Australia: Calidad v Seiko – defining the scope of the implied licence

One of the more controversial questions in patent law is the extent to which a patentee may continue to exercise control over patent-protected goods after their sale. This question invokes competing tensions between the rights of the patentee and the rights of the purchaser to free enjoyment of goods they have purchased.

In a number of jurisdictions (including Europe and the U.S.), the rights of the patentee in a patented product are said to be 'exhausted' upon the first authorised sale of the product within the jurisdiction. The exhaustion of rights doctrine has never explicitly been recognised in Australia. Instead, the sale of a patented product is said to give rise to an 'implied licence' from the patentee to the purchaser (and any subsequent owner) to deal with the product in certain ways.

In Calidad Pty Ltd v Seiko Epson Corporation [2019] FCAFC 115, the Full Court considered the nature and extent of this licence, and in particular, the circumstances in which the modification or repurposing of a patented product will bring it outside the scope of the licence.

Facts of the case

The respondent, Seiko Epson Corporation, sold printer cartridges for inkjet printers, known as 'Epson' cartridges. Each Epson cartridge was fitted with a memory chip, which stored information regarding the volume of ink remaining inside. Importantly, once the chip registered that the volume of ink had dropped below a certain level, the cartridge was no longer able to be used by a printer. The Epson cartridges embodied the invention claimed in two Australian patents owned by Seiko.

Ninestar, a Malaysia-based manufacturer of generic printer consumables, obtained used and discarded Epson cartridges from third parties (who in turn had acquired them from various sources). It then undertook various steps to enable the cartridges to be re-used. Generally, this involved:

(a) Preparing the cartridge for refill;

(b) Refilling the cartridge with ink; and

(c) Replacing, reprogramming or resetting the memory chip, to enable the cartridges to be used in printers.

The appellant, Calidad, imported the cartridges from Ninestar into Australia and sold them as 'remanufactured Epson cartridges.'

Seiko brought proceedings against Calidad alleging that its importation, offer for sale and sale of the repurposed cartridges infringed its patents. Calidad did not dispute that the remanufactured Epson cartridges fell within the claims of Seiko's patents. However, it argued that it was the beneficiary of an implied licence from Seiko to deal with the cartridges, arising from Seiko's sale of the cartridges on the open market. Importantly, both parties accepted that any such implied licence would not include a licence to 'manufacture' the patented goods.

The trial decision

At trial, Justice Burley identified seven categories of remanufactured Epson cartridges. In each case, Ninestar had undertaken different steps to enable the cartridges to be re-used. His Honour found that, in the case of four of the seven categories, the modifications undertaken by Ninestar were so significant that the cartridges could no longer be said to be subject to an implied licence from Seiko. For the remaining three categories, his Honour found that the modifications had little impact on the essential features of the claimed invention, and accordingly, that the cartridges were still subject of the implied licence.

Appeal Judgment

On appeal, Justices Greenwood, Jagot and Yates found that all the categories of remanufactured Epson cartridges fell outside the scope of Seiko's implied licence. Accordingly, Calidad's importation, offer for sale and sale of these cartridges was found to infringe Seiko's patent rights. While the decision in the case was unanimous, each judge took a slightly different route to get there:

  • Justice Yates focussed on the scope of the implied licence as it arose on the facts, finding that it could not authorise any person, after the useful life of the Epson cartridges, to modify them so that they could be used again as printer cartridges;
  • On the other hand, Justice Greenwood found that the modifications undertaken by Ninestar amounted to an exercise of the right to 'manufacture' the patented invention, which is not comprehended in any implied licence;
  • Finally, Justice Jagot considered that on any view, the steps taken by Ninestar both amounted to a manufacture of the patent protected goods, and fell outside the scope of any implied licence.

Key Points

The Full Court's decision in Calidad v Seiko provides much needed clarity regarding the rights of patentees in Australia to control or limit what may be done with a patented product after it has been sold. There are a number of significant aspects to the decision:

  • There are real differences between 'exhaustion' and 'implied licence' doctrines. While the distinction between the 'exhaustion of rights' and 'implied licence' doctrines might seem academic, it can lead to substantially different outcomes. In Impression Products Inc v Lexmark international Inc. 137 S. Ct. 1523 (2017), the U.S. Supreme Court, considering near-analogous factual circumstances, found that the patentee Lexmark had exhausted all of its rights in its printer cartridges upon first sale (whether this occurred inside or outside the U.S.), and accordingly, did not have a claim for patent infringement in respect of the repurposed printer cartridges sold by Impression. In Calidad v Seiko, the Full Court proceeded on the footing that the 'exhaustion of rights' doctrine does not apply in Australia. However, Calidad preserved its rights to appeal this point to the High Court.

  • Relatively minor modifications may bring a product outside the scope of the implied licence. One of the steps undertaken by Ninestar involved creating a hole in the printer cartridges to enable them to be filled with fresh ink, then resealing the hole with plastic by applying heat and pressure. While Burley J considered this to be a 'minor physical alteration,' Jagot J disagreed, finding that, at the moment the new hole was created, the cartridge ceased to be a 'printing material container,' within the meaning of the patent claims. Taking a different approach, Yates J found that the Court's consideration of the materiality of modifications to a patented article need not be confined to the claimed features of the invention – instead, the Court must ask whether the article was altered in such a way that it was, in substance, a different article to that put on the market by the patentee.

  • Calidad was not exercising a right to repair. As an alternative submission, Calidad contended that the modified Epson cartridges were the product of the exercise of a legitimate right to repair or refurbish a patent-protected article. The Court found this argument unconvincing, principally because the cartridges acquired by Ninestar were not worn or broken – rather, they had reached the end of their useful life as a consequence of their intended use. While interesting questions may arise as to the scope of any 'right to repair' and whether it is independent to, or merely one aspect of the implied licence conferred on purchasers of patented articles, it was not necessary for the Court to resolve these questions in the present case.

  • Seiko's cartridges did not contain inherent restrictive conditions. A corollary of the implied licence doctrine is the ability of the patentee to impose restrictions on the use of a patented article where such restrictions are clearly 'brought home' to the buyer at the time of sale. Seiko had failed to expressly impose such restrictions in the present case, however, it argued that the very configuration of its cartridge gave rise to an 'inherent restrictive condition' precluding buyers from repurposing the cartridges in the manner undertaken by Ninestar. At trial, Justice Burley rejected this argument on the basis that the features cited by Seiko really amounted to digital attributes of its goods, rather than a notice of its relevant intention to Calidad. Justice Greenwood affirmed Justice Burley's reasoning in this regard.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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