High Court adopts Exhaustion Doctrine for patent products, jettisoning the ‘implied licence doctrine’ in Australia

On 12 November 2020 the High Court delivered its much anticipated decision in Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA (Calidad v Seiko). This decision is about patent rights and the extent to which they apply following the first sale of patented goods to a purchaser. When a patented product is first sold, can the patentee dictate the way in which the purchaser may use the product relying on an implied licence, or are the patentee’s rights exhausted after that first sale? On appeal from the Full Court of the Federal Court of Australia, the High Court found that the patentee’s exclusive rights to hire, sell, use or otherwise dispose of the patented product are exhausted after sale, departing from over 100 years of case law which used the implied licence doctrine.

Facts

Seiko Epson Corporation (Seiko) manufactures and sells single use patented printer cartridges under the brand name ‘Epson’ (the Original Epson Cartridges). Ninestar Image (Malaysia) SDN BHD (Ninestar) acquired the Original Epson Cartridges from various sources and modified them so that they could be refilled and re-used. Calidad Distributors Pty Ltd, in connection with its related companies (together, Calidad) purchased these cartridges from Ninestar and sold them in Australia. Seiko asserted that Calidad infringed its patent by importing and selling the repurposed cartridges.

The decision of the High Court

The exclusive statutory rights of a patentee to exploit a patented product include the rights to ‘make, hire, sell or otherwise dispose of the product’ and to ‘use it’[1]. In their majority judgment, Kiefel CJ, Bell and Keane JJ (with Gageler JJ agreeing), clearly distinguished between a patentee’s rights with respect to the sale and use of a patented product once it is sold and the patentee’s exclusive right to make a product embodying the essential features of the invention.

The majority’s decision emphasised that the patentee retains the exclusive right to make the product in the first place, so a critical question for the Court was whether the modifications to the Original Epson Cartridges amounted to the ‘making’ of the patented product or whether they were permissible alterations to improve the usefulness of the product and enable its reuse. Finding that the modifications were directed towards improving the usefulness of the Original Epson Cartridges, the Court concluded that the modifications did not involve the replication of parts and features of the invention claimed. There was no true manufacture or construction of a cartridge which embodied the features of the patent claim and as a result there was no patent infringement.

While the modifications to the Original Epson Cartridges were not found to be infringing, the majority confirmed that modifications to a product could result in the ‘impermissible making of a new product’. In doing so, however, the decision made it clear that any such assessment must be made by reference to the claims of the patent and not by reference to a characteristic of the product as sold (in this instance for example, by focusing on the ‘single use’ nature of the Original Epson Cartridges). In response to this aspect of the decision, we can expect Patent Attorneys to adapt their claim drafting to capture future uses of a product to improve the prospects of a finding of infringement.

The majority observed that their finding with respect to infringement was true, whether or not the exhaustion doctrine or the implied licence doctrine was applied. This was, however, the first time the High Court had the opportunity to decide which doctrine should be applied in Australia.

The majority was critical of the implied licence doctrine, describing it as ‘complicated in its operation and effects’[2]. Importantly, it was observed that the licence upon which the doctrine depends is a fiction – it originates from the courts in an attempt to resolve a perceived tension in the law.

The majority favoured the exhaustion doctrine for its virtues of ‘logic, simplicity and coherence with legal principle’[3]. The exhaustion doctrine is consistent with the fundamental principle of law which recognises that an owner has full rights as to the use and disposal of a chattel. Further, the majority explained that the exhaustion doctrine ‘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’[4]. The majority’s decision brings Australia’s patent laws further into line with the United States and Europe, which have a well-established body of jurisprudence in favour of the doctrine of exhaustion.

With the abandonment of the implied licence doctrine, patentees will need to rely on contractual provisions, where appropriate, to restrict the after sale uses of patented products. It remains to be seen just how effective the reliance on contract will be for patentees (for example, patentees will need to be cognisant of the ‘unfair contract term’ provisions of the Australian Consumer Law and the extent to which they can practically bind a subsequent purchaser of the patented product to post sale terms) and whether contract alone is capable of giving patentees the type of control of their inventions that they typically seek or expect. One likely outcome is that we will see more breach of contract and fewer patent infringement cases being litigated in the future.

Survival of the implied licence doctrine?

One salient message throughout the majority’s decision, is that certainty in trade and commerce should be prioritised and that the maintenance of patent rights following sale of the product is not conducive to the free flow of goods in a market. This position is reflected in Australian trade mark and design laws which, over the course of the twentieth century, have recognised the benefits of facilitating the parallel importation of legitimate goods, and consequently the exhaustion of trade mark and design owners’ rights. With exhaustion principles now well established under Australian patent, trade mark and design laws, doubt is cast over the role the doctrine of implied licence will continue to play under Australian copyright laws, where it is very much alive and well.

Australia has long been an advocate of allowing the parallel importation of legitimate goods. There are various policy reasons for this, a key one being the potential harm to local consumers caused by excessive restrictions on such trade. With the introduction of a new defence to trade mark infringement contained in section 122A of the Trade Marks Act 1995 (Cth) (TMA) (which came into effect on 25 August 2018) (the new Parallel Import Defence), it is argued that ‘Australia now has the most liberal trade mark exhaustion regime of any major jurisdiction’.[5]

In short, the new Parallel Import Defence applies if the parallel importer or reseller reasonably believed that the mark was originally applied to the goods by or with the consent of the owner, or a range of other parties, with ‘consent’ being defined in exceptionally broad terms. In reversing the typical onus of proof, if an importer/reseller forms such a reasonable belief it will not be liable for infringement unless it continues the offending conduct after information regarding the lack of consent to application of the mark is brought to its attention. Finally, critically, the new Parallel Import Defence does not turn on whether the imported/resold goods have been altered, repackaged or relabelled, or if there are material quality differences between the imported/resold goods and those supplied locally by or under the licence of the trade mark owner.

