley laid out a new test for when the modification of a product will extinguish the implied licence.

Justice Burley found that the central question was whether the modified product is materially the same embodiment of the invention as the product that the patentee sold. In other words, it is only if the modifications result in a product that is a different embodiment of the invention compared to the original product that the implied licence is extinguished and the patentee can sue the seller of the modified product for patent infringement.

His Honour considered that this question involved a three-stage inquiry:

  1. What is the scope of the invention as claimed;
  2. What is the manner in which the patentee's product is an embodiment of the invention as claimed; and
  3. To what extent do the modifications made affect the patented product insofar as it represents an embodiment of the claims.

Calidad's Modifications

In the context of this dispute, this inquiry involved determining whether any of Calidad’s modifications to the Epson Cartridges involved a modification of an aspect of the Epson Cartridges that was an element of the patent claim.

For this purpose the printer cartridges were divided into several categories which reflected differences in the nature of the Epson Cartridges and in the process by which Calidad converted them to Calidad Cartridges. In all cases, the contents of the electronic memory in the Calidad Cartridges needed to indicate that the cartridges were full of ink, or at least not empty. In some cases, Calidad reprogrammed the memory. In others, it replaced the memory circuits.

The Epson Patent referred to “memory”, which Justice Burley interpreted as referring to the memory circuits, and not their contents.

Accordingly, Justice Burley found that where the memory was reprogrammed, Calidad's modifications had not materially altered the product insofar as it represented an embodiment of the claims of the Seiko Patent.

However, where Calidad had physically removed the circuit boards (including the memory chips) from the cartridges, replaced the memory chips with generic devices, and then refitted the circuit boards onto the cartridges, with no guarantee that the same circuit board would end up on the same cartridge, this materially altered the product with the result that the implied licence did not attach to these Calidad Products.

Conclusion on Patent Infringement

Justice Burley's test of when modification of a patented product extinguishes the implied licence which accompanies its unrestricted sale by the patentee therefore resulted in some Calidad Products infringing the Seiko Patent while others did not.

In relation to the non-infringing Calidad Products, Calidad had not materially altered the Epson Products, meaning that the implied licence which arose as a result of Seiko's unrestricted original sale of the Epson Products carried through to the relevant Calidad Products and Calidad had not infringed Seiko's patent in dealing with the products.

In relation to the infringing Calidad Products, Calidad had materially altered the Epson Products by removing the circuit boards and replacing the memory chips, which had extinguished the implied licence which had originally arisen. Therefore Calidad had infringed Seiko's patent in dealing with these products.

Infringement of Seiko's Registered Trade Mark

Seiko alleged that the Calidad Products infringed its registered trade mark for EPSON because the word was printed on the circuit board of the cartridges, which is circled below (all images taken from the judgment):

Burley J found that this use of EPSON was not "use as a trade mark" (meaning a mark used as a "badge of origin" for goods) as required for infringement under the Trade Marks Act, because for the reasons outlined below, consumers were likely to acquire the Calidad Products with an appreciation that they are products of Calidad and not Epson.

His Honour observed that despite being cheap products ($11-18 per unit), printer cartridges are relatively high involvement purchases due to the consumer's need to identify cartridges compatible with their printer. This would mean that a consumer was more likely to carefully inspect the packaging (below), which would reveal several relevant features:

  • The words "Alternative for Epson" and an accompanying disclaimer "Epson, Stylus and WorkForce are registered trademarks of Seiko Epson Co. Calidad has no affiliation with Epson" (Seiko did not allege that this was trade mark infringement).
  • Details of the printer model numbers in which the products can be used.
  • Fine print that the products are "remanufactured Epson cartridges".
  • A Calidad product warranty.

The boxes were also sealed with stickers which prevented customers from inspecting the cartridges prior to purchase. Even if customers were to inspect the cartridges, the word "EPSON" on the circuit board was miniscule (less than 1mm x 6mm), was covered by additional plastic wrapping, and was partially obscured by an ink blob placed by Calidad during the repurposing process.

His Honour concluded that a consumer was unlikely to see the word "EPSON" on the circuit board and that, even if they did, they would not regard it as a trade mark. The trade mark infringement claim was therefore dismissed.

Breach of Statutory Duty by Tampering with a Registered Trade Mark

Seiko alleged that Calidad had breached section 148 of the Trade Marks Act by obscuring or destroying the EPSON trade mark on the Calidad Cartridges. The provision broadly provides that it is an offence to deal in goods to which a registered trade mark has been applied or altered, defaced or removed without the permission of the registered owner.

