Legal Insights

High Court of Australia adopts the doctrine of exhaustion of patent rights

By Ben Miller & Natasha Faigenbaum

• 17 June 2021 • 5 min read

We review the High Court’s decision to adopt the doctrine of patent exhaustion and consider the implications for both patentees and purchasers of patented products.

In brief

  • In Calidad v Seiko Epson [2020] HCA 41, a narrow four-to-three majority of the High Court of Australia (High Court) adopted the doctrine of ‘exhaustion of rights’ for patents, diverging from more than 100 years of application of the ‘implied licence’ doctrine.
  • It is now the law in Australia that whilst patentees retain the exclusive right to ‘make’ products embodying the claims of a patent, all other exclusive rights are exhausted upon first sale of a patented product unless the patentee expressly imposes conditions on use by way of contract.
  • Patentees will need to rely on express contractual restrictions to control the use of patented products after sale and patenting strategies will need to be adjusted accordingly.
  • The High Court’s decision brings Australia more in line with the long-standing jurisprudence in the USA and Europe.

Background

An inherent tension exists in patent law between the exclusive right of a patentee to exploit their patented product and the rights of a purchaser (or product owner) to use and dispose of their purchased products. In an attempt to overcome this tension, two competing doctrines have emerged:

  • the doctrine of exhaustion of rights for patents which provides that the patentee’s rights in the particular product are extinguished upon first sale
  • the doctrine of implied licence which provides that, subject to any express conditions imposed at the time of sale, the purchaser has an implied licence to use the particular product without infringing the patent.

Facts

Seiko manufactures and sells ‘Epson’ branded single-use ink cartridges the subject of two Seiko patents (Epson Cartridges). Ninestar Image (Malaysia) legally sourced used Epson Cartridges from recyclers and consumers and then modified the cartridges to enable re-use. Calidad obtained the repurposed ink cartridges from Ninestar and imported and sold the cartridges in Australia.

Seiko claimed that Calidad infringed its patents by importing and selling the repurposed Epson Cartridges in Australia. Calidad counterclaimed alleging, amongst other things, that it had an implied licence to import and sell the repurposed Epson Cartridges arising from the original sale of the Epson Cartridges.

Journey to the High Court

At trial, Burley J of the Federal Court applied the ‘implied licence’ doctrine referring to the decision of the Privy Council in National Phonograph Company of Australia Ltd v Menck (1911) 12 CLR 15; [1911] AC 336. Burley J held that by repurposing and modifying some of the Epson Cartridges, the implied licence was terminated such that Calidad was infringing Seiko’s patents.

On appeal, the Full Federal Court found entirely in favour of Seiko. Rather that assessing whether the implied licence had been terminated as in the first instance decision, the Full Court instead considered whether the modifications fell within the scope of the implied licence. Upon doing so, it was 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 implied licence.

Calidad appealed to the High Court on the grounds that Menck was wrongly decided and that the doctrine of exhaustion of patent rights should apply in Australia.

High Court decision

By a narrow four-to-three majority, the High Court overturned the Full Federal Court’s decision on infringement, finding that none of the refilled cartridges infringed Seiko’s patents. In doing so, the High Court confirmed that the implied licence doctrine is no longer good law in Australia, rejecting it as complicated and reliant on a legal fiction. The majority noted the doctrine’s lack of alignment with fundamental laws relating to personal property, and limited applicability in the face of modern laws prohibiting various forms of anti-competitive conduct. The majority considered the doctrine of exhaustion, on the other hand, to have ‘the virtues of logic, simplicity and coherence with legal principle’.

In reaching this decision, the majority distinguished between a patentee’s exclusive right to ‘make’ new patented products and a purchaser’s right to ‘repair’ a patented product, including to prolong the life of a patented product to make it more useful or replace non-patented parts. The majority explained the distinction between ‘make’ and ‘repair’ as relieving the tension between the law of personal property and patent law. The majority found that the modification of the Epson cartridges did not cause the cartridge to cease to exist such that it was then ‘made anew’.

The majority regarded this approach as consistent with the new objects clause inserted as section 2A of the Patents Act 1990 (Cth) in February 2020, one component of which is ensuring the efficiency of the market economy. This is the first patent case to be decided by the High Court since the enactment of section 2A and demonstrates the High Court’s willingness to give effect to the new provision.

Key lessons

The High Court’s decision, while a fundamental change to Australian patent law, brings Australia more in line with the long-standing jurisprudence in the USA and Europe. Patentees will need to rely on express contractual restrictions to control the use of patented products after sale. Patenting strategies will need to be adjusted accordingly

To read more articles from this edition of The Prescription, please click here.

By Ben Miller & Natasha Faigenbaum

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