Calidad v Seiko Epson: High Court Adopts Patent Exhaustion and Limits Re-Making Claims

On 12 November 2020 the High Court of Australia handed down its decision in Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41, one of the most significant patent decisions of the last decade. By a 4–3 majority the Court held that a patentee's rights to use and sell a patented product are exhausted when the product is sold without conditions, and that a customer who modifies the product so it can be used again does not "make" a new product. For manufacturers who sell consumables, and for businesses that repair, refurbish or recycle other people's products, the decision resets the boundaries of what a patent can control after the first sale.

What was the dispute about?

Seiko Epson Corporation manufactures and sells Epson printers and ink cartridges. Its original Epson cartridges embody inventions claimed in two Australian patents (Nos 2009233643 and 2013219239), which concern a particular layout of electrical terminals on a cartridge carrying a memory chip and other electronic devices. The cartridges were designed and sold as single-use items. A memory chip records how much ink remains, and once the ink falls below a threshold a compatible printer treats the cartridge as empty and refuses to print.

A Malaysian company, Ninestar, collected empty original Epson cartridges from various sources and modified them for re-use. It drilled a small hole to inject fresh ink and resealed the holes with heat. It rewrote the memory chip, or replaced it with a generic one, so the printer would read the cartridge as full. For some categories of cartridge it also cut off the "interface pattern" (protruding ribs on the housing) so the cartridge would fit other printers, and in some cases it moved the integrated circuit assembly from one cartridge to another. Calidad imported the modified cartridges into Australia and sold them. Seiko sued for patent infringement. Importantly, Seiko did not claim that any contractual restriction on use had been imposed when the cartridges were first sold.

What did the lower courts decide?

The case was run on the footing of the "implied licence" doctrine from the Privy Council's 1911 decision in National Phonograph Co of Australia Ltd v Menck. On that approach, a purchaser of a patented product is taken to hold a licence to use and resell it, and the question was whether that licence reached what Ninestar had done. At first instance, Burley J sorted the modified cartridges into nine categories and held that five of them fell outside the implied licence and infringed. On appeal, the Full Federal Court (Greenwood, Jagot and Yates JJ) went further and held that all nine categories infringed, reasoning that the cartridges were sold as single-use products, that re-use was never contemplated, and that the modifications amounted to the making of new embodiments of the invention. Calidad appealed to the High Court.

Did modifying the cartridges amount to making a new product?

No, according to the majority. Kiefel CJ, Bell and Keane JJ (with Gageler J agreeing) held that what remained after Ninestar's work was the original Epson cartridge, modified so it could be used again. The majority said the modifications were within an owner's rights "to alter an article to improve its usefulness and enable its re-use", and that this was so whichever of the competing doctrines applied.

The majority found that the Full Court had gone wrong in two connected ways. First, it defined the scope of the purchaser's rights by a characteristic of the product (single use) rather than by what the patentee had actually claimed. The expectations of Seiko and its customers about how the cartridges would be used were irrelevant, and single use was not a feature of the claimed invention. Second, it blurred infringement by use with infringement by making. The majority observed that under the Patents Act 1990 (Cth) the question is directed to the integers of the claim, not to the nature of the article. Where what has been done does not replicate the combination of integers that describes the invention, it is not a making of it. A hole drilled and resealed did not make the cartridge cease to exist, and swapping a memory chip did not alter the terminal layout claimed in the integers.

What is the exhaustion doctrine, and why did the Court adopt it?

The more far-reaching part of the judgment is the choice between two competing theories. Under the implied licence doctrine, a patentee's rights over a product survive its sale, and the purchaser is treated as holding a licence, which the patentee can qualify with conditions that bind later owners who have notice of them. Under the exhaustion doctrine, the patentee's rights to use and sell the particular product are exhausted once it is sold without conditions as to use. The product leaves the patent monopoly and becomes the buyer's property. The patentee keeps the exclusive right to make new embodiments of the invention, and can still impose restrictions, but has to negotiate them and enforce them in contract.

The majority preferred exhaustion. They described it as having "the virtues of logic, simplicity and coherence with legal principle" and as consistent with the common law principle that an owner of chattels may use and dispose of them as they see fit. They called the implied licence doctrine a fiction that is complicated in operation, likely to cause confusion because it "combines a fictional licence with the possibility of real restrictions", and inconsistent with the certainty demanded by trade. They also noted that the exhaustion approach matches the position in the United States (Impression Products v Lexmark, a case on strikingly similar facts) and in the European Union.

The Court rejected Seiko's arguments that the statute required the older doctrine. Section 13(2), which makes patent rights personal property, and sections 135 and 144 of the Act, did not give effect to the implied licence doctrine. Nor did the extrinsic materials, which left the question open. The Court also noted that Australian courts had rarely depended on the implied licence doctrine to decide a case, so abandoning it was unlikely to cause real inconvenience.

Why did three judges disagree?

Nettle, Gordon and Edelman JJ dissented in part. They would not have chosen between the two theories at all. In their view the point was unnecessary to decide, because neither theory permits the unauthorised making of a patented invention, and they considered that stripping patentees of rights held for over a century was a matter for Parliament rather than the courts. On the facts they would have allowed the appeal only in part. They thought the work on some cartridge categories was not a making of the invention, but that cutting off the interface pattern, combined with the other modifications, changed those cartridges into new and different ones that infringed. Even so, the dissent reversed a good deal of what the Full Court had found, so the judges agreed that the Full Court's approach to "making" was too aggressive.

What does the decision mean for Australian businesses?

If you own patents on products, contracts now matter. A patentee who wants to restrict what customers do after sale, such as single-use or no-resale terms, cannot rely on the patent alone. Conditions must be agreed with the buyer at the time of sale and enforced in contract. They must also be drafted with care, because the Australian Consumer Law's unfair contract terms provisions and section 144 of the Patents Act (which voids certain tying conditions) can limit what is enforceable. Patentees should also look to their other rights, as the patentee still controls the making of new embodiments, and claims drafted around replaceable or consumable components may help.

If you repair, refurbish, recycle or remanufacture products, you have more room. Extending the life of a lawfully purchased patented product is, on this decision, within the owner's rights of use. The line is still the making of a new embodiment. Replacing worn or consumed parts and refilling are generally safe, while rebuilding that replicates the integers of the claim is not. Because the question is tested against the claim, a careful analysis of the claim before you modify a product is the best protection.

Some questions remain open. The decision does not settle how far contractual restrictions will bind downstream purchasers in practice, whether the doctrine applies where the first sale was made overseas or by someone other than the patentee (the parallel importation question), or exactly where the repair and making boundary falls in more complex cases. Each will turn on the facts and on the claims of the patent concerned.

Stellar IP Law advises patent owners, manufacturers, importers and aftermarket businesses on patent strategy, claim drafting, freedom-to-operate and infringement risk, and on the contract terms that govern what happens to products after sale. If you sell or modify patented products, or have received a letter alleging infringement, we can help. We act for clients in Sydney, Gold Coast, Brisbane, Sunshine Coast, Newcastle and Wollongong, so contact us to discuss your situation.