Death of the implied licence: High Court adopts the doctrine of exhaustion in Australia
Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41
What you need to know
- By 4:3 majority, the High Court has held that the doctrine of exhaustion applies to patented products in Australia. This replaces the former implied licence doctrine, and means the rights of patentees in respect of a product are exhausted upon the first sale.
- The dichotomy between "repair" and "making" remains relevant, as the doctrine of exhaustion does not affect a patentee's exclusive rights to "make" new patented products.
- It is now clear that purchasers of patented products can do things to prolong the life of the product to make it more useful or replace non-patented parts. However, where extensive repurposing or repair occurs post-sale, the question will be whether there has been "re-making" which may still infringe the patent.
- Australia's law on this issue is now largely aligned with the USA, and divergent from the UK.
- Patentees seeking to restrict or control the use or repair of their products post-sale must now turn to their contracts. But it remains unclear whether other IP rights such as design registrations, copyright or confidentiality could also be used to control actions in respect of products following sale. Implied licence rights are often considered in the context of right to use copyright works that have been acquired from third parties, and it now seems that serious doubt has been cast on that approach.
What you need to do
- This decision is particularly significant for Original Equipment Manufacturers (OEMs) and other patentees facing competition from third parties for post-sale services (such as servicing, repairs, or replacement parts).
- Patentees and purchasers should closely consider their contractual arrangements. Contractual terms will be a key vehicle for patentees to control what happens to their goods after sale, together with restrictions on the use and dissemination of confidential information. This should provide greater certainty to purchasers in relation to their rights to patented goods.
- Patentees should also consider filing patent applications in respect of key wear components that are likely to need replacing during the life of the overall product. Without specific patent protection, product owners now have broader rights to replace non-patented components of larger products assuming those parts can be otherwise obtained from non-OEMs.
The High Court of Australia has delivered its long awaited judgment in the dispute between Seiko Epson Corp (Seiko) and Calidad in relation to single-use printer ink cartridges. In doing so, the High Court has provided detailed treatment of the way Australian law resolves the inherent tension between:
- the exclusive rights of patentees to exploit (make, use, sell etc) their patented invention; and
- the rights of product owners to use and dispose of their products.
In a landmark decision, a 4:3 majority of the High Court has held that this tension is resolved via the doctrine of exhaustion (the approach in the US). That is: "that a patentee's rights with respect to a particular product are exhausted once that product is sold without conditions as to use": at [9].
In doing so, the majority has rejected the earlier "implied licence" doctrine, marking a fundamental shift in Australian law.
Profitable printer ink
Seiko manufactures and sells computer printers and printer ink cartridges. In particular, Seiko sells "Epson" branded single-use ink cartridges that embody the inventions claimed in two Seiko patents (Epson Cartridges).
The Epson Cartridges are sold as single-use. The ink cartridges are not physically designed to be re-filled, and sometimes include electronic chips that indicate an "empty" status that would prevent use even if the cartridge was physically re-filled.
Calidad imported and sold modified cartridges that were refilled with ink and could be re-used. These modified cartridges were made by a third party, Ninestar Image (Malaysia) (Ninestar). Ninestar obtained spent Epson Cartridges from recyclers and consumers, modified them to enable re-use (including by reprogramming the electronic chips), and re-filled them with ink (including by drilling a small hole in the cartridge and then re-sealing it).
Seiko wanted to prevent this. However, the used Epson Cartridges were lawfully acquired by Ninestar, and neither Ninestar nor Calidad were subject to any contractual obligations to Seiko.
Instead, Seiko turned to its patent rights and argued that Calidad infringed those patents by importing and selling the repurposed Epson Cartridges. Calidad countered, among other things, that it had the benefit of an implied licence to Seiko's patent rights arising on the original sale of the Epson Cartridges.
Road to the High Court
At first instance, Justice Burley of the Federal Court found in favour of Seiko. His Honour properly followed the binding Privy Council authority in National Phonograph Co of Australia Ltd v Menck (1911) 12 CLR 15; [1911] AC 336 (Menck Privy Council). That decision provides that the purchaser of patented goods obtains an implied licence to exploit the relevant patent to the extent necessary to use the goods.
