18 April, 2018
Seiko Epson Corporation v Calidad Pty Ltd [2017] FCA 1403
What you need to know
There is a presumption of an “implied licence” that arises automatically upon the unconditional sale of a patented product.
Unless qualified, the implied licence will carry with it a right to use, maintain, import/export, resell or otherwise dispose of the product, as the purchaser (or a subsequent owner) sees fit.
Being implied, this licence can be excluded by express terms, provided that the purchaser is given notice of those terms at the time of sale.
On the other hand, goods which are materially altered in a process of repair or modification may be taken outside the scope of the implied licence, such that their importation or resale may involve patent infringement.
What you need to do
Patent owners who wish to prevent consumable products being refurbished and resold should review their terms of sale to ensure that such conditions are imposed in express terms and clearly brought to the purchaser’s attention at the time of sale.
Wherever practicable to do so, these conditions should also be brought to the attention of any person who subsequently purchases, or otherwise acquires, the (used) goods. If practicable, it will generally also be desirable for the patent owner, at the time of first sale, to oblige the purchaser to bring such conditions to the attention of anyone who subsequently acquires the (used) goods.
Background
The decision of Justice Burley of the Federal Court of Australia in Seiko Epson Corporation v Calidad Pty Ltd [2017] FCA 1403 examines a myriad of intellectual property issues spanning patent and trade mark infringement, breach of statutory duty and misleading or deceptive conduct.
The case examines the extent to which intellectual property rights may be used to prevent consumable products being restored and resold by a competitor. This article focuses on one aspect of the case: the scope of a purchaser’s right to repair or remanufacture a patented product, and the circumstances under which the importation of such a product into Australia for resale might amount to patent infringement.
This decision examines some novel questions of law and has important implications for both Original Equipment Manufacturers and Remanufacturer businesses.
The Seiko products
Seiko Epson (Seiko) sells Epson-branded printer cartridges worldwide. The Epson cartridges embody the invention claimed in the Seiko Australian patent (Patent No. 2009233643). The printer cartridges have memory chips programmed to recognise when a cartridge is spent. This protects the user’s printer from damage, but also prevents the cartridges from being refilled and reused, if the memory in the chip remains intact. This mechanism was circumvented by a third party who refurbished and refilled the cartridges overseas. The cartridges were then imported and resold in Australia by Calidad Distributors (Calidad), in competition with the original Epson cartridges.
Two methods were used to refurbish the Epson cartridges. In some cases, the memory chip was reprogrammed. In other cases, the entire circuit board was removed, a new memory chip inserted, and the modified circuit boards refitted to the cartridges. Some cartridges were further modified to allow them to be used with a wider range of Epson printers than originally intended.
Seiko claimed that Calidad infringed its Australian patent by importing and selling its printer cartridges in Australia. Calidad accepted that its cartridges fell within the Seiko Australian Patent, but claimed it had the benefit of an implied licence to import and sell those cartridges in Australia.
Patent rights vs property rights
The central issue at stake in the proceedings was the right of a patentee to control what may be done with a patented product, once sold. This problem gives rise to a conflict between a patentee’s exclusive right to “exploit” the patented invention under the Patents Act 1900 (Cth), and the rights of property ownership in a chattel at common law. This tension has been addressed by two competing forms of judicial reasoning, namely the doctrine of “patent exhaustion” (recently endorsed by the US Supreme Court in Impression Products v Lexmark (2017) 581 U.S. 1523), and the notion of an “implied licence” (adopted in the UK and Australia, most notably in the Privy Council decision in National Phonograph Co of Australia Ltd v Menck(1911) 12 CLR 15).
The doctrine of exhaustion posits that upon the first authorised sale of a product by or with the consent of a patentee, all patent rights in the invention are exhausted. By contrast, the implied licence doctrine posits that an unconditional sale of a patented product confers on the purchaser an implied licence to use and resell that product without infringing the patent, subject to any conditions imposed by the patent owner and brought to the purchaser’s attention at the time of sale.
Consistent with applicable Australian authority, Calidad’s defence to infringement was founded on the implied licence doctrine (although it contended that, after selling the original Epson cartridges, Seiko’s rights to control the subsequent use of those products were, in effect, “exhausted”).
The central question
Seiko challenged Calidad’s “implied licence” defence on a number of bases. Amongst other things, Seiko contended that the Epson printer cartridges were sold subject to “implied conditions” preventing their refurbishment or resale, in the form of technical restrictions built into the cartridge memory chips. Justice Burley rejected this argument, noting that other explanations for the technical restrictions were available (eg, preventing printer damage) and explaining that the Court would be slow to infer that implied conditions had been imposed at the time of sale where the patent owner could have done so in express terms, but did not.
In an alternative argument, Seiko contended that the modifications made to the cartridges prior to their importation and resale took those products outside the scope of any implied licence.
Accepting the proposition that modification could take the refurbished goods outside the scope of the implied licence arising from an unconditional first sale, Justice Burley held that the question of whether Calidad’s refurbished cartridges fell within, or outside, the implied licence was not to be determined by comparing those goods to the original Epson cartridges, because:
“The question is not whether or not the product was altered or repaired, but whether the product, insofar as it is an embodiment of the invention as claimed, was materially altered, such that the implied licence can no longer sensibly be said to apply.” [emphasis added]
His Honour proceeded to formulate a three-step test to assist in deciding when modifications will extinguish an implied licence:
- first, what is the scope of the invention as claimed;
- second, what is the manner in which the patent owner’s product is an embodiment of the invention as claimed; and
- finally, to what extent do the modifications made affect the patented product insofar as it represents an embodiment of the patent claims.
Noting that memory chips were an integer of the claims of the Seiko Australian Patent, Justice Burley held that, where refurbishment had involved physically removing and replacing memory chips, a material change to the embodiment of the invention had occurred. The resulting Calidad cartridges were held to fall outside the implied licence and so infringe Seiko’s patent.
By contrast, where refurbishment had merely involved reprogramming the memory content of the original chips, Justice Burley found that no material change had occurred, noting that the claims of Seiko’s patent were silent as to the content of the memory chips. In respect of these cartridges, Calidad was held to have the benefit of an implied licence to import and sell the products in Australia, without infringing the Seiko Australian Patent.
Extinguishing an implied licence?
In assessing whether modifications had taken the Epson cartridges outside the scope of the implied licence arising from their unconditional sale, Justice Burley briefly reviewed English authorities concerning the dichotomy between “repair” of patented goods (generally permissible) and “remaking” of those goods (typically an infringement). His Honour considered those authorities did not provide an answer to the central question raised in this case. Arguably, however, the concept of a “material” alteration which takes goods outside the scope of an implied licence might alternatively be viewed as an impermissible “remaking” of those goods, along the lines discussed in the UK cases. It will be interesting to see how an appellate court views this question, should an appeal take place in the instant case.
The contrasting US and Australian approaches – does it matter?
A key practical difference between the US “patent exhaustion” doctrine and the “implied licence” doctrine applied in the present case is the scope of remedies potentially available to a patent owner.
Under the US approach, following a first sale of its product, a patent owner may have a claim in contract against a purchaser who breaches the terms of sale, but will have no ongoing patent rights to assert. The implied licence approach has the potential to afford the patent owner both contractual and patent claims against such a purchaser.
For patent owners, the latter approach provides greater flexibility and is therefore likely to be preferred.
For further information please contact:
Andrew Rankine, Partner, Ashurst
andrew.rankine@ashurst.com
