This important decision by the Full Court of the Federal Court in Calidad Pty Ltd v Seiko Epson Corporation  FCAFC 115 clarifies the position on an area of law that, surprisingly, is still developing in Australia, namely the scope of the implied licence issuing from the sale of a patented product.
Re-manufacturers that refurbish and repurpose used patented products should take heed of this decision, as work that goes beyond mere repair of damaged or broken parts, or that replaces or refurbishes parts that extend the useful life of the product, may be considered an infringement of the patentee’s exclusive right to make the product.
Calidad has foreshadowed a request for special leave to appeal to the High Court on the anterior question of whether the “implied licence” or the “patent exhaustion” doctrine is the correct approach in Australia. Calidad has until 2 August 2019 to apply to the High Court for that leave to appeal.
Seiko Epson sells Epson printer cartridges worldwide. The Epson cartridges embody the invention claimed in the two Australian patents in suit. The cartridges are designed as a consumable product, and are intended to be discarded and replaced when the ink runs out. This is achieved by memory chips programmed to recognise when a cartridge is spent, thereby preventing the cartridges from being refilled. Each cartridge is also configured to be compatible with only certain Epson printers.
After initial sale of the original Epson cartridges, a third party modified the used cartridges to enable them to be re-used. Calidad then imported and sold the cartridges in Australia, in competition with the original Epson cartridges.
Calidad asserted an implied licence to treat the cartridges as an ordinary chattel deriving from Seiko’s unconditional sale of the original Epson cartridges. In the alternative, it asserted that a patentees’ right to exploit the patented product under the Patents Act 1990 (the Act) did not include the right to prevent a subsequent owner of the product from repairing or refurbishing the product and dealing with the refurbished product.
The Modifications Made
The process of refurbishment carried out by the third party, first, involved cartridges being emptied and cleaned in preparation for refilling. Replacement ink was then injected into the cartridge through a new entry port created in the cartridge, which was subsequently sealed.
Next, for some cartridges, the memory chip was reprogrammed so that the cartridge would not read as spent (referred to as the “current products”). For other cartridges a new memory chip was inserted and the modified circuit boards refitted to the cartridges. Some cartridges were further modified by changing their interface pattern to allow them to be used with a wider range of Epson printers than originally intended. These latter categories were referred to as the “past range of products”.
There was no dispute that all the modified cartridges supplied by Calidad fell within the scope of claim 1 of each of the patents in suit.
Opposing Doctrines: Implied Licence vs Patent Exhaustion
The right of a patentee to control what may be done with a patented product, once sold, gives rise to competing rights: the patentee’s exclusive right to “exploit” the patented product under the Act, which includes the right to make, use, sell and import the product inter alia, and the personal proprietary rights of ownership in a chattel at common law.
Two opposing doctrines have developed to address this tension.
- The doctrine of patent exhaustion was endorsed by the United States Supreme Court in Impression Products v Lexmark (2017) 581 U.S. 1523. Under this doctrine, upon the first authorised sale of a patented product by or with the consent of a patentee, all patent rights in that article are exhausted. The Full Court in the present case confirmed unequivocally that under Australia’s current law there is no doctrine of exhaustion.
- The implied licence doctrine provides that the sale of a product embodying a patented invention with the authority of the patentee carries with it an implied licence permitting the purchaser to use, maintain, re-sell and import the product without infringing the patent. Such implied licences are subject to any conditions of sale the patentee imposes and “brings home” to the purchaser at the time of sale. This approach was adopted in the United Kingdom and Australia following the Privy Council’s decision in National Phonograph Co of Australia Ltd v Menck (1911) 12 CLR 15 (Menck).
At first instance Justice Burley found that Menck applied in Australia. Both parties advanced the appeal and cross-appeal on this basis. However Calidad has reserved the right to challenge the approach taken in Menck in any subsequent appeal to the High Court, including raising at that stage its contention that the doctrine of exhaustion should apply in Australia, as it does in the United States.
