In the context of patents, the principle of exhaustion of rights is an important one, albeit one that comes up infrequently in court judgments. In this article, we discuss a recent Australian court judgment dealing with the principle.
Exhaustion, what is it?
Patent exhaustion, in essence, means this: the initial authorised sale of a patented item terminates (exhausts) all patent rights to that item. The rationale behind the principle is that the owner of the patent (the patentee) has already been rewarded for its ingenuity through the sale of the item and should therefore not need to benefit from or be allowed to interfere with downstream activities relating to the item subsequent to the initial authorised sale.
South African authority
The South African Patents Act, 1978 provides for the exhaustion of patent rights in section 45 (2), which reads as follows: "the disposal of a patented article by or on behalf of a patentee or his license shall, subject to other patent rights, give the purchaser the right to use, offer to dispose of and dispose of that article."
Authority for the principle in South Africa is the case of Stauffer Chemical Co v Agricura Ltd. South African law recognises exhaustion as it is applied within South Africa (ie, in respect of an article first sold and re-sold within South Africa). It does not, however, recognise exhaustion of rights where the article is first purchased outside South Africa with the consent of the foreign patentee (or its licensee) but is resold in South Africa without the South African patent owner's consent.
In an earlier article, we discussed a UK decision, Nestec v Dualit, which dealt with a patent relating to a capsule extraction device, and the unauthorised sale of a capsule that was compatible with the Nespresso coffee machine. The court said this: "By consenting to the manufacture and sale of Nespresso machines, Nestec have exhausted their rights under the patent to restrict purchaser's freedom to use such machines in accordance with their normal function."
The new Australian case
The case is Calidad Pty Ltd v Seiko Epson Corporation. According to a recent piece by Spruson & Ferguson, this case related to printer cartridges and, more particularly, the refurbishment of such cartridges by a party that had not been authorised by the patentee to do so. What happened here was that the Australian company Calidad took printer cartridges that had been manufactured by Seiko Epson and both refurbished and modified them, thus making them re-usable. Seiko Epson sued for patent infringement and Calidad raised the defence of exhaustion of rights. The first court held that the modifications did not constitute repair but repurposing, which meant that there had been patent infringement. The case went on appeal.
On appeal, the decision was reversed, with the court finding that there was no infringement. The majority (four of the seven judges) applied the exhaustion principle, which it said "leaves no patent rights to be enforced with respect to the particular product sold." The judges noted that the exhaustion principle applies in the USA and the EU.
The issue according to the court was whether the modification resulted in a new product being made. This was not the case - the modifications made to the cartridges were "within the scope of the rights of an owner to prolong the life of a product and make it more useful." The court made reference to these words from the leading UK judge Lord Hoffman in the United Wire case, namely that repair "is one of the concepts (like modifying or adapting) which shares a boundary with 'making' but does not trespass upon its territory."
Implied licence approach rejected
In coming to its decision, the court rejected the alternative implied licence approach. This says that the patent owner grants the purchaser of the patented product an implied licence to enjoy the product, although the owner can impose restrictions - if those restrictions are breached, the patent rights are breached. The court described this as a "fiction". It further said that "the notion of there being a licence to repair is apt to confuse and distract attention from the statutory question whether the defendant has made the patented product."
So, what about those restrictions?
The court did recognise that contractual restrictions can be imposed by the patentee. The right of exhaustion "does not prevent a patentee from imposing restrictions and conditions as to the use of a patented product after its sale, but simply requires that they be obtained by negotiation in the usual way and enforced according to the law of contract or equity." Patentees, take note.
Any other restrictions?
Spruson & Ferguson do suggest that, in light of this judgment, patent owners may seek to rely more on technological measures to create practical barriers to prevent re-use. That does seem likely.
An important judgment
Spruson & Ferguson are quite right when they say that this judgment has "significant implications for both patent owners and businesses operating in industries in connection with the repair, refurbishment and recycling of goods and possibly parallel importers."
The local position
It is likely that a South African court would come to the same conclusion if asked to decide a dispute similar to the one between Calidad and Seiko Epson (assuming the products were purchased in South Africa with the patentee's authorisation). In the book, "Introduction of Intellectual Property Law" (Dean and Dyer), the authors say that on such a sale "the article is freed from all restraints which the patentee's monopoly had imposed on it." Our courts would, we suspect, adopt a test similar to the one followed in the United Wire case and would find that the purchaser of a patented product has the right to do whatever does not amount to "making" the product, including adapting the product to prolong its life or make it more useful.
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.