Within the framework of this implied licence doctrine, Burley J held that the activity of modifying some of the Epson Cartridges terminated the implied licence, such that their import into Australia and sale by Calidad could not rely on that implied licence and infringed Seiko's patents.
You can read our report of that decision here.
In the Full Court of the Federal Court, Justices Greenwood, Jagot and Yates also found in favour of Seiko. Their Honours adopted different reasoning, and instead considering whether the modifications fell within the scope of the implied licence (rather than whether the implied licence had been terminated).
In particular, Justice Jagot held that the modifications by Ninestar amounted to a re-making of the products, and thus fell outside the scope of the implied licence.
You can read our report of that decision here.
Calidad appealed to the High Court, and argued that the implied licence doctrine should not be the law in Australia, and that the High Court should instead follow its own earlier decision in National Phonograph Co of Australia Ltd v Menck (1908) 7 CLR 481 (Menck High Court) and apply the doctrine of exhaustion.
The High Court's decision
The doctrine of exhaustion
By 4:3 majority, Kiefel CJ, Bell & Keane JJ (with Gagelar J agreeing) held that the doctrine of exhaustion applies in Australia and replaces the former implied licence doctrine.
The doctrine of exhaustion provides that a patentee's rights with respect to a product are exhausted once the product is sold (without conditions as to use). The owner of the product takes it, free to use and enjoy in accordance with all of the usual rights of ownership, subject to any conditions imposed by contract.
This is a significant departure from the earlier implied licence doctrine. In particular, a key distinction is that the patentee can no longer "contract out". That is, while you can expressly limit an implied licence, you cannot revive an exhausted right.
The majority deals at length with the reasons for departing from the implied licence doctrine. These include consistency with the wording and objectives of the Patents Act 1990 (Cth), logical consistency, simplicity, and legal coherence.
By contrast, the implied licence doctrine is observed to be complicated, reliant on a legal fiction, inconsistent with the objectives of the Patents Act 1990 (Cth) and inconsistent with the certainty demanded by trade and commerce and with consumer expectations. The majority concludes that the implied licence is an unworkable doctrine and an "unjustifiable gloss" on the statutory language.
Justices Nettle, Gordon and Edelman mounted a well-argued (and 125 paragraph) defence of the implied licence doctrine. Nevertheless, the law in Australia has now changed, and is unlikely to revert in the near future.
Given that the doctrine of implied licence has been widely employed beyond patent rights, and particularly in consideration of what rights purchasers of copyright works (such as brand logos, construction drawings and written reports) have to make use of those items, the judgment casts serious doubt on whether that approach has any continuing place in Australian intellectual property law.
Permissible repair or a new making
Notwithstanding this significant change of law, the key question for Calidad and Seiko remains largely the same. Did the modification of the Epson Cartridges amount to:
- repair or modification of the existing cartridges; or
- the making of a new cartridge using some aspect of the former cartridges as a component part.
The former being permitted under the new exhaustion approach, the latter remaining an act of patent infringement that is not permitted.
While this central question of repair versus making remains the same, it now must be asked through the lens of whether the conduct infringes the patentee's exclusive rights to "make" the relevant articles (rather than whether the making falls outside the scope of the implied licence).
The majority concluded that Calidad and Ninestar's activity did not amount to a making. In particular, their Honours held that "there was no true manufacture or construction of a cartridge which embodied the features of the patent claim".
The majority observed that the modification process (e.g. drilling a hole into the Epson Cartridge to enable it to be refilled) did not cause the cartridge to cease to exist, such that it was "made anew" when it was re-sealed.
