Australia’s High Court introduces patent exhaustion doctrine into Australian law – awarding a victory to remanufacturers

By Jane Owen, Patrick Brown

11-2020

In the long running patent infringement battle between OEM cartridge supplier Seiko Epson, and the remanufacturer of its cartridges, Calidad, on 12 November the High Court delivered its judgment, imposing a significant limitation on patentee’s rights. In its decision, Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41, the High Court has enshrined the doctrine of patent exhaustion in Australian law, thereby limiting the patentee’s (Seiko Epson) ability to restrict the post market remanufacturing of its cartridges.

A 4:3 majority of the Court (Nettle, Gordon and Edelman JJ dissenting) rejected the long held “implied licence” doctrine as a method of reconciling the rights of patentees and purchasers of products which embody patented inventions.  The majority provide a clear statement that the rights of a patentee to control a product which embodies their invention are completely exhausted on the first sale of the product to a consumer.  

This decision aligns with the approach taken by courts in the United States and the Court of Justice of the European Court, but represents a significant split from UK jurisprudence.

Calidad was granted special leave to appeal a decision of the Full Court of the Federal Court which found it had infringed two of Seiko Epson’s patents by supplying re-filled printer ink cartridges.  The High Court overturned the decisions of both the Full Federal Court and the Federal Court at first instance, finding that none of the refilled cartridges infringed Seiko’s patents.  

In an important decision for the remanufacturing industry the High Court found that no patent rights remained in relation to the cartridges after they were first sold to consumers. Additionally, the process of refilling and reprogramming the cartridges did not amount to making a new embodiment of the patented invention.

Background to the case

Calidad (through its subcontractor Ninestar) acquired empty Epson ink cartridges, after they had been used by consumers, refilled them with ink and sold them as an alternative to purchasing new Epson cartridges.  This process involved several steps, including puncturing the cartridge, refilling with ink, resealing the cartridge and replacing, or rewriting a memory chip to indicate the cartridge was full.
The Seiko patents related to the design of the circuit attached to the memory chip and was alleged to be infringed by the process of modifying and refilling the cartridge.  At first instance Justice Burley found that the cartridges had been sold subject to an implied licence to use the invention embodied by the product.  His Honour found the modifications made to some types of cartridge were permitted by the implied licence, but modifications to other types were so substantial that they terminated the implied licence and amounted to infringement.  

Calidad and Seiko both appealed to the Full Federal Court.  The Full Federal Court also considered that an implied licence existed in relation to the cartridges, but focussed on the scope of that licence, rather than whether Calidad’s actions had terminated it.  The majority of the Full federal Court found that the process of refilling any of the cartridge types amounted to making a new embodiment of the invention and as such could not be covered by the implied licence.  It found infringement by all Calidad’s remanufacturing activities.

The High Court rejects implied licences

There are two fundamental approaches which have been adopted to reconcile patent rights with the fundamental law of personal property - the implied licence doctrine and the exhaustion doctrine.  Both attempt to address the tension between the exclusive rights of the patentee over an invention with the right of the purchaser to deal with a product as they wish.

Chief Justice Kiefel and Justices Bell and Keane (and Justice Gageler in a separate judgement) chart the development and advantages of each approach.  In Australia the law relating to the resale of patented products has remained substantially unchanged since the early 1900s and the decisions of the High Court and then the Privy Council in National Phonograph Co of Australia Ltd v Menck (Menck).  

The High Court in Menck favoured the view that the purchaser of a product which embodied a patented invention has the absolute right to dispose of the property as they wish without restriction.  The patentee’s monopoly rights to control the sale or use of the invention (as embodied in the product) are exhausted on first sale of the product by the patentee (the exhaustion doctrine).

The Privy Council agreed that a purchaser of a patented product received the product subject to an implied licence that they were free to dispose of the product as they wished.  The patentee could modify the terms of this implied licence by giving the purchaser sufficient notice of any restrictions; however, these restrictions did not run with the product and would be only apply to subsequent purchasers if they were also given notice.

