13 November 2020

Patent rights on sale: High Court adopts doctrine of exhaustion of rights on first sale

This article was written by Kim O’Connell, John Swinson, Luke Hawthorne and Sarah-Jane Frydman.

The High Court of Australia has ruled on and concluded a long-running dispute between Seiko-Epson and Calidad in relation to print cartridges, setting down an important precedent in relation to the scope of patent rights. 

The question at the heart of the dispute was whether a patentee's rights with respect to the sale and use of a particular product continue after the product has been sold.

A number of patent owners use their patent rights to place restrictions on the repair and modification of products after sale.  For example, consider a car that has a patented cruise control system.  If a consumer purchases that car, what rights does the patent owner continue to have in respect of the car?  The law is clear that the patent owner cannot use the patent to prevent resale of the car on the second hand market.  But can the patent owner use the patent to control how the consumer repairs or modifies the car?

For close to 110 years until this week, the doctrine of an “implied licence” has, as the High Court said, been a convenient legal fiction which applied constraints on the owner of a patented product.  

An “implied licence” was said to apply upon the sale of a product embodying a patented invention, that permitted the purchaser to use, maintain, re-sell and import the product without infringing the patent.  The implied licence was subject to any express conditions the patentee imposes and makes known to the purchaser at the time of sale.  The implied licence did not extend to refitting or necessarily to refurbishing the product, or doing anything other than minor repairs.

The implied licence doctrine is contrasted with position adopted in the United States, which has what is known as the “exhaustion of rights” doctrine.  The effect of the exhaustion of rights doctrine is that the patentee does not retain any control over use of the product after its sale, unless conditions on use are expressly imposed by contract.  That doctrine has been recently affirmed by the US Supreme Court in Impression Products, Inc v Lexmark International Inc

The High Court, by a 4-3 majority, favoured the US position.  Australian law now reflects the doctrine of “exhaustion”, where a patentee's rights with respect to a particular product are exhausted once that product is sold without conditions as to use.

Background to question of “exhaustion” in Australia

Despite their international significance, patent rights are national rights.  Countries issue and enforce their patent rights for their own jurisdiction, and – apart from obligations contained in some international agreements – they do so independently.  Infringement occurs within a jurisdiction, or “patent area”, according to what rights are reserved to the patentee in that jurisdiction.

Patent rights are also described as “negative” rights.  Patents confer a right to exclude others from exploiting the patent.  They do not confer on a patentee the positive right to use the invention or the right to manufacture according to it.  Under the Australian Patents Act 1990 (Cth), the patentee’s exclusive right to “exploit” a patented product includes the right to make, use, sell and import the product, amongst other things.  In practice, a patent confers the right to exclude others from undertaking these actions.

A tension has historically arisen between how these rights can be asserted in relation to products which have been sold by the patentee, particularly where products cross international borders – for example, by being manufactured in one jurisdiction, and imported into another.

This is relevant to the scope of the exhaustion doctrine.  If a patented car is sold in Japan, and then imported by the owner into Australia, is only the Japanese patent exhausted, or is the corresponding Australian patent also exhausted?  In the U.S., the doctrine of exhaustion applies across international borders, and exhausts both patents in these circumstances.

A comparable position applies in the European Union, implemented by regulation, but confining the exhaustion theory to sales within the European Union.

History of the dispute in the Courts

Seiko is a manufacturer and the original seller of Epson-branded printer cartridges.  Calidad is an Australian distributor of a range of re-manufactured or modified printer cartridges, including cartridges modified by a company known as Ninestar.  Ninestar had modified 11 different original Epson cartridges used and discarded by a Seiko customer to produce five different categories of products that were imported into Australia and sold by Calidad.  In this instance, the infringement Seiko sought to restrain was the importation by Calidad of the modified printer cartridges.

In the court below, the Full Court considered that the scope of the implied licence granted by Seiko to its customer when it sold the cartridges was narrow, and accordingly, decided that all of Calidad's acts infringed Seiko’s patent.

By undertaking modifications to the original Epson cartridges, Seiko argued that Ninestar stepped outside the implied licence to repair and was “making an article constituting a product embodying the integers of a claim defining Seiko’s invention”, so that Calidad infringed the patents in question by importing the modified cartridges into the jurisdiction. 

Both at first instance and on appeal, the proceedings were conducted on the basis that the Federal Court was bound by the decision of the Privy Council in case known as the Menck case, or, if not strictly bound, should follow it. 

