Australian Patent Law Update – The High Court reversed more than 100 years of law, favoring the US Doctrine of Exhaustion
At the end of last year, the High Court of Australia reversed more than 100 years of precedent when it put down its decision in Calidad Pty Ltd v Seiko Epson Corporation  HCA 41 (Calidad v Seiko).
Rather than agreeing with the current concept of 'implied licence,' the High Court in its decision followed the US Common Law Patent Doctrine, which provides that the patentee's exclusive rights over its inventions are 'exhausted' after the sale (the exhaustion doctrine).
Seiko Epson Company, the defendant in the lawsuit, made and marketed printer cartridges under the brand name 'Epson' (Epson cartridges). The Epson proprietary cartridges were a single-use item which means the cartridge had to be discarded and substituted as soon as the cartridge's ink had been used. SDN BHD obtained and changed empty Epson pads to allow the pads to be refilled. Ninestar Image (Malaysia), SDN BHD The claimant, Calidad Pty Ltd (Calidad), then bought the updated cartridges and shipped them for public sale into Australia. Calidad used the implied license doctrine to contend that it did not directly infringe the patent of Calidad since an implied license was applied to the commodity on initial distribution, which involved the use, repair, manufacture, shipment, resale, or other disposal of Epson cartridge. Seiko alleged that the alterations to the proprietary Epson cartridges had extinguished every implicit permission. Calidad violated Seiko's rights as the patentee by the manufacture and sale of the changed cartridge.
Implied Licence Doctrine:
The 'implicit license' doctrine lays down that the patent extends the implicit permission for use by the purchaser (and by any later purchaser) to use the product when the patented product is sold by or with the permission of the patented individual and when the subsequent use or use of the patented product is unrestricted.
An effort to align Australian patent law with the established law principle emerging from the implicit license doctrine given is that the consumer of a product is the owner of that product and has the sole right to use and disposal the product as he deems fit. The implicit license doctrine was designed to remedy the legal tension resulting from the purchaser (legal owner) of a patented product who wishes this product to be disposed of without the patentee's consent.
Initially in Calidad v Seiko, Calidad and Seiko ran their respective arguments regarding the implied licence doctrine.
In the first case, Burley J found that the Epson cartridge had been altered beyond the scope of the licence and thus that Calidad had infringed the Patent Rights of Seiko, which was such a drastic improvement.
On appeal, the Full Court disagreed with Burley J's logic and declared that the matter to be resolved was whether the Epson cartridge alterations came within the implied license scope. The Full Court ruled that the changes were not included by the implied license and agreed with Seiko's claims that Calidad had thereby violated the patent.
Calidad pleaded in appeal to the High Court that, concerning the implicit license doctrine, the Court could extend exhaustion and, by 4:3 plurality, the High Court agreed.
The exhaustion doctrine
According to the exhaustion doctrine, a patentee's rights concerning their patented products are 'exhausted' once those products are sold without any restrictive conditions for their use.
The majority of the High Court acknowledged that the basic discrepancies between the doctrine of the implied license and the doctrine exhaustion are the ones that follow:
The implicit license doctrine states that the patentee's rights concerning their patented products shall endure the sale of such products. According to the implied license doctrine, a patentee may apply for a license. The qualification may be 'forced as a matter of common sense,' as opposed to compliance under contract law.
The doctrine of exhaustion assumes that the patentee's rights concerning their proprietary products are exhausted by selling such products. That is, 'the sale takes the product outside the patentee's monopoly rights' scope. The patentee may restrict the purchaser's use of the product by way of contract.
High Court Judgment
The majority opinion was that the implied license doctrine is 'complicated' and is only capable of achieving partial compliance with the fundamental principle of chattel law 'when it is clear that no restrictions were enforced at the point of the first sale.
The High Court held that the doctrine of exhaustion had been adopted and that any implicit license had been exhausted on sale. The Court, therefore, ruled in favour of Calidad. The changes made to the Epson cartridges were deemed to come within the limits of the rights that the consumer (and thus the legitimate owner) of the product had to extend the life of the product and thus did not represent a 'making' of the patented product of Seiko. The import and sale of Epson cartridges by Calidad were held not to constitute an infringement on Seiko's rights.