Australia's High Court introduces doctrine of exhaustion of patent rights

7 minute read  25.11.2020 Rebecca Pereira, Robert Cooper

A new High Court decision explores the fundamental nature of patent rights in Australia, in particular, the rights of a patentee following the first sale of a patented product. We explore what this means for patentees seeking to control the activities of downstream purchasers of patented products.


Key takeouts


  • The exhaustion of rights doctrine is now the law in Australia, replacing the 'implied licence' doctrine. Patentees retain the exclusive right to 'make' products embodying the invention, but all other exclusive rights are exhausted upon first sale of patented products unless the patentee expressly imposes conditions on use by way of contract.
  • Future litigation is likely to focus on what constitutes 'impermissible making', and whether any modifications involve the replication of parts and features of the invention claimed.
  • Patentees will need to rely on contracts with downstream suppliers and purchasers to control post-sale activities. Express contractual restrictions will need to be carefully reviewed and drafted, in particular from a consumer law perspective.

The High Court, by a 4:3 majority, has introduced an exhaustion of rights doctrine into Australian patent law in Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41. The Court's decision generally aligns Australian patent law with the approach taken in the US, and overturns over 100 years of law that developed by way of the 'implied licence' doctrine.

The Court's decision explores the fundamental nature of patent rights in Australia, in particular, the rights of a patentee following the first sale of a patented product. Under the exhaustion approach adopted by the High Court, the patentee's exclusive rights cease upon first sale of a product embodying the invention (save for the right to prevent others from 'making' such products), unless the patentee expressly imposes contractual conditions on use. The decision has significant implications for original equipment manufacturer (OEM) industries in particular, but more broadly, it affects all patentees seeking to control the activities of downstream purchasers of patented products.

Factual background

The case concerns remanufactured printer cartridges. Calidad imports a variety of remanufactured Epson printer cartridges into Australia. These cartridges come into Australia after they are obtained and refilled by Ninestar, a third party in Malaysia. During the refilling process, a number of modifications are made to the cartridges, which vary depending on the model of the cartridge, the date on which it was imported into Australia and whether they were modified by the 'old' or 'new' process.

MinterEllison represented Calidad and Ninestar at trial and on appeal to the Full Federal Court.

Trial and appeal judgments

At trial, Burley J decided the case on an 'implied licence' analysis, referring to the 1911 Privy Council decision of National Phonograph Company of Australia Ltd v Menck. The Menck decision held that purchasers and all subsequent owners of patented products have the benefit of the full right of ownership, unless restrictive conditions are brought to their attention at the time of sale or acquisition. His Honour developed what came to be known as the 'material modification test', ultimately holding that the 'old' process cartridges infringed Seiko's patent, but the new cartridges did not.

On appeal, the Full Federal Court overturned the decision of the trial judge and held that all categories of modified cartridges infringed Seiko's patent. In doing so, the Full Court also accepted that it was bound by the Menck decision, and narrowly construed the implied licence said to be granted by Seiko.
From the outset, Calidad had reserved its right to argue before the High Court that Menck was wrongly decided and that an exhaustion of rights doctrine should apply in cases of this kind in Australia.

High Court: Exhaustion of rights

The majority of the High Court held that the modifications made to the original Epson cartridges were within the scope of the rights of an owner to prolong the life of a product and improve its usefulness, and did not amount to an 'impermissible making' of a 'new' product. This was even the case when the 'remanufactured' Calidad cartridges were then sold to retailers for profit. Irrespective of whether an exhaustion of rights doctrine or implied licence approach was to be preferred, the Court observed that neither doctrine could avoid infringement where there has been a 'making' of a patented product. In this regard, 'the sale of a patented product cannot confer an implied licence to make another and it cannot exhaust the right of a patentee to prevent others from being made'.

The High Court was critical of the approach taken by the Full Court to the infringement analysis, which 'impermissibly elide[d] infringement by use and infringement by making'. Merely because the original Epson cartridges were sold for a single 'use' and later remanufactured to be re-used, this did not make them new products. The majority clarified that the correct approach is as follows:

The question of infringement under the Patents Act 1990 is not addressed to the nature of the article but rather to the invention described by the integers of the claim. Where what has been done does not involve the replication of the combination of integers that describe the invention it cannot be said that what has been done is the making of it. (emphasis added)

Turning to which doctrine should be accepted in Australia, the High Court considered that the exhaustion of rights doctrine 'has the virtues of logic, simplicity and coherence with legal principle', while the implied licence doctrine 'is complicated in its operation and effects' and is a legal fiction that 'is likely to cause confusion in part because it combines a fictional licence with the possibility of real restrictions … it engenders uncertainty'. Further, the implied licence doctrine was said to be 'inconsistent with the certainty demanded by trade and commerce or with consumer expectations'. The majority noted that the result reached by the Full Court would have been 'very different' had the Court been in a position to apply the exhaustion doctrine.

Ultimately, the majority concluded that 'the matters which inform the adoption of a policy of the law as to the scope of the patent rights to sell and use a product, as they affect a patentee and owner of a chattel, point strongly to an acceptance of the exhaustion doctrine and away from the implied licence doctrine'. Interestingly, the majority judgment is one of the first to consider the 'objects clause' in section 2A of the Act when interpreting the scope of the patentee's rights, with the Court noting that 'there is nothing in the Patents Act 1990 to suggest that a patentee is to be rewarded more than once'.

In contrast, the minority judges considered that to adopt an exhaustion of rights theory would diminish the rights granted under the Act, and that there was 'no principled reason' for so doing. Not only did the minority consider that such a fundamental change to patent rights was a matter for the legislature rather than the courts, the point was not necessary to resolve Calidad's appeal given their Honour's findings in relation to 'making'.

Implications

The High Court's decision has significant implications for OEM manufacturers and their distributors, as well as repairers and refurbishers dealing in patented products. More broadly, however, the newly-introduced doctrine of exhaustion of rights profoundly affects the extent to which patentees in all industries can control the activities of downstream parties in relation to patented products following their first sale. As the majority noted in the present case, the exhaustion doctrine has a long history and lineage, particularly the body of jurisprudence that has developed in the US. We expect that Australian courts will derive guidance from this in future decisions.

Importantly, the exhaustion of rights doctrine does not prevent patentees from imposing express contractual conditions regarding the downstream use of patented products. In this case, for its own commercial reasons, Seiko did not impose express restrictions or conditions as to the use of the original Epson cartridges after sale (chiefly antitrust reasons in overseas markets for the relevant products). Following this decision, in addition to exercising applicable contractual rights, we expect that patentees will rely more heavily on their allied intellectual property rights in relation to modified or refurbished patented goods on the market (e.g. confidential information, copyright, design rights). As noted above, whether the refurbished or modified good constitutes a 'making' will become the central focus of any patent analysis.

The scope of the particular claims in suit were a critical limitation on Seiko's ability to restrain Ninestar and Calidad's conduct in this fact scenario. Here, Seiko's invention was essentially a particular layout of terminals on the cartridge that addressed the problem of 'shorting', whereas the majority of the Court held that the modifications made by Ninestar did not replicate the combination of integers that described the invention, and therefore did not constitute a 'making' of it. In this respect, the Court's decision is likely to affect claim drafting practices, e.g. by way of amendments or the filing of divisional applications with claims that are more particularly targeted to the combination of features likely to be taken by refurbished or modified products, where appropriate. Conversely, repairers and refurbishers may be prompted to modify their activities so as to avoid replicating the precise combination of claimed features and thereby avoid a finding of infringement.

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https://www.minterellison.com/articles/australias-high-court-introduces-doctrine-of-exhaustion-of-patent-rights

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