As foreshadowed in our media update last week, the High Court on 12 November delivered its judgment in the long running patent infringement case between printer toner cartridge giant Seiko Epson and cartridge importer and supplier, Calidad. (The full decision of Chief Justice Kiefel, and Justices Bell, Gageler, Keane, Nettle, Gordon and Edelman (Calidad Pty Ltd v Seiko Epson Corporation  HCA 41) can be found here.)
Louise Brunero and Jeff Bergmann of Solubility discuss what the High Court’s rejection of the implied licence approach means for patentees and owners of patented products.
In a 4:3 majority the High Court allowed Calidad’s appeal from the judgment of the Full Court of the Federal Court of Australia in Calidad Pty Ltd v Seiko Epson Corporation  FCAFC 115 (5 July 2019) which had found that Calidad had infringed two of Seiko’s patents by supplying the refilled printer toner cartridges for reuse. Kiefel CJ, and Bell and Keane JJ delivered a joint judgment. Gageler J delivered a judgment “agree[ing] entirely” with that joint judgment, but added:
“In deference to the closely reasoned dissent of Nettle, Gordon and Edelman JJ, I feel the need to explain in my own words why I cannot accept the reasons their Honours advance for considering that the implied licence doctrine should not be abandoned in favour of the exhaustion of rights doctrine.”
The question which arose on appeal was whether the exclusive statutory rights under the Patents Act 1990 (Cth) to exploit a patented product are exhausted when that product is first sold (the “exhaustion doctrine”) or whether the sale is accompanied by the grant of an implied licence to use that product and with those exclusive rights continuing and allowing the patentee to attach conditions to that licence (such as in this case, excluding the right to make and sell refilled printer toner cartridges).
- The High Court has stated that the exhaustion doctrine should be accepted and applied in Australia instead of the implied licence doctrine. That is, a patentee’s exclusive statutory rights are exhausted on first sale.
- The Australian position is now consistent with the approach taken in the United States for over 160 years and recently endorsed by the US Supreme Court in 2017 litigation also concerning refurbishment, refill and resale of used printer toner cartridges. It is also consistent with the current approach in the EU, but does however mark a significant step away from the UK’s long-standing preference for the implied licence approach.
- The owner of a patented product can alter it to improve its usefulness, prolong its life and enable its re-use provided the new product does not embody all of the features of the invention as claimed in the patent.
- The decision does not stop a patentee from attaching conditions to the product at the time of sale (eg to limit modification, re-use or resale), and enforcing those conditions under contract law or in equity. However, the patentee will not be able to sue under patent infringement, and those conditions will need to be enforceable under contract or in equity, and it may be necessary to prove that the alleged modifier, re-user or re-seller was aware of those conditions at the relevant time.
- As such, the decision provides fertile ground for developing creative regimes for imposing restrictive conditions enforceable under contract law or in equity against third parties distant from the patentee’s initial sale.
Epson manufactures original Epson printer toner cartridges and holds two patents in relation to the original Epson cartridges. Epson manufactured and sold original Epson cartridges in a form which permitted single use only. A third party obtained empty, used original Epson cartridges from various sources and made modifications to the cartridges which allowed them to be refilled and reused. Calidad acquired these refilled cartridges from the third party and imported them into Australia for the purpose of sale to the public.
In 2017, at first instance the Federal Court found that certain re-purposing of toner cartridges constituted infringement of patents covering those cartridges, whilst certain other re-purposing did not. The court considered that the relevant distinction was whether the effect of the repurposing was properly characterised as repair of the cartridge or manufacturing.
In mid-2019 the Full Federal Court held that all of the repurposing activity was properly characterised as manufacturing, and none was properly characterised as repair.
In each instance the Federal Court followed the principles laid down in 1911 by the Privy Council in National Phonograph Company of Australia Limited v Menck, that the proper characterisation of a purchaser’s rights to use a patented article purchased from the patentee is under an implied licence rather than an “exhaustion of rights” analysis.
These principles have been explained as follows:
“the law treats the sale [of a patented good] without express restriction as involving the grant of a licence from the patentee authorising such future use of the goods as the owner for the time being sees fit. The law does this because, without such a licence, any use or dealing with the goods would constitute an infringement of the patentee’s monopoly in respect of the use, exercise and vending of the patent.”
