Toner Cartridge Exhausted: High Court of Australia adopts "exhaustion of rights" doctrine in patent law

The High Court has held that modifying and refilling spent printer cartridges for reuse and resale did not infringe patents on the cartridges. In a new approach for Australian patent law, a majority of the High Court considered a patentee's monopoly rights in an article to be "exhausted" when the article is sold. (Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41).

Seiko sold EPSON branded printers and printer cartridges. The printer cartridges were the subject of two Australian patents. The cartridges featured a memory chip which stored information about the amount of ink remaining in the cartridge and a high voltage circuit device, used to detect the level of ink remaining. The patents involved a layout of electrical terminals directed towards reducing the risk that shorting could occur between the terminals for the memory and high voltage circuit devices. The EPSON cartridges were intended for single use, however, Seiko had not imposed any contractual condition on the purchaser limiting the use of the cartridges after purchase.

A third party (Ninestar) obtained spent EPSON cartridges that had originally been sold by Seiko, and modified them for re-use. Calidad then obtained the cartridges and sold them in Australia as refills. The modifications varied, and for the purposes of the proceedings the modified cartridges were grouped into nine different categories. As well as refilling the cartridges with ink, it was necessary to reconfigure or rewrite the information on the memory chip, or replace the memory chip with another. In some instances Ninestar also cut a gas membrane in the cartridge, or replaced the integrated circuit assembly.

Seiko alleged patent infringement. Calidad argued that the modification for reuse and resale did not involve infringement, because the cartridges had already been sold by Seiko, with no express restrictions on their use. Either Sekio's patent rights were at an end once the sale occurred (the "exhaustion of rights" doctrine) or the sale resulted in the purchaser having a licence to use the products in any way they saw fit subject to any express contractual restrictions (the "implied licence" doctrine).

First instance decision: implied licence vs exhaustion

The primary judge, Justice Burley, held that an implied licence, not exhaustion of rights, was the applicable principle in Australian law. Justice Burley applied a 1911 decision, National Phonograph Co of Australia Ltd v Menck, in which the Privy Council, then the highest appeal Court for Australia, had overturned a decision of the High Court of Australia ((1911) 12 CLR 15; [1911] AC 336 (Privy Council); (1908) 7 CLR 481 (High Court of Australia)).

In Menck, the High Court had applied the principle that the owner of a chattel has an absolute right to use or dispose of the chattel as the owner sees fit – and thus, the patentee's monopoly rights of use and sale were exhausted once the patentee sold the patented article (the doctrine of "exhaustion of patent rights"). On appeal, however, the Privy Council decided that a patentee could impose conditions on the sale or use of patented goods that would be binding on subsequent owners if they had notice of the conditions. In the absence of any express contractual conditions, the Privy Council held, a right to use the goods is implied by law from the sale.

At first instance in the present case, Justice Burley held that the "implied licence" defence succeeded in respect of four categories of cartridges, as the modifications made to the original cartridges did not "materially" alter the claimed features of the invention – the product that the purchaser had an implied licence to use. However, in the remaining categories modifications were more significant and meant the product "had been altered to such an extent that the implied licence can no longer sensibly be said to apply".

Full Court Decision and High Court Appeal

On appeal, the Full Federal Court held that, for all nine categories of cartridge, the modifications were so significant that they amounted to making a new infringing product out of the EPSON cartridges – and therefore infringed the patentee's rights.

While taking different approaches, the Full Court judges generally agreed with the primary judge that the implied licence was only to use the patented product in the form in which it was sold, the Full Court said the correct question was whether the modifications were outside the scope of the licence – which was to be determined by reference to the nature of the article. The cartridges had a limited lifespan, and were not intended to be repurposed in the manner of the Calidad products.

In light of the Privy Council’s decision in Menck, the appeal was decided on the basis that the doctrine of implied licence applied in Australia, however, Calidad had reserved its right to challenge that position in any appeal to the High Court. Calidad appealed the Full Court’s decision and argued that the doctrine of exhaustion of rights should apply be adopted instead of the implied licence approach; that is, that the Privy Council’s decision in Menck should not be followed. Seiko contended that the doctrine of exhaustion did not apply, and argued that, regardless of which doctrine applied, the modifications amounted to infringement because they resulted in a new infringing product.

