Australian High Court overturns 150 years of precedent to adopt exhaustion of rights doctrine for patented products

It is a broadly accepted principle of patent law throughout the world that patent rights in a product are exhausted on sale. The product become the personal property of the purchaser who may then dispose of it as they see fit, including resale. Despite this generally accepted principle, there is no international agreement on exhaustion of rights of patented products. There is significant divergence in legal practice on exhaustion, for example in the geographical limitations placed on exhaustion by different jurisdictions. On the general legal principle of exhaustion itself, Australia has long been a important outlier, favouring a practically similar but conceptually opposed "doctrine of implied licence". In a first of two posts on the exhaustion of rights, this Kat takes a look at a high profile recent case from Australia, in which the Australian High Court over-turned more than150 years of precedent to firmly establish the doctrine of exhaustion in Australian patent law. 

Australia's implied license doctrine

Australia has long lacked an exhaustion of rights doctrine. A decision of the Privy Counsel in 1911, instead established a "doctrine of implied license" (Menck). Under the doctrine of implied license, patentees were held to retain some of their rights to a patented product after sale. In order to align this position with consumer practice, the patentee was assumed to have granted the buyer an implied license for the patented product by the process of sale. 

Importantly, the implied licence was a legal fiction. The implied licence was not a "real" licence granted by a patentee to a purchaser of a patented product, but was implied for the sake of resolving a legal tension between the position that patentees retain rights in a patented product after sale, and consumer rights. By contrast, the doctrine of exhaustion leaves no patent rights to be enforced following the initial sale of a patented product, although conditions of sale distinct from the patent right may of course be negotiated. Canada is another jurisdiction that holds onto an implied licence doctrine in place of explicit exhaustion of rights. 

The Adoption of Exhaustion of Rights in Australia

The case in question related to the resale of Epson's single-use printer cartridges. A Malaysian company (Ninestar Image) acquired empty Epson cartridges from customers and refilled them with ink for re-use. The re-fill procedure was relatively straightforward. An Australian company (Calidad) imported the re-filled cartridges into Australia for resale to the public. Epson sued Calidad for infringement of their Australian patents (AU 2009233643 and AU 2013219239) covering the cartridges (Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41). 

A criticism of Australian implied license doctrine was that it was unnecessarily complex. This was the view of the Australian High Court in Calidad v Epson. The Australian High Court majority (4:3) decision overturned the use of the implied license doctrine as the appropriate legal test. The established use of the doctrine of exhaustion by the US Supreme Court and CJEU was noted. It was further argued by the judges in favour of the doctrine of exhaustion that the concept of the implied licence was complex, unclear and outdated: "The prospect that restrictions might be imposed on the further use or sale of a patented product after its first sale may be more theoretical than real now. Even if such restrictions were acceptable to consumers, they would face the hurdle of modern statutes concerned with anti-competitive conduct in the market" (paragraph 77).

Printer re-fill

It is worth noting, however, that the case did not turn on whether a doctrine of implied licence or doctrine or exhaustion should be applied. The main dispute in the case was instead whether Ninestar's refilling process amounted to the making of a new product (and thus not subject to the doctrine of exhaustion) or the simple repair and reuse of an exhausted product (a permitted act under the doctrine of exhaustion). The Australian High Court found that Calidad's import of the printer cartridges did not infringe Epson's patents, as refilling the cartridges did not constitute the making of a new product. 

The simplification of the Australian law in line with other major jurisdictions on this crucial principle of patent law is a welcome harmonisation. The full decision is also worth a read for its exploration of the crucial moral and legal unpinning of the doctrine of exhaustion, that many of us may take for granted.