Implied licence vs “exhaustion of rights”
The High Court has revisited the long-standing authority of Menck and for the first time has stated that the exhaustion doctrine should be accepted and applied in Australia instead of the implied licence doctrine.
On the sale or resale of a patented product the purchaser becomes the owner of that item of property. An undisputed principle of the law of personal property is that the owner of goods has an absolute right to use or dispose of them as they think fit. The implied licence approach and the “exhaustion of rights” doctrine both seek to address how this principle of the law of personal property sits with the exclusive rights of a patentee.
The implied licence approach is that the patentee’s monopoly rights regarding the use of a patented product continue after its sale. The purchaser gains certain rights to use or dispose of the patented product without the patentee’s consent by way of a licence implied by the law.
By contrast the exhaustion doctrine does not accept the premise that a patentee’s rights of use with respect to the particular product survive its sale. Rather, it requires that a patentee who wishes to restrain an owner’s absolute right to use or dispose of goods do so by imposing contractual conditions at the time of sale.
Kiefel CJ and Bell and Keane JJ make the important qualification in their joint majority judgment, that the exhaustion doctrine does not affect a patentee’s rights to make and to sell another product embodying the claimed invention, and also does not affect the patentee’s right to use a product so made and to prevent others from doing so, at least until the product is sold.
In deciding the preferable doctrine, Kiefel CJ and Bell and Keane JJ state that:
“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.”
By contrast their Honours found that the implied licence approach is complicated in its operation and effects, and is likely to cause confusion in part because it combines a fictional licence with the possibility of real restrictions and of which an owner many times removed from the first sale may not have notice. In short, it engenders uncertainty.
Do modifications made to a product to enable its re-use amount to a making of a new product and infringement?
The High Court also addressed this second, no less important question and held that “[T]he modifications made to the original Epson cartridges are within the scope of the rights of an owner to prolong the life of a product and make it more useful. They do not amount to an impermissible making of a new product.”
Kiefel CJ and Bell and Keane JJ stated that neither the exhaustion doctrine nor the implied licence approach has any part in determining whether a patent has been infringed by a new product embodying the claimed invention being made. Their Honours held that to establish infringement by making a new embodiment of the invention the patentee must show that the new product takes each of the essential features by reference to the description of the invention. The question of infringement is not addressed to the nature of the product but rather to the invention described by the integers of the claim.
Their Honours concluded:
“When all of the third party modifications to each of the original Epson 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.”
Nettle, Gordon and Edelman JJ took a conservative approach, noting that “for more than a century, understanding the nature and extent of the monopoly rights granted by Australian (and English) patents Acts has been resolved by the implied licence theory” whereas the “exhaustion theory was developed and applied in the United States (and elsewhere) by reference to different legislative provisions”.
Their Honours considered that the exhaustion theory diminishes the rights granted under the Act, leaving the patentee “with only whatever rights and remedies are available in contract, and no rights and remedies under patent law”. Their Honours further considered that there was “no principled reason for such a change”, and decision of the point was not necessary to resolve the appeal. Their Honours noted that “[S]tripping patentees of rights which they have held for more than a century is a question for the legislature, not the courts” and observed that over successive iterations of the Patents Act (1903, 1952 and 1990), the legislature had not made any attempt to overturn the settled understanding of the implied licence doctrine.
Final words from the authors
The authors note that the exhaustion of rights approach spares a patentee of the need to turn its mind to the possibility of myriad licences being implied by the law at the point of each first sale of the patented good, and the consequent complication those implied licences create if the patentee subsequently seeks to grant an exclusive licence under the Act to a third party commercial licensee.
On a historical note, the long-standing 1911 authority of Menck was in fact a judgment of the Privy Council in London, allowing an appeal from a 1908 High Court decision. Whilst the High Court ceased to be bound by Privy Council decisions in 1975, and a right of appeal from the High Court to the Privy Council was abolished in 1988, the Privy Council’s view in Menck has been recognised as authority in Australia for over 100 years. This decision in Calidad overturns one of the (if not the) longest-standing successful appeals of a High Court decision.
An interesting address on “The Privy Council – An Australian Perspective” by former High Court Chief Justice Gleeson is available here.
Jeff Bergmann is the Director and Owner of Solubility. During his 25-year career Jeff has covered all aspects of IP commercialisation for clients from multinational and large corporations through to investee companies of venture capital clients, and individual clients in the academic and not-for-profit sectors.
Cover image Source: Epson.com.au