A recurring question often put to Australian IP lawyers is whether Australian law recognizes a doctrine of exhaustion of patent rights, says Helen Macpherson, a partner at Baker McKenzie in Sydney. “Patent exhaustion (alternatively referred to as the ‘first sale’ doctrine) is a judicial doctrine which limits a patentee’s exclusive rights conferred by the grant of a patent. The effect of the doctrine is that the patentee’s exclusive rights in respect of a patented product come to an end (i.e. are ‘exhausted’) by the first authorized sale of the patented product by the patentee or its licensee. The purchaser is then permitted to use, repair and resell the product without liability for patent infringement.”

Whether Australian law recognizes the doctrine of patent exhaustion is a question which is relevant to owners of Australian patents wanting to know how, and to what extent, patent law can be used to control the subsequent re-sale and use of their patented products, Macpherson says. “It is also relevant to any purchaser of patented goods who is considering altering those goods, for example, the purchaser of a single use medical device who, after use of the device, ‘refurbishes’ the device so that it can be re-sold or re-used. Will such alteration constitute patent infringement and would the answer differ depending on whether the doctrine of patent exhaustion is recognised in Australia?”

To date, the answer has been “no,” Australian law does not recognize a doctrine of patent exhaustion, she says. “However, the answer to this question may be about to change, as this question is the subject of a pending High Court of Australia decision.”

On August 11, 2020, the High Court of Australia heard the appeal in Calidad & Ors v. Seiko Epson Corporation & Anor (S329/2019). In this appeal, the High Court was asked, inter alia, to consider whether a patentee’s rights under the Australian Patents Act are exhausted at the point of first authorized sale of a patented product.

The High Court’s consideration of this question comes more than a century after the High Court first considered this issue in the 1908 case of National Phonograph Co of Australia v. Menck (1908) 7 CLR 481. In that case, the High Court held that a patentee selling a patented product exhausted all patent rights in the product and had no power to impose limitations on what might be done with the patented product. The High Court’s decision in Menck was overturned by the Privy Council, who held that the patentee’s sale of a patented product carried with it the full right of ownership in that product, subject to any limitations imposed by the patentee at the point of sale.

“So how has this question come before the High Court again? And what might the implications be for owners of Australian patents and users of patented products should the High Court decide that the doctrine of patent exhaustion is a part of Australian law,” asks Macpherson.

The Calidad v Seiko Facts

In Calidad v Seiko, Seiko Epson Corporation, a Japanese manufacturing company, sold or authorized the sale of cartridges worldwide. After their sale, Ninestar Image obtained some of the already used cartridges, modified and refilled these cartridges and then sold them to Calidad which imported them into Australia and sold them. Seiko (and its exclusive Australian licensee) alleged that Calidad had infringed its Australian patent by importing, offering for sale and selling the printer cartridges in Australia.

The Full Court, following the Privy Council decision in Menck, proceeded to determine whether Calidad’s conduct constituted patent infringement on the assumption that Australian law did not recognize the doctrine of patent exhaustion. The Full Court considered whether Calidad’s conduct was permissible pursuant to an implied licence derived from Seiko’s unrestricted sale of the original printer cartridges. Applying implied licence principles, each of the Full Court Judges held, in separate judgments, that Calidad’s modifications were not encompassed by the scope and content of any implied licence, Macpherson says. “In summary, this was because the judges considered that, in substance, the modifications amounted to a remanufacture of the discarded original cartridges to produce ‘reborn’ printer cartridges, and the implied licence did not encompass such remanufacture. Such remanufacture constituted an unauthorized “making” of the patented cartridge, so infringing the Seiko patent.”

During the conduct of the Full Court case, Calidad reserved its right to appeal on the question of whether the doctrine of patent exhaustion formed part of Australian law.

Would the outcome be different if the doctrine of patent exhaustion is a part of Australian law?

In major markets such as the United States, the doctrine of patent exhaustion is recognized. So, Australian law will fall into line with these major markets, should the High Court hold that the doctrine of patent exhaustion forms part of Australian law.

“Whether this will change the ultimate finding on patent infringement will depend on the characterization of Calidad’s conduct,” Macpherson says. “As Calidad accepted in its submissions, a doctrine of exhaustion would not permit the remanufacture of a patented product or supply of such a remanufactured product, as distinct from modifying or repairing the patented product or supplying that modified or repaired product. This is consistent with the US authorities on the doctrine of patent exhaustion.”

Relevantly, in the factually analogous case of Impression Products v. Lexmark International 137 S Ct 1523 (2017), the US Supreme Court considered whether the sale of single use printer toner cartridges acquired and refilled by a third party constituted patent infringement. Applying the doctrine of patent exhaustion recognized under the US law, the Supreme Court held that there was no infringement because the patentee’s rights had been exhausted upon first authorized sale of the original patented goods. However, it appears that in that case Lexmark did not argue that the third party’s conduct resulted in the making of new articles.

“So, whether a doctrine of patent exhaustion or implied licence principles are applied, it is clear that, if a purchaser remanufactures a patented product, such a remaking will constitute patent infringement. This means that, regardless of the outcome in Calidad v. Seiko, much will depend on an analysis of the conduct in issue, including possibly the circumstances of the sale of the patented product, and also a characterization of the invention claimed in the patent,” Macpherson says. “For example, in Calidad v. Seiko, Seiko argued that the fact that the printer cartridges were sold as ‘single use’ products was relevant to whether Calidad’s conduct constituted repair or re-manufacture, the argument presumably being that any ‘second life’ for the cartridge must constitute a re-making. Calidad, however, disputed whether this was a relevant factor for the High Court’s consideration, arguing that only the conduct in issue and characterisation of the invention claimed in the patent were relevant.”