The First Instance Decision
Justice Burley held that Calidad infringed the Seiko patents in relation to the past range of products (where memory chips were replaced or the interface pattern was changed), but not the current products. Burley J’s analysis turned on whether the implied licence, which was taken to have arisen validly, was terminated by the modifications carried out by the third party. This was to be determined by whether the product was “materially altered” by the modifications.
The Full Court
Scope of the Implied Licence
The Full Court (Greenwood, Jagot and Yates JJ), each in separate judgments, found entirely in favour of Seiko. The Full Court concurred in finding that the primary judge erred by asking the wrong question – that is, was the implied licence brought to an end by the materiality of the modifications. Instead, the question to be addressed was whether the modifications constituted conduct outside the scope of any implied licence arising from an unrestricted sale. Each of the Full Court judges held that the modifications brought into existence a new article, which could only be properly characterised as an impermissible making of the patented product, and unequivocally outside any possible licence recognised by Menck. The licence did not come to an end by reason of the materiality of the modifications – it never authorised the relevant conduct of Calidad and the third party from whom it procured the cartridges.
Yates and Jagot JJ, in their separate reasons, pointed to the fact that none of the modifications amounted to repair on any reasonable view. The cartridges were not damaged – they had instead been consumed in the manner intended by Seiko upon their manufacturer and sale. An implied licence did not authorise modifications or refurbishment after the useful life of a patented article. Jagot J also observed that the refurbishment process involved “unmaking” the patented cartridges by effectively removing one integer of the patent claims (by creating a hole in the ink container) and then making a new patented article when adding that integer back in (by sealing the newly-made hole to re-establish a functional ink container). Yates J considered that Calidad’s assertion of a right of refurbishment was an unsupported embellishment of the subject matter dealt with in the United Kingdom cases, as the cases themselves refer only to repair.
Licence to repair?
The question of whether Australian patent law recognises an implied licence to repair did not arise on the facts of the present case, leaving this question, ostensibly, to be resolved on another occasion.
However the exclusive right to “exploit” the invention granted to a patentee under s 13 and Schedule 1 of the Act does not include (at least expressly) the exclusive right to repair a patented product. Under the current legislative regime, arguably, an implied licence to repair is not required, provided the work performed does not cross over into an impermissible making of the invention. Consistent with this view, the United Kingdom courts have long recognised a right to repair (essentially as an implied contractual term associated with the purchase of a product), but more recently have characterised this as a residual right to do whatever does not amount to making the invention (Lord Hoffman in United Wire Ltd v Screen Repair Services (Scotland) Ltd  RPC 24).
Patent Exhaustion – would the outcome be any different?
Even if the patent exhaustion doctrine were found to apply in Australia, the outcome of this case may be unchanged. As Jagot J persuasively states in obiter, neither an implied licence nor the doctrine of exhaustion would “result in the loss of the right to prevent the making of new embodiments of the invention, whether or not the new embodiment involved starting from scratch or re-using and modifying parts of the patented product as sold”. Patent exhaustion applies to the particular product as sold, and not to the making of a new embodiment of the invention.
Implications for Re-manufacturers
Re-manufacturers will need to carefully consider whether their activities may infringe the patent rights of original product manufacturers, particularly where work goes beyond mere repair of damaged or broken parts, or where parts are replaced or refurbished thereby extending the useful life of the patented article.
Each case will, however, turn on its facts – both with respect to the nature of the patented invention and the article that embodies it. As observed by Jagot J, “…all the cases, in one way or another, are about the scope of the implied licence which necessarily arises on the sale of every patented article, the scope of which will depend upon all relevant circumstances including but not limited to the nature of the patented article, the circumstances of the sale, and the imposition at the time of sale of any express restrictions on the use which the purchaser may make of the article after sale”.
We await with interest any further developments in the law should the High Court choose to address this question.
Authored by Duncan Longstaff