The recent Seiko Epson v Calidad case in the Federal Court of Australia raised a number of questions around intellectual property when it comes to the recycling and sale of patented products.

In a mixed bag decision, Justice Stephen Burley found that Calidad had infringed patents relating to Seiko’s Epson printer cartridges but dismissed claims that Seiko’s EPSON trade mark had also been infringed.

The judge has ordered Calidad to deliver up all of the infringing printer cartridges in its possession.. The question of what damages Calidad should pay is yet to be decided.

This dispute traversed the issues surrounding the modification of patented products and the risks associated with importing remanufactured products into Australia.

The decision addresses the extent to which patentees can enforce their Australian patents to restrict the sale of goods that were originally sold overseas and were subsequently altered for sale in Australia.

The proceedings centre around used Epson branded cartridges that were collected by Chinese manufacturers who refilled and modified the cartridges so that they could be sold for use with compatible Seiko printers in Australia.

Seiko alleged that the importation and sale of these cartridges into Australia infringed two of their patents and that the modification of the cartridges was also in breach of criminal provisions in the Trade Marks Act.

In response Calidad argued that:

  • The proprietary rights of the purchasers of the original cartridges prevented Seiko from enforcing their patent rights;
  • Seiko’s failure to notify the original purchasers of restrictions on the modification of the cartridges meant that Calidad’s importation of the cartridges was licensed; and
  • The trade marks on the cartridges were altered after the cartridges had become Calidad products.

The remanufactured cartridges

The original Epson cartridges contained memory chips that retained information regarding ink levels and then sent this data to compatible printers via terminals located on the cartridges. After the used cartridges were refilled, the information stored on the memory chips was rewritten so that compatible Epson printers would read that the cartridge was full.

The EPSON trade mark was also blacked out, covered or removed from the outside of the cartridge, but importantly, this step occurred after the remanufacturing processing described above. An example of the relevant cartridges is set out below.

Ink spilt over trade mark claims

Seiko attempted to rely on the provisions in section 145 and section 148 of the Trade Marks Act that relate to the removal of registered trade marks without the permission of the owner of the mark.

Contrary to the parties’ submissions, the Court held that the reference to a ‘registered trade mark’ in section 148 means a registered trade mark that is used as a trade mark to indicate a connection between the goods and their source (ie used as a badge of origin).

The Court found that the EPSON mark functioned as a badge of origin only on the original Seiko products, and that this function had ceased once the cartridge was remanufactured. Accordingly, at the time that the EPSON mark was blacked out, it no longer functioned as a trade mark, but was merely a word located on the cartridges and was not intended to be seen by consumers. As a result, the timing of the modification to the labels on the cartridges meant that Calidad escaped a breach of section 148.

Applying the same reasoning, Calidad’s conduct also fell outside of section 145 because the Calidad products which were sold to consumers in Australia were not the same goods that Seiko had originally applied the EPSON trade mark to.

The Court held that in any event, Seiko did not have a right to bring civil proceedings for the breach of criminal provisions of the Trade Marks Act. Burley J found that it was not necessary to construe an additional right under section 148 when section 121 already allows trade mark owners to bring civil proceedings in very similar circumstances.

The relevant claims of the Seiko patents were directed to the arrangement of terminals on the cartridges that prevented the cartridges from shorting. Calidad conceded that the remanufactured cartridges took all of the features of the relevant claims of the Seiko patents and that the patents were infringed in the absence of an implied licence.

Exhaustion of rights or an implied licence?

In related US proceedings, printer cartridge remanufacturers successfully argued that a patentee’s right to enforce their monopoly in respect of a product which embodies the claims of their patent is exhausted after the product is first sold.

Under the Australian position, there is a presumption that a purchaser and any subsequent owners acquire an unrestricted right to exploit a patented product. This is because an implied licence to exploit the product arises automatically if there has been an unconditional sale of a patented product. Burley J noted that this implied licence arises from the intersection of both the patentee’s intellectual property rights and the purchaser’s proprietary rights.

However, if a patentee imposes restrictions on the use of the patented product at the time at which patented goods are acquired, these conditions will prevent the usual licence from arising. The patentee can only enforce these restrictions against subsequent owners if they also have notice of the conditions. As a result, inbuilt technical restrictions contained on the memory chips were insufficient to constitute notice of conditions prohibiting modifications to the cartridges.

The failure to make Calidad aware of any restrictions on the use of the cartridges meant that the products were acquired subject to an implied licence.

The Court confirmed that this licence can arise even where a patented product is first sold outside of Australia and applies irrespective of whether the purchaser paid for the patented goods (ie it extends to recycled products).

However, throughout his decision Burley J stresses that the licence arises from the sale of a specific embodiment of the patentee’s invention. As a result, an implied licence may be extinguished where modifications or repairs have a material impact on the manner in which the original product embodies the invention claimed in a patent.

Extinguishing the implied licence

In considering the modifications made to the Calidad cartridges the Court held that physical alterations, such as refilling the cartridges and creating new injection ports, fell outside of the scope of the claims of the Seiko patents. Similarly, resetting the information stored on the chips (including where this required the use of third party technology) was not sufficient to extinguish the licence.

However, the removal of entire circuit boards and interface patterns, including the terminals, was found to be a material change to the embodiment of the invention claimed in the patent. As a result, cartridges which fell into this category of modifications were not subject to the implied licence and infringed the Seiko patents.

Businesses who deal in second hand, remanufactured or recycled goods may be able to rely on an implied licence depending on the terms under which they acquire patented goods. Similarly, the circumstances surrounding the removal of registered trade marks may prevent the application of provisions of the Trade Marks Act.

However, the dispute serves as a reminder of the risks that can arise from the overlap between the general rights of property ownership and intellectual property rights.