Limiting the remedies for patent owners
CALIDAD PTY LTD V SEIKO EPSON CORPORATION [2020] HCA 41
In a landmark decision, a 4:3 majority of the Australian High Court held that the doctrine of exhaustion applies in Australian patent law and this replaces the former implied licence doctrine.[1]
This important change to Australian patent law has the effect of limiting the scope of a patent owner’s rights:
Under the previous implied licence doctrine, a patent owner’s rights in the patented product survived the sale of the product.
Under the doctrine of exhaustion, a patent owner’s rights in the patented product are exhausted upon the first sale of the product.
The significance of this limitation is that under the doctrine of exhaustion, a patent owner will not be able to rely on patent law or seek the statutory remedies provided under such law once their patented product is sold. A patent owner will need to rely on contract law to control their patented-product post-sale and these contracts will be subject to the Australian Consumer Law prohibitions against anti-competitive conduct.
Key Take-Aways
This decision will open the door for greater competition in the spare parts aftermarket. It is clear that the owner of a patented-product is entitled to modify or repair the product.
Patent owners will need to rely on well-drafted contracts/licensing models to control what happens to their patent-protected products post-sale.
For patent protection, Original Equipment Manufacturers (OEMs) must assess the claims of their patents with respect to potential modifications and should look to patent key components and parts.
Background
This case concerned printer ink cartridges that were protected by 2 patents owned by Seiko Epson Corporation (Seiko). The printer ink cartridges were sold under the trade mark EPSON. It was the intention of Seiko that once the printer ink cartridge was used, it would be thrown away and the consumer would buy a new EPSON cartridge.
Ninestar Image (Malaysia) SDN BHD (Ninestar) obtained used Seiko cartridges and modified those cartridges so that they could be re-used. Ninestar is one of the world’s largest manufacturers of generic printer cartridges. Ninestar purchased the discarded cartridges from recycling facilities and other sources, then reconditioned the used cartridges for use as generic, replacement cartridges.
The re-conditioning work involved re-filling the cartridge with ink and reconfiguring or replacing the memory chip on the ink cartridges so that when the cartridge is installed in the printer, the printer recognises that it is not used or empty.
Calidad Distributors Pty Ltd (Calidad) purchased the reconditioned ink cartridges from Ninestar and imported them into Australia to be re-sold to Australian consumers. While Calidad accepted that the re-conditioned printer cartridges fell within the claims of Seiko’s patents, Calidad claimed that Seiko’s patent rights were either exhausted upon Seiko’s initial sale of the printer cartridges or, alternatively, Seiko impliedly licensed the initial purchase, and all subsequent purchasers to use the cartridges.
The issues before the Australian High Court were:
Did the modified cartridges constitute a repair or making a new product?
Should Australia adopt the doctrine of exhaustion or should Australia continue to use the implied licence doctrine.
Implied license doctrine
Under the implied licence doctrine, a patent owner’s rights in respect of the patented product continue after its sale, but the purchaser is granted an implied licence to use or dispose of the patented article without the need for the patent owner’s consent. The ‘implied licence doctrine’ was established in Australian law in the case of the 1911 decision of Menck[2] and has been followed since by the Australian courts. Under the implied licence doctrine, the patent owner may still rely on its patent rights and seek the patent statutory remedies.
Exhaustion doctrine
Under the exhaustion doctrine, the right granted to a patent owner to prevent others using or selling the patent-protected product is extinguished when the product is first sold. After the sale, the patented product becomes the private, individual property of the purchaser, with all the rights and benefits of ownership[3].