In reaching this conclusion, the majority adopted a narrower construction of what amounts to a "making" than that adopted by the Full Court. In particular, the majority referred to the following illustrative examples from UK and US decisions:
| Case | Product and conduct | Conclusions |
| United Wire Ltd v Screen Repair Services (Scotland) Ltd [2001] RPC 24 |
Patented sifting screens used in off-shore oil-drilling. The alleged infringer removed the used screens, stripped down the product to its frame, and then secured a new mesh screen. |
Making The stripping down of the used screens resulted in a mere component (the frames), to then be used in the construction of a new screen. |
| Hewlett-Packard Co v Repeat-O-Type Stencil Manufacturing Corporation Inc (1997) 123 F 3d 1445 | Ink jet pen with a single-use ink cartridge. The alleged infringer purchased new pens, modified them and sold them as refillable cartridges. |
Repair The mere replacement of individual unpatented parts is no more than the exercise of the lawful right of an owner to repair their property. |
| Jazz Photo Corporation v International Trade Commission (2001) 264 F 3d 1094 |
Single-use cameras. The alleged infringer purchased spent cameras, removed the cardboard cover, cut open the plastic casing, inserted new film and a container, replaced the winding well, replaced the battery, reset the counter, resealed the case and added a new cardboard cover. |
Repair The conduct was no more than an exercise of the owner's rights to preserve the useful life of the original article. |
| Wilbur-Ellis Co v Kuther (1964) 377 US 422 |
Fish-canning machine. The alleged infringer resized or relocated key elements so that the machine could pack fish into smaller cans. |
Repair The modifications were merely adapting an old machine to a related use. |
The majority observed that, within the umbrella of permissible repairs, the following would be permitted:
- any conduct falling short of the making of a new article;
- the modification of an article to improve its functionality;
- the replacement of unpatented parts that were worn or spent, in order to preserve the utility of the overall article; and
- the adaptation of an article to improve its usefulness and extend its life.
The majority also held that the expectations of the patentee are irrelevant for the purposes of this assessment. That is, the fact that Seiko didn't want consumers to re-use the Epson Cartridges did not mean modifying them amounted to a "making" for the purposes of patent infringement.
Significance of the case
This decision represents a fundamental change in Australian patent law. It reduces the rights of patentees to control the use of products following sale, and reduces the remedies that will be available (from those available for patent infringement to those available under breach of contract or in equity for breach of confidentiality).
The key power retained by patentees is to negotiate and agree any restrictions on the use of patented products upfront, as part of the contract. This contract generally should also include an obligation requiring the first purchaser to pass on those restrictions to subsequent purchasers. However, it is doubtful whether such a significant restriction could be imposed via mere one-sided terms of sale placed on consumer products, and this may only be possible to achieve in negotiated supply arrangements between sophisticated commercial parties.
Where patented products, properly sold by the patentee, end up in the hands of purchasers who are not subject to contractual restrictions, the Patents Act 1990 (Cth) will provide no protection. The one exception to this is the scenario where the product owner deals with the patented product in such a way that there is a making or construction of a new product that infringes the patentee's rights. As the examples above demonstrate, a broad range of modifications or alterations will likely be permitted as a "repair" and not reach the level of making.
In practice, this means OEMs who have patents in respect of complicated systems (e.g. a drill assembly or power plant turbine) will have increased difficulty preventing owners of those systems from replacing or modifying component parts as desirable to repair, preserve, alter or even improve the overall system (e.g. replacing wear teeth on the drill assembly, or replacing wear teeth with heavy duty alternatives). One response to this issue is to ensure patent protection is separately sought in relation to key component parts. In the circumstance where such equipment is substantially destroyed or very heavily damaged due to an event such as an explosion or premises fire, the exhaustion doctrine may permit in effect reconstruction of that equipment without recourse to the OEM – although it remains desirable to provide for such events in supply contracts to avoid disputes.
Patentees should also continue to rely on their rights in contract, as well as other intellectual property rights where available, such as copyright, design registrations and confidentiality. For example, a patentee may be able to use copyright (subject to our comments on implied licensing questions in the copyright context) or confidentiality protection in respect of key design drawings to prevent a product owner from being able to provide the information to third parties to have replacement parts made. The availability of copyright remedies in this context will also depend on whether the copyright/designs overlap applies.
On a positive note, purchasers now have more certainty as to their rights to deal with patented products, subject to any contractual conditions to which they have agreed at the time of purchase.
Authors: Kellech Smith, Partner; and Tim Rankin, Lawyer.
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