Implications of Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41 3 min read
With this High Court decision, the exhaustion of rights doctrine now applies to Australian patent law.
Key takeaways
- Patent owners cannot exercise their rights under the Patents Act 1990 (Cth) (Act) over specific patented products once those specific products have been sold onto the market.
- User modifications will not infringe the patent if they are designed to enable re-use.
- The key question is whether the user has 'made' the patented product.
Background
Developed in the context of US patent law, the exhaustion of rights doctrine provides that a patentee cannot exercise its monopoly rights with respect to a specific patented product once that product has been sold. The parallel implied licence theory, which has found favour in the UK, assumes that, in the absence of contrary conditions of sale controlling use of a patented product, a purchaser has an implied licence to use and sell the product. The implied licence theory had been the accepted position in Australian law for over 100 years following the Privy Council's decision in National Phonograph Co of Australia Ltd v Menck (1911) 12 CLR 15 (Menck).
Seiko Epson Corporation (Seiko Epson) manufactures printer cartridges protected by Australian patents, intended to be single-use. A manufacturer of generic printer products modified the cartridges to enable their re-use. The modifications included creating a hole in the cartridge, injecting it with new ink, replacing or altering the memory chip and cutting the cartridge so it could fit other brands of printers. Calidad Pty Ltd (Calidad) imported the modified cartridges into Australia for sale.
The Full Court of the Federal Court, applying the implied licence theory, held the modifications fell outside the scope of the implied licence. The modifications were infringing as they amounted to a new 'making' of the patented products. Calidad appealed and invited the High Court to adopt the exhaustion of rights doctrine.
The decision
The choice of doctrine
A 4-3 majority of the High Court overturned Menck, accepting that the exhaustion of rights doctrine should now apply in Australia.
The majority preferred the exhaustion of rights doctrine because it was more logical, simple and coherent than the implied licence theory. This is particularly apparent for 'downstream purchasers' who purchase the product from someone other than the patentee, as those purchasers may not have notice of any implied licence. Justice Gageler commented that the implied licence theory in this context is 'a riddle, if not a muddle. It is certainly a mess.'
The minority of Justices Nettle, Edelman and Gordon considered that overturning the implied licence theory would strip patentees of their rights. In their view, this should be done by the legislature.
Making the patented product
Both the majority and minority agreed that regardless of the preferred doctrine, the key question was whether the modifications involved 'making' the patented product. The right to make a patented product belongs exclusively to the patentee under the Act. This involves determining whether 'the new product takes each of [the patent's] essential features by reference to the description of the invention'.
The majority held there was no 'true manufacture or construction of a cartridge which embodied the features of the patent claim'. Rather, the modifications were designed to enable re-use of the product. The minority, applying the implied licence theory, considered that some of the modifications were not infringing as they were merely repairs to the product. However, in the minority's view, reshaping the cartridges so that they would work in non-Seiko Epson printers did infringe by 'making' a product that fell within the relevant claims of the patent.
Implications
Patentees cannot pursue users who modify and re-sell patented products, where those modifications merely involve repairing or enabling re-use. Infringement only occurs where a user's modifications amount to making the patented product.
However, carefully constructed contractual conditions imposed at the time of sale may offer patentees a mechanism to restrict purchasers' use of the product. These conditions are only enforceable by contract.