Their Honours noted the exhaustion doctrine has been the preferred approach in the United States for over 160 years, referring particularly to the recent decision of the US Supreme Court in Impression Products Inc v Lexmark International Inc (2017) 137 S Ct 1523.  In that case, it was found that Lexmark retained no patent rights to toner cartridges after they were sold, as the product was “no longer within the limits of the monopoly”.

In considering if a similar doctrine should apply in Australia, the majority highlighted that the public policy objectives of the Patents Act 1990 (Cth) are to “promote economic wellbeing through technological innovation” and provide a patent system which balances the interests of producers, owners and users of technology and the public.

Their Honours considered the exhaustion doctrine was most consistent with achieving these objectives, stating:

“The exhaustion doctrine has the virtues of logic, simplicity and coherence with legal principle. It is comprehensible and consistent with the fundamental principle of the common law respecting chattels and an owner's rights respecting their use. At the same time, it does not prevent a patentee from imposing restrictions and conditions as to the use of a patented product after its sale but simply requires that they be obtained by negotiation in the usual way and enforced according to the law of contract or in equity.”

In contrast the implied licence doctrine relies on a legal fiction and is complicated in operation and effects, particularly when a product has been resold many times.  As a result, it is likely to result in confusion and uncertainty.

The majority stressed that the exhaustion doctrine was completely compatible with the patentee’s exclusive right, in section 13(1) of the Patents Act, to “exploit” their invention.  It was found that nothing in the definition of “exploit” in the Act required the rights of the patentee to extend to a product after its purchase by a consumer.  Their Honours considered the exclusive right to make a product relates to making new products which embody the invention and is unaffected by the exhaustion of patent rights in any given product once sold.  Similarly, the patentee has the right to exclude others from the use of the invention, but only for so long as the patentee retains the product which embodies it.

According the majority concluded there was no inconsistency in adopting the exhaustion doctrine in Australia.

When does modification amount to “making”?

In the absence of an implied licence doctrine, the High Court made it clear that the correct way to determine if repairing or remanufacturing a product infringes a patent is to as whether it amounts to making a new embodiment of the claimed invention.
The majority stressed that this question must be answered with references to the essential integers of the claims, not by reference to the qualities of the remanufactured product itself.  The expectations of the patentee regarding how the product should be used (e.g. whether it was intended to be single use or not) are not relevant to this analysis.

The question then was whether the refilling and reprogramming the ink cartridges by Calidad amounted to making a new embodiment of Seiko’s invention.  The majority found the Full Federal Court had erred in answering this question by reference to the usefulness of the product in the form it was originally supplied by Seiko, rather than by reference to the scope of the claims.

Contrary to the findings of the Full Federal Court, the High Court majority found the modifications made by Calidad did not involve replication of parts or features claimed by the Seiko patents.  In particular, the majority rejected the suggestion that puncturing the cartridge, followed by refilling and resealing somehow “unmade” and the “remade” the product.  Similarly, reprogramming the existing memory chip did not amount to making a new product.  Even the removal and replacement of the integrated circuit board assembly did not amount to making a new embodiment of the invention.  The particular layout of the circuit board and terminals was an essential feature of the patent claims; however, as Calidad only removed the circuit boards and replaced them with other circuit boards also taken from original Epson cartridges, they had at no point created a new embodiment of this integer.  As a result, it was found that all of the modification were consistent with the rights of an owner of the product and did not infringe Seiko’s patents.

Key takeaways

  • For the first time the High Court has stated that a patentee’s rights over a patented product are extinguished completely when it is sold to a consumer
  • The owner of a patented product is entitled to modify or repair the product as much as they wish, provided this does not amount to making a new embodiment of the invention
  • It is important to assess whether a modification amounts to making a new embodiment with reference to the integers of the claims, not the original features of the product