Exhaustion Doctrine wins out over Implied Licence

Following decisions by the Federal Court and the Full Federal Court of Australia, the High Court has delivered its verdict on the question of whether the refilling and reselling of used printer cartridges infringes patents directed to the cartridges.

The Seiko Epson Corporation is the patentee in relation to two Australian patents directed to printer cartridges manufactured and sold by Epson. The two patents are directed to a special configuration of electrical terminals to allow the level of the ink remaining in the cartridge to be read by the printer while also allowing power to be provided to the cartridge.

printing press in action
Source: Photo by Bank Phrom on Unsplash

Our readers may be familiar with the lucrative printer cartridge refill market which caught the ire of Epson.

Specifically, Ninestar Image SDN BHD obtains used Epson cartridges, modifies the cartridges, and subsequently refills and sells the cartridges to Calidad who sells the same cartridges in Australia. Importantly, the modifications to the cartridges involved creating a hole in the cartridge for refilling purposes, and modifying an electronic chip on the cartridge.

Epson claimed that Calidad’s use of the cartridges for this purpose was an infringement of their patents.

In the Federal Court, the question of the implied licence doctrine was considered and it was found that the modifications to the cartridges went beyond the implied licence granted to the purchaser and thus the refilling and reselling of the cartridges amounted to infringement of the Epson patents.

In a successful appeal to the High Court (Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41) by Epson, the High Court opined that the implied licence doctrine was out of step with the objectives of the Patents Acts 1990 (Cth) and decided that the exhaustion doctrine, preferred by the US and UK courts, was a more suitable doctrine to balance the interests of patentees and the public. The High Court was also of the opinion that the implied licence doctrine was complex and difficult to apply, especially in situations where a product has been sold and resold multiple times. The High Court contrasted this with the exhaustion doctrine which “has the virtues of logic, simplicity and coherence with legal principle. It is comprehensible and consistent with the fundamental principle of the common law respecting chattels and an owner’s rights respecting their use. At the same time, it 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 in equity.”

In its adoption of the exhaustion doctrine, the High Court made it clear that the most important question is whether the modifications performed by the purchaser of a patented product result in the making of a new product that falls within the scope of the claims of the patent. If so, then infringement has occurred. In this case, the High Court, with reference to the claims of the Epson patents, found that the modifications by Calidad did not amount to making of a new product that fell within the scope of the claims of the patents and thus there was no infringement.

The most important lesson from the decision is that the purchaser of a patented product may modify the product without fear of infringement of the patent relating to the patented product but only to the extent that a new product falling with the scope of the claims of the patent has not been created.

This question of whether a new product has been made must be considered within the context of the claims of the patent rather than the originally manufactured product.

If you would like to discuss your patent concerns, please contact us to arrange a free initial consultation with one of our patent attorneys.