Calidad conceded that it partially covered up the EPSON trade mark on the circuit boards and that it applied stickers to the Calidad Cartridges to obscure the word EPSON from the cartridges:

Crucially, His Honour found that the requirement in the section that a "registered trade mark on the goods" be tampered with meant that the mark in question must have been used as a Trade Mark on the goods, meaning as a badge of origin.

Calidad had modified the products so that they were no longer Epson Catridges, but rather, as accepted by both parties, became Calidad Cartridges, and the tampering with the Epson marks took place on these products. As the Epson marks were not used as badges of origin on the Calidad Cartridges but were rather "artefact[s] of the process by which [they] were manufactured", Calidad had not breached section 148 of the Trade Marks Act by tampering with the marks.

Justice Burley also considered that the section, which is headlined "indicatable offence", did not provide Seiko with any civil remedies, because:

  • The language of the section is such that the doing of an act is only a criminal offence.
  • Section 121 of the Trade Marks Act separately prescribes the particular circumstances in which tampering with a registered Trade Mark will infringe a registered owner's private rights.
  • The severity of criminal penalties for a breach of section 148 (imprisonment for up to 5 years) is sufficient so as to achieve the purpose of the section, which is to deter counterfeiting, without additional civil penalties.
  • The rights of a Trade Mark owner are set out in section 20 of the Trade Marks Act and do not extend to section 148.

Misleading and Deceptive Conduct by Claims on Website

Seiko claimed that Calidad had engaged in misleading and deceptive conduct in breach of sections 18 and 29 of the Australian Consumer Law by posting on its website "Status: New product, now available" in reference to three Calidad Products.

However, His Honour quickly dismissed this claim, finding that the wording, as a matter of ordinary language and the context in which it appeared, clearly indicated that the stock was newly available and did not, as Seiko alleged, amount to a representation as to how the products were made.

Breach of Prior Settlement Deed Between the Parties

The parties had entered into a settlement deed in October 2013 in order to resolve allegations of patent infringement in which Calidad had agreed to cease selling certain products. Calidad admitted that it had, in error, sold a small amount of these products in March 2015. His Honour found that these sales had breached the deed, but was satisfied that the sales had been inadvertent and on a small scale, meaning that no injunctive orders were necessary.

In the same deed Calidad had agreed not to sell products which infringed the Seiko Patent. As his Honour had found that certain Calidad Products infringed this patent, Calidad had breached this provision of the settlement deed and it was appropriate to order declarations and injunctions to prevent them from resuming doing so in the future.

Joint Tortfeasorship of the Calidad Companies

The final issue was whether each company of the Calidad group was a joint tortfeasor in the commission of the infringements, meaning that they had "act[ed] in concert in committing the tort".

The corporate structure of the companies showed a strong degree of connection in terms of share ownership and common directors, and an employee of Calidad had even been confused, in giving oral evidence, about which company employed him. Justice Burley therefore found that the companies "act in concert to produce one business outcome". To the extent that any acts of infringement had been established, the Calidad companies were liable as joint tortfeasors.

The Outcome of Seiko's Case Against Calidad

Seiko's claim of patent infringement succeeded in respect of Calidad Products where Calidad had physically removed the circuit boards as a part of the repurposing process. Each Calidad company was liable as a joint tortfeasor for this infringement. Calidad no longer sold the infringing products, however Justice Burley ordered that Calidad give an undertaking not to sell them in the future.

The remainder of Seiko's claims, including Trade Mark infringement, breach of statutory duty, misleading and deceptive conduct, and the balance of its patent infringement case, were dismissed.

Observations, Lessons, and Future Possibilities

Justice Burley's judgment is the first time that an Australian Court has considered the effect of modification of a patented product on the implied licence which accompanies the initial sale of the product by the patentee. Indeed this is one of the few times that a court has considered the implied licence, which is particularly relevant to the question of parallel importation, at all.

His Honour's test for when modification will sufficiently change a product so as to prevent the implied licence from operating (meaning that the patentee is entitled to sue the seller of the modified product even though it was based on a product sold with the patentee's consent), will likely be the guiding authority on this point, at least until it is considered by a superior court.

Given the lack of authority on this issue in particular, it is possible that this case may be appealed by one or both parties, which would give the Full Court, and perhaps ultimately the High Court, the opportunity to do just that. As at the time of publication, no appeal has been filed.