The High Court appeal

Allowing this appeal, a majority of the High Court rejected the Menck decision’s theory of an “implied licence” arising at the time of sale of the printer cartridges, declaring it a “judicial gloss”, and contrary to how exploitation, being the exclusive right of a patentee, should be understood in the context of the current Australian Patents Act 1990 (Cth) (the Act). 

The majority found that modifications to the original Epson cartridges did not amount to an unlawful “making of a new product” and that the exhaustion doctrine should be instead be accepted in Australian law, meaning that once the printer cartridges were sold by Seiko, the cartridges were outside the scope of Seiko’s monopoly rights and Seiko’s customers and third parties were free to use, modify (by refilling and restoring) and sell the cartridges as they wished, as long as the modifications did not result in a new product being made.  As succinctly put by Justice Gageler, in a separate judgment (at [134]):

The exhaustion of rights doctrine has a lineage that is decades longer than the lineage of the implied licence doctrine. It has been shown by repeated application in the United States to be workable and coherent. It sets clear statutory boundaries. It respects longstanding common law principle. It does not need to enlist equity in some way to prop it up. It strikes an appropriate balance between the interests of patentees and the owners of patented products. In so doing, it fits comfortably with the statutory object of the Patents Act 1990 as well as with the statutory language.

In contrast, the minority, Justices Nettle, Gordon and Edelman, thought it was for Parliament, rather than the Court, to make “such a fundamental change to patent rights”. 

Applying the doctrine of exhaustion, the majority concluded that the particular work done to the cartridges by Ninestar, which was intended to prolong the life of the cartridge and make it more useful, did not amount to making a new product and therefore could not infringe Seiko’s patent rights.   The High Court said that “the Full Court had reasoned that because the original Epson cartridges were sold for a single use and had been modified to be reused, they became new products”.  This, the Court said, “impermissibly elides infringement by use and infringement by making”. 

Critically Justices Kiefel, Bell and Keane (who with Justice Gageler formed the majority) said:

When all of Ninestar’s modifications to the categories of cartridges were completed what remained were the original Epson cartridges with some modifications which enabled their reuse.  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.

Of course, the extent of modifications to an existing product can be a matter of degree.  On this point, the minority departed from the majority.  The minority (Nettle, Gordon and Edelman JJ) thought that some of the categories of cartridges that had been modified “involved the making of new, different cartridges” because, for example, the modifications included cutting off the interface pattern to make the cartridge fit a different type of printer.  The minority concluded that the cartridges so modified comprised “a new and different cartridge adapted to a new and different task” involving making the patented invention and thus infringing.

Application of the objects clause in the Patents Act

This decision represents one of the first uses of the new “objects” clause of section 2A of the Act when interpreting the provisions of the Act, particularly in relation to the scope of a patentee’s rights.  The object of the Act is stated in s 2A as follows:

The object of this Act is to provide a patent system in Australia that promotes economic wellbeing through technological innovation and the transfer and dissemination of technology. In doing so, the patent system balances over time the interests of producers, owners and users of technology and the public.

In this instance, the High Court found that the implied licence doctrine was not consistent with the “certainty demanded by trade and commerce” or with “consumer expectations”, which instead requires maintenance of the fundamental principle of the law which generally recognises that an owner has full rights as to the use and disposal of a chattel.  Innovation, too, was said to be adversely affected by continuing application of the implied licence doctrine:

There is nothing in the Patents Act 1990 to suggest that a patentee is to be rewarded more than once.

Implication and considerations for businesses in Australia

For businesses involved in manufacturing and re-manufacturing, or their distributors – particularly, for example, in industrial, automotive, technological, and medical industries – this shift in the law is likely to be of practical significance.

Re-manufacturing has been a feature of Australian industry for some time.  However, as environmental and economic pressures on Australian businesses increase, it is likely that many organisations will seek to extend the life of products (and their components).  “Designed obsolescence” may also be more difficult to enforce through patent law.

In the past, repairers and restorers have needed to carefully consider infringement risk where their activities extend beyond mere repair of damaged or broken parts, or where parts are replaced or refurbished to extend the useful life of the patented article.  Now, a reconsideration of the scope of many patent rights is warranted and there are likely to be more options available to those wishing to restore or adapt products for extended use.   

In contrast, patentees who have been relying on the implied licence doctrine to protect their products in the market may need to carefully assess their intellectual property strategy, including their patent portfolio and claim coverage.  The decision may also lead to a reassessment of the way in which patent owners derive revenue from their products, given that investment in product development may need to be recouped from the first sale of the product and, as a result of being able to refurbish the product, the number of first sales may be reduced. 

 

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