High Court decision
The 4:3 majority of the Australian High Court noted that they are no longer bound by decisions of the Privy Council, and that the doctrine of exhaustion should be accepted in Australian patent law. The majority cited with approval of the United States Supreme Court decision of Impression Products Inc v Lexmark International Inc[4] and found that, in addition to being compatible with the definition of ‘exploit’ under the Patents Act 1990 (Cth),[5] the doctrine of exhaustion was in alignment with broader policy objectives of both: 1) the desire not to broaden patent owner rights, and 2) to create commercial certainty in the downstream sale of the patented product. [6]
“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.”[7]
The minority justices refused to adopt the exhaustion theory and argued that such a fundamental change of removing the rights and remedies available under patent law from the patent owner is a question for the legislature and not for the court.[8] They also argued that it was incorrect to only view patent rights as a ‘negative right’, because as a grant of personal property it has both negative and positive aspects.[9] It includes a right to exclude others and a right to exploit the invention.[10]
International harmonisation
Australia’s adoption of the doctrine of exhaustion aligns Australia’s approach to the United States and the European Court of Justice but is a departure from the United Kingdom which continues to follow the implied licence doctrine. While many of Australia’s trading partners rely on the doctrine of exhaustion and this decision brings Australia in step with these countries, the application of the doctrine of exhaustion is not consistent between jurisdictions and there is no international agreement on the type of doctrine of exhaustion model that may be followed.[11]
Repair or making a new product?
The second issue before the High Court was whether the modifications are within the scope of the rights of the owner. While it is acceptable to modify a product to prolong its life or make it more useful, such rights do not extend to the making of a new product.
When does a repair become a re-making? This tends to be viewed as a spectrum – and the court will consider whether the modifications are closer to repair (a permissible repair) or closer to making a new product (an impermissible reconstruction). The question will be one of fact and degree and decided having regard to the nature of the article.[12]
The High Court emphasized that the correct approach is to recognise the rights of the owner of the product to the full use and control of it, and not by reference to a characteristic of the product.[13] This requires a comparison of the steps taken to modify the product against each of the claimed features in the patent. Just because the Epsom products were sold as ‘single use’ and then were modified for re-use, did not mean that they became new products.
The majority of the court were mindful not to give undue expansion of the patent owner’s monopoly right[14] and found that the modifications made to the original Epson cartridges by re-filling and re-programming the cartridges were consistent with the exercise of the rights of an owner to alter an article to improve its usefulness and enable its re-use. Accordingly, the modifications did not amount to ‘making’ or ‘manufacture’ and were not an infringement of Seiko’s patents.[15]
Conclusion
This decision will be viewed favourably for providing certainty to the aftersales spare parts markets and the right for owners to make repairs to patented products. It brings Australian patent law in line the statutory ‘repair defence’ under s 72 of the Designs Act 2003 and is consistent with Australia’s long-term policy objectives to encourage competitive markets. The adoption of the doctrine of exhaustion also arguably brings greater harmonisation to Australian patent law with the laws of our major trading partners.
For patent owners, protection of inventions will need to focus on how the claims of patented products might be compared to potential modifications of the product and whether the part itself should be patent-protected. OEMs will need to rely on contracts and licensing mechanisms as a means to control their patented-products post-sale, but such arrangements will be subject to Australia’s prohibitions on anti-competitive behaviour.
[1] Calidad Pty Ltd v Seiko Corporation [2020] HCA 41 (12 November 2020)
[2] National Phonograph Co of Australia Ltd v Menck ("Menck (PC)") [1911] UKPHCA 1; (1911) 12 CLR 15; [1911 AC 336
[3] Impression Products Inc v Lexmark International Inc (2017) 137 S Ct 1523 at 1531
[4] (2017) 137 S Ct 1523
[5] Calidad Pty Ltd v Seiko Corporation [2020] HCA 41 at [89]
[6] Ibid at [79], [82] and [127]
[7] Ibid at [76]
[8] Ibid at [147] and [213]
[9] Ibid at [164]
[10] Ibid at [176]
[11] Article 6 of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) signed 15 April 1994
[12] Calidad Pty Ltd v Seiko Corporation [2020] HCA 41 at [263]
[13] Ibid at [61]
[14] Ibid at [22], [65] and [124]
[15] Ibid at [70]
This article discusses the significance of the decision Australian High Court decision in Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41. It is not legal advice. This case represents a significant change in the rights of patent owners in Australia. If you have any questions about how this case might impact you, please feel free to contact me.