|End-of-day quote - 01/25|
Seiko Epson : High Court Of Australia Allows Sale Of Modified Cartridges, Adopts Exhaustion Doctrine Over Implied Licence
|11/25/2020 | 07:13am|
The two competing doctrines - 'implied licence' and 'exhaustion'
The key question brought before the
This question required the
According to the implied licence doctrine, the sale of a patented product by or with the consent of the patentee includes an implied licence that the purchaser may use the product as they see fit without infringing the rights of the patentee. The patentee may attach conditions to the sale to control how the product may be used. However, a subsequent purchaser will only be bound by these conditions if they knew about them when they purchased the product.
The doctrine of exhaustion, on the other hand, holds that the rights of a patentee come to an end (are exhausted) when the patented product is first sold by, or with the authorisation of, the patentee. The patentee may enter into a contract with a purchaser to limit how the purchaser may use the patented product. However, in the event that the purchaser breaches these conditions, the patentee will have a cause of action for breach of contract, not patent infringement.
While the differences between the two doctrines may be semantic in some cases, there are significant practical consequences of adopting one doctrine over the other with respect to the remedies available to the patent owner. Because under the exhaustion doctrine a patentee's rights against a purchaser who does not abide by the patentee's conditions are limited to breach of contract, the adoption of this doctrine means that the patentee is not entitled to seek an injunction under the Patents Act in the event that a purchaser breaches its obligations. In addition, under the exhaustion doctrine, subsequent purchasers can do what they like with the product (including parallel importation), even if they know about the conditions the patentee put on the first sale of the product.
Calidad's sale of modified and re-filled single-use Seiko printer cartridges
As set out in our previous article on the original single-judge decision,
The Patents do not concern the technology used to render the cartridges unusable after one use, but rather were primarily directed to the layout of the electrical terminals in the cartridges which was designed to prevent a short circuit if spilt ink joined the terminals.
It was common ground that the Calidad Cartridges embodied the inventions claimed in the Patents. The relevant question was whether Calidad was protected from Seiko's patent infringement claim because the Calidad Cartridges were simply modifications of Epson Cartridges originally sold by Seiko.
The Federal Court proceedings
On appeal, the Full Court unanimously found that all the Calidad Cartridges infringed the Patents. The Full Court held that the modifications performed on the Epson Cartridges by
Regardless of the doctrine, the
According to the majority, the Full Court had erroneously focused on the fact that the cartridges were designed for a single use (making reference to Seiko's intentions).
The relevant question was whether the activities of
The majority considered that
This reasoning indicates that the
While this was sufficient to resolve the appeal, the majority nevertheless held that the doctrine of exhaustion should be adopted in
1. The doctrine of exhaustion is logical and simple, whereas the implied licence doctrine may give rise to difficult questions concerning whether restrictions were imposed on a purchaser and whether subsequent purchasers knew about these restrictions when they purchased the product.
2. The doctrine of exhaustion is coherent with a fundamental tenant of the common law that respects the right of owners of chattels to use those chattels.
3. The implied licence is a legal fiction. It arises without any explicit agreement and also cannot be implied into the sale of goods by traditional means.
4. The implied licence doctrine is not consistent with the certainty demanded by trade and commerce, which requires that the owner of a chattel should have full rights to use and dispose of that chattel. The implied licence cuts across this by treating a restriction on the use or sale of the product as running with it, binding all subsequent owners with notice of the restriction.
5. The doctrine of exhaustion has been adopted in other jurisdictions, including
6. The doctrine of exhaustion is not inconsistent with the rights conferred on a patentee by the Patents Act, which are negative in nature. The definition of "exploit" in the Patents Act, which defines the monopoly of a patentee, does not suggest that the sale of a patented product should be understood any differently to an ordinary sale which carries with it the unrestricted right to use the purchased product.
7. The doctrine of exhaustion is consistent with the purposes of the Patents Act, which include ensuring the efficiency of the market economy and encouraging innovation. These objectives are achieved by ensuring that a patentee is rewarded for their efforts through the sale of a product embodying their invention. There is nothing to suggest that a patentee should be rewarded more than once.
8. The extrinsic materials to the Patents Act and its predecessors do not suggest that the Patents Act was premised on either doctrine, which leaves the adoption of either doctrine open to the courts.
9. The implied licence doctrine has only been applied in a handful of decisions and, as such, no great inconvenience would be caused by abandoning it.
10. Justice Gageler also considered that amendments to the Competition and Consumer Act 2010 (Cth) last year already limited the extent to which patentees are entitled to apply restrictions on the use or resale of patented goods by purchasers.
The minority held that the implied licence doctrine should be followed
Justices Nettle, Gordon, and Edelman held that the implied licence doctrine should continue to apply in
1. The implied licence theory is longstanding in Australian and
2. Adopting the doctrine of exhaustion would diminish the rights granted to patentees under the Patents Act, which should not occur unless there is a "principled reason" for such a change.
3. A change of this nature is a question for the legislature, not the courts.
4. Considering whether the doctrine of exhaustion should be applied is unnecessary in order to resolve the appeal in question and, as such, this case is not a suitable vehicle for the resolution this issue.
5. The rights of a patentee are not merely negative rights, but also include a positive right to vend (sell) the invention. As such, the implied licence doctrine is consistent with the rights of a patentee under the Patents Act, which include an implicit freedom for patentees to grant rights to deal with patented products conditionally as they see fit. This positive right would be limited by adopting the doctrine of exhaustion.
6. The implied licence doctrine is consistent with equitable principles that bona fide purchasers for value without notice take their rights free from prior interests, whereas purchasers with notice of restrictions may take their rights subject to these restrictions.
7. The doctrine of exhaustion has been developed and applied overseas, in different legal contexts to
8. At the time the Patents Act was enacted, it was settled law that the implied licence doctrine applied in
The minority held that some cartridges but not others had infringed the Patents
The dissenting judgment then considered whether Calidad had infringed the Patents.
The minority agreed with the majority that it was irrelevant whether the doctrine of exhaustion or the implied licence doctrine was applied in this case, and also that the nature of the Epson Cartridges as single use goods was "largely irrelevant" to this question.
The minority therefore held that most of the Calidad Cartridges were protected by the implied licence, for reasons similar to that of the majority.
In the case of some cartridges,
Take home points for practitioners, patentees, and purchasers of patented products
Companies which run similar businesses for repairing, modifying or refurbishing goods will be reassured by the outcome, as will companies which conduct third party repairs on patented goods such as smartphones. The judgment also confirms the rights of individuals who purchase products, which include the right to re-sell, repair, or modify these goods.
Notwithstanding this, the
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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