The two key issues in the High Court appeal were:

• whether the modifications to the ink cartridges constituted an impermissible "making" of the product; and
• whether the doctrine of exhaustion of patent rights should apply in Australia.

Modification and restoration did not constitute "making" an infringing product

The High Court held that the modifications did not constitute "making" infringing products. The refilled and restored cartridges were merely modified versions of the products Seiko had sold. A product could be purchased and altered in such a way that it retains much of its essential features in order to be reused to have improved functionality, without being "made". The majority judgment stated:

"When all of Ninestar's modifications to each of the categories of cartridges were completed what remained were the original Epson cartridges with some modifications which enabled their re-use. The modifications did not involve the replication of parts and features of the invention claimed. There was no true manufacture or construction of a cartridge which embodied the features of the patent claim."

In dissent, Justices Nettle, Gordon and Edelman considered the modifications in Categories 1, 2, 3, 4 and A did not amount to a "making" of the patented invention, but those in Categories 5, 6, 7 and B did, and thereby infringed Seiko's patents.

Doctrine of patent exhaustion adopted

A majority of the High Court (Chief Justice Kiefel, and Justices Bell and Keane JJ, joined by Justice Gageler in a separate judgment) accepted that the doctrine of patent exhaustion should apply under Australian law instead of the doctrine of implied licence. The High Court has not been bound by decisions of the Privy Council for many years.

The majority judgment noted the following characteristics of the two doctrines:

• the implied licence approach accepts that the patentee’s rights of use in respect of a patented product may survive the sale of that product, but holds that a right of use by the purchaser will be implied except to the extent that there are express contractual restrictions imposed at the time of sale – whereas, in contrast, under the exhaustion doctrine the patentee’s rights are deemed to be extinguished when the product is sold (subject to any express agreement to the contrary);
• the exhaustion doctrine leaves no patent rights to be enforced with respect to the particular product sold, but the patentee's rights remain unaffected with respect to any other product embodying the claimed invention; and
• the "fundamental difference" between the two was that the exhaustion doctrine does not accept the premise that a patentee's rights of use with respect to the particular product survive its sale: the "special rights deriving from the patent which are given statutory effect are exhausted when the reward which is the object of those special rights is achieved by the patentee".

The practical difference between the two doctrines was most cogently elucidated by Justice Gageler in a concurring judgment. He noted that “discordance sets in” when a patented product becomes the property of a subsequent purchaser – or even more so when the subsequent owner is:

“a scavenger or, as here, a recycler. For such a downstream owner, the notion of a licence to use and resell being implied at the time of the contract of sale does not work at all. Either there is no contract of sale or, if there is a contract of sale, the patented is not privy to it… [T]here is simply no settled understanding of the implied licence doctrine in its application to downstream owners. Their position is a riddle, if not a muddle. It is certainly a mess. The exhaustion of rights doctrine cuts through that mess.”

The majority took the same view, noting that the doctrine of exhaustion is conceptually simpler, having "the virtues of logic, simplicity and coherence with legal principle". The doctrine of exhaustion was considered to be in line with the overarching purposes of the patent system to promote technological advancement and "balance" the interests of producers, owners and users of technology and the public. (This was the first time the High Court has considered the new objects clause in the Patents Act, which was legislated earlier this year.) The doctrine was "consistent with the fundamental principle of the common law respecting chattels and an owner's rights respecting their use", while still allowing restrictions on future use to be imposed by contract or in equity.

By contrast, the majority viewed the doctrine of implied licence as a legal fiction, "complicated in its operation and effects", and with a tendency to engender confusion and uncertainty in lower courts. It is also inconsistent with the certainty demanded by trade and commerce or with consumer expectations, and at risk of falling foul of competition laws.

The majority also noted that the doctrine of exhaustion was consistent with the approach taken in the US and Europe. In particular, a similar outcome was reached in the US in Impression Products Inc v Lexmark International Inc (2017) 137 S Ct 1523, a case that also involved the refilling and refurbishment of patented printer cartridges for resale and re-use.

In a strong dissent, Justices Nettle, Gordon and Edelman were not prepared to adopt an exhaustion theory over an implied licence theory. They considered that making "such significant change in the rights of patentees" was a more appropriate question for Parliament, and noted that a decision on the point was not necessary to resolve the appeal.

The authors acknowledge the assistance of Connie Beswick in preparing this article.

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