The new Parallel Import Defence applies the principle of ‘international exhaustion’ to the effect that the trade mark owner’s rights are exhausted once they market their goods in their home jurisdiction. Brand owners can still take action against importers/resellers but are more likely to have success relying on alternative causes of action to trade mark infringement.

The exhaustion principle also exists in the Australian designs regime, by virtue of s 71(2) of the Designs Act 2003 (Cth). Section 71(2) permits parallel imports but is in no way as comprehensive or as liberal as the analogous new Parallel Import Defence in the TMA. It provides that it is not an infringement to import a product which embodies a design (or one substantially similar to it) if the design has been embodied in the product with the licence or authority of the registered owner of the design. The defence intends that ‘pirate’ imports will infringe, but that ‘genuine’ products will not.

There are some inherent flaws with the defence (for example, it does not specify that selling, hiring, offering for sale or hire, using or keeping such imported products for the purposes of trade or business is not an infringement also, though this is generally assumed), but based on current reforms to Australia’s design system, it doesn’t appear that amendments to the defence will occur anytime soon. It is likely the s 71(2) defence has received less attention because the volume of relevant parallel imported goods is not as significant as in the trade mark space. However, if the Government’s motivation to increase competition continues, in time we might expect to see similar amendments to the s 71(2) defence.

The doctrine of implied licence has been widely employed under Australia’s copyright laws, particularly in relation to the rights purchasers of copyright works (such as brand logos, architects drawings, photographs, written documents) have to make use of those items. The rationale for implying a licence is that someone who pays for copyright material to be produced for their use should be permitted to use it for that purpose. Identifying and applying the implied licence is fraught with challenges, not least because the implication is to be drawn from all of the relevant circumstances existing at the time of the agreement, including what the parties then contemplated, objectively assessed[6].

The implied licence doctrine was recently applied in a case involving photographs and floor plans used by real estate agencies to advertise properties for lease or sale. In Hardingham v RP Data Pty Ltd [2019] FCA 2075 (Hardingham v RP Data), the Court was required to decide whether real estate analysis and information provider Core Logic (RP Data Pty Ltd) (RP Data) had a licence to reproduce content created by Mr Hardingham and owned by his company, Real Estate Marketing Australia Pty Ltd (REMA) (together, the Applicants). RP Data obtained the photographs and floor plans from realestate.com.au Pty Ltd (REA) who were provided with the content from agencies that had dealt directly with Mr Hardingham.

The Applicants accepted that the content Mr Hardingham generated was impliedly licensed to agencies for the purpose of marketing (with a right to sub-licence), but argued that the licence was limited only to use the photographs and floor plans for the limited purpose of marketing for sale or lease. The Applicants objected to RP Data’s use of the photographs and floor plans once the sale or lease of a property was completed. In the absence of evidence demonstrating any formal written contract between the applicants and agencies, the Court was required to understand the context in which the parties dealt with each other and what the terms of the contract were. This assessment did not work in the Applicants’ favour. The Court concluded that either as a result of the conduct and interactions between the Applicants and the agencies, or due to a term implied in the agreement between the Applicants and the agencies necessary for business efficacy:

‘the applicants agreed that the agencies were authorised, by way of licence from the applicants, to upload the photographs and floor plans to the realestate.com.au platform and grant to REA a licence in the form required by REA and contained in REA’s usual terms and conditions’.[7]

The Court further found that ongoing publication of photographs and floor plans on realestate.com and corelogic.com.au was so commonplace that that Mr Hardingham knew full well of the uses that would be made by the real estate agents, their sub-licensees (REA) and further sub-licensees (RP Data). In this case the implied licence was open to considerable interpretation against the surrounding factual matrix and circumstances. It demonstrated the potential lack of certainty in the scope of the implied licence and illustrated that clear express licence terms are much preferable.

In light of the decision in Calidad v Seiko and the clear adoption of the doctrine of exhaustion in Australia’s trade mark and design laws, one is left wondering just how satisfactory the outcome in Hardingham v RP Data and similar cases is and whether this course of jurisprudence can continue in the current climate. It feels a long way from the ‘certainty demanded by trade and commerce’[8] that the majority espoused in Calidad v Seiko and begs the question of whether the ‘implied licence doctrine’ has any continuing place in Australian IP law.

Authored by:

Alana Long, Senior Associate
Stephanie Rawlinson, Associate

[1] Patents Act 1990 (Cth), s 13(1), Sch 1 (definition of ‘exploit’).

[2] Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41, [77]

[3] Ibid., [76]

[4] Ibid., [76]

[5] Handler, Michael ‘Rethinking Trade Mark Exhaustion: Does Australia’s New Defence Offer a Way Forward?‘ [2019] UNSWLRS 93

[6] Beck v Montana Constructions Pty Ltd [1964-5] NSWR 229 [235]

[7] Hardingham v RP Data Pty Ltd [2019] FCA 2075, [75]

[8] Calidad Pty Ltd v Seiko Epson Corporation, [82]