Calidad v Seiko – the High Court has spoken: the doctrine of patent exhaustion applies in Australia
On 12 November 2020 the High Court of Australia handed down the much anticipated decision in Calidad Pty Ltd v Seiko Epson Corporation  HCA 41. In a majority decision, the High Court confirmed that all rights of the patentee (use, sell, dispose of, repair etc) except the right to make the patented article are exhausted at the time of sale, in respect of a product which embodies that patent.
The case concerned the repurpose and remanufacture of printer cartridges. Seiko Epson Corporation (Seiko) manufactures and sells printer cartridges. Ninestar Image (Malaysia) SDN (Ninestar) "repurposed" these printer cartridges by refilling used cartridges collected from consumers, which were then imported and sold in Australia by Calidad Pty Ltd (Calidad).
Questions determined by the High Court
There were two questions before the High Court:
- Whether a patentee's rights with respect to the sale and use of a particular product should be regarded as exhausted when that product is sold or whether they continue (subject to an implied license)?
- Whether modifications made to a product to enable its re use amount to a making of a new product and infringes on that account?
By a 4:3 majority the Court held that a patentee's rights with respect to a particular product are exhausted once that product is sold without conditions as to use. As there is no appeal from decisions of the High Court this is now the law in Australia, unless the legislature introduces amendments to the Patents Act (which is very unlikely given the current focus on IP and competition).
All judges also found that modifications will amount to making a new product, which is an infringement of patent rights, where the modifications are of claimed features. The High Court rejected the position of the Full Court that this question should be answered by considering how the patentee placed the product on the market rather than by reference to the language of the claims.
Importance of this decision
For over 100 years the law in Australia proceeded on the basis of a legal fiction, that the patentee maintained their patent rights in product after the point of sale but granted the purchaser an implied license (doctrine of implied licence). Under the doctrine of exhaustion the patentee’s rights are exhausted and they are not in a position to bring patent infringement proceedings if that same product is subsequently repurposed, remanufactured or reused by the purchaser (or another person who has taken ownership of the product).
In adopting the doctrine of exhaustion in place of the doctrine of implied licence the majority stated: “The exhaustion doctrine has the virtues of logic, simplicity and coherence with legal principle... The implied licence doctrine is complicated in its operation and effects.”
The High Court emphasised that the exhaustion doctrine leaves no patent rights to be enforced with respect to the particular product sold, however the patentee maintains the exclusive right to make products embodying the claimed invention.
There is reference in the majority decision to rights being exhausted where the product is sold without conditions as to use, which could be read as permitting patentees to impose contractual conditions to maintain their patent rights. We expect this will be the subject of later litigation as patentees try to maintain maximum patent rights. An alternative, and possibly better, reading of this aspect of the decision is that patentees can impose contractual conditions, that give them a right in contract against the purchaser, but those conditions cannot maintain the right to sue for patent infringement as the patent rights are exhausted.
As the patentee now only maintains its exclusive rights to make the product, the High Court’s approach to determining whether changes to a product by the alleged infringer amounts to making a new product is also crucially important.
Ultimately, the Court in this case determined that the modifications made to the original printer cartridges by Ninestar were within the scope of the rights of an owner to prolong the life of a product and make it more useful. They do not amount to an impermissible making of a new product.
The new battle ground – what is an impermissible making of a new product?
The High Court has made clear that modification of a product could result in the “impermissible making of a new product”. However, in doing so the majority stated that the Full Court erred by considering the question by reference to a characteristic of the product as sold (i.e. that it was put on the market by Seiko as a single use product), rather than by reference to the claims of the patent.
All judgements of the High Court state clearly that modifications can only amount to making a new product if they are of parts or features of the invention as claimed. The question must therefore be answered by a detailed comparison of the steps taken to modify the product against each of the claimed features.
Despite these clear statements there are some aspects, particularly of the dissenting judgement, where the judges appear to have regard to not only the claim language but the design and purpose of the product in reaching their decision. We expect that this will form the basis of future litigation as Australian law on ‘making’ is further developed.
It will also be quickly apparent that, as the focus will be on the claims, changes to claim drafting could improve a patentees prospects of a finding of infringement. We will address this in more detail in a future article.
Can contracts be amended to return the power to patentees?
Given that patentees have no rights over how consumers and competitors use their products once they have been sold, we foresee substantial shifts in the way patentees conduct business.
Since the doctrine of exhaustion is based on the elementary principle that the owner of the product has an absolute right to use and dispose of the product as they think fit, patentees may choose to change their supply model to lease or licence their products to consumers, rather than pass title. In such cases a patentee should consider registering their ongoing rights on the Personal Property Securities Register. Alternatively, patentees could provide consumers with commercial incentives to return used products in exchange for a discount on a replacement, which would take their used products away from the hands of those who would repurpose them.
All of these solutions are however premised on the basis that the patentee and purchaser/lessee of their products have a direct relationship. Where the person in possession of the patented product was not a party to any contract with the patentee (i.e. because they bought it second or third hand) it will be very difficult for the patentee to prove they should be held to the terms of the contract.
Whether any of these strategies is effective, either legally or commercially, we will see in the coming years as the law under the doctrine of exhaustion evolves.
This decision has changed the landscape significantly for Australian businesses by providing certainty for businesses dealing in repurposed products, but creating a new problem for patentees. Luckily we are not moving into unknown waters as the US, and other key trading partners, have had the doctrine of exhaustion for many years. We can learn a lot from the US experience in this space and we will be presenting with our US colleagues on what Australia can expect from this new doctrine in the near future.
If you have questions about whether your intellectual property rights are being infringed, or how your business activities may need to change in light of this decision, please get in contact with our team of intellectual property lawyers at DLA Piper Australia.
Our previous article on the Full Federal Court decision can be found here.