Patents get exhausted in Australia

The High Court has handed down its decision in Calidad: by a 4:3 split decision, 150 years of precedent has disappeared into history.[1] Given some time constraints, this is going to be a high level summary only. There are two main areas of significance.

First, the High Court (by majority) has ruled that the sale of a patented product exhausts the patentee’s right to control further exploitation of the product. The right of a purchaser to use and deal with the product does not turn on an implied licence which, being implied, could be excluded by appropriate contractual terms.

Secondly, the High Court has given what is probably its first detailed consideration of what constitutes making a new product (infringing) versus merely repairing it (non-infringing).

Calidad was importing and selling reconditioned Seiko (Epsonm) printer cartridges – that is, used Epsonm cartridges which Calidad’s supplier, Ninestar, had refilled. Seiko sued for patent infringement.

On appeal from Burley J, the Full Federal Court had ruled that the reconditioning amounted to making a new product and so the patent infringed.

In allowing the appeal, the High Court unanimously held that refilling 4 categories of the printer cartridges did not infringe. In these categories, what was involved was simply drilling one or two holes in the cartridge case, injecting replacement ink and sealing the holes again. Thus, they had merely been repaired and did not involve making new products.

All judges also held that a fifth category, which involved the replacement of an unpatented component, a memory chip, with another, was not infringing because it too did not involve making a new product.

By a majority of 4 to 3, the High Court held that the reconditioning of four other categories was also not infringing. Nettle, Gordon and Edelman JJ explained why their Honours dissented on this point at [266]:

Category 5, 6 and 7 cartridges involved the making of new, different cartridges: because the processes used to modify those cartridges[440] included cutting off the interface pattern to make them fit a different printer from that for which they were designed. Relative to each cartridge in its totality, that was such a significant change to the form and function of the cartridges as properly to be viewed as changing each cartridge from the cartridge it had been into a new and different cartridge adapted to a new and different task. When that significant change was combined with the other modifications, there was a making of the patented invention thereby infringing Seiko’s patents.

In contrast, Kiefel CJ, Bell and Keane JJ held:[2]

68 The reprogramming of the memory chip in the original Epson cartridges and the removal of the interface patterns did not constitute the making of a new embodiment of the patented product. It may be accepted that the substitution of an “integrated circuit assembly” was a substantive modification which included the layout of the electrical terminals, but it did not constitute a making. The particular layout of the electrical terminals as defined by integers [5] to [11] was not affected by this action. Moreover, as Calidad submits, it was an action undertaken to enable the data in the memory chip to be replaced and the cartridge to be re-used, not to change the layout of the terminals in any way.

69 When all of Ninestar’s modifications to each of the categories of 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.

70 The modifications to the original Epson 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. Both English[111] and United States authority accept the prolonging of the life of a product to be within an owner’s rights of use of a patented product. Regardless of whether it is said to be something done which is closer to “repair” than “making”, it clearly does not involve a manufacture or making. And this is so regardless of whether the exhaustion doctrine or the implied licence doctrine is applied.

So, in all judgments whether there was an infringing making of a new product or a merely a non-infringing repair involved a qualitative assessment of fact and degree.

On the “second” point, the High Court adopted the doctrine of exhaustion on sale by a majority of 4 to 3: (Kiefel CJ, Bell and Keane JJ, Gageler J agreeing; Nettle, Gordon and Edelman JJ dissenting).

All the judges agreed that the decision on the appeal did not turn on whether the doctrine of exhaustion or implied licence from purchase applied.[3] Thus, the adoption of the exhaustion theory is strictly speaking obiter dicta. Nonetheless, as “seriously considered” obiter dicta it is pretty much binding on all lesser courts in Australia.

Accordingly, when a patentee sells a product protected by a patent the patentee’s monopoly rights of use and sale with respect to a product arising from statute are exhausted on sale.

If you have clients who sell patented products on terms seeking to control how they are used – for example, a field of use restriction – you should be recommending a review of the arrangements to ensure that they are binding as a matter of contract law. And, if your client also sells the products, or licenses others to sell them, you should be considering whether the arrangements expose your client to breach of the cartel provisions or exclusive dealing arrangements in the Competition and Consumer Act 2010.

Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41

ps. Thanks to John McPhail for pointing out that my spring racing fever had confused a horse race in Old Blighty with a brand of printers! What was I thinking?

  1. Betts v Willmott (1871) LR 6 Ch App 239; Société Anonyme des Manufactures de Glaces v Tilghman’s Patent Sand Blast Co (1883) 25 Ch D 1; National Phonograph Co of Australia Ltd v Menck (1911) 12 CLR 15 at 28; [1911] AC 336 (PC). A bit more background here.  ?
  2. Gageler J in separate reasons agreed with their Honours.  ?
  3. Kiefel CJ, Bell and Keane JJ at [45]; Nettle, Gordon and Edelman JJ at [144].  ?