Repurposing patented products: Inking a new test for infringement in Australia?

Kat friend Tyrone Berger has provided us with a report about the latest judicial treatment in Australia of an implied license in connection with a patent litigation action.

For many jurisdictions, the issue of repurposing a patented product is an issue of exhaustion. Not so in Australia, where, as the case below, Calidad Pty Ltd v Seiko Epson Corp [2019] FCAFC 115, 5 July 2019, shows, the relevant test is whether an implied license can be successfully asserted by the alleged infringer.

It is well known that printer manufacturers employ a range of strategies to thwart their ‘generic’ competition, including resorting to IP. But when it comes to the issue of repurposing or refilling printer cartridges, the law is less than clear with regard to enforcing IP rights. Seiko Epson Corp is a global manufacturing company that inter alia sells Epson-branded printer cartridges in Australia. Calidad Pty Ltd purchased refilled Epson cartridges subject to patent protection and originally sold by Seiko, and then imported the used cartridges to Australia.

In dispute

The printer cartridges were modified overseas by Ninestar Image (Malaysia), which enabled their reuse in Epson branded printers. Calidad then imported them as ‘refills’ for subsequent sale. Seiko contended that the importation and sale of Calidad cartridges infringed two Australian patents (Nos 2009233643 and 2013219239). Calidad did not dispute that the refilled cartridges fell within the scope of the patent claims. Rather, Calidad submitted that it was the beneficiary of an implied licence, which allowed it to legitimately import and sell the cartridges in Australia.

The question for the Full Court (Greenwood, Jagot and Yates JJ) of the Federal Court was whether a patent holder can prevent the commercial activities of another business that legitimately acquired the patented products repurposing them for resale in direct competition with the patent holder’s product.

A bit of background

This case was an appeal from the Federal Court in Seiko Epson Corp v Calidad Pty Ltd [2017] FCA 1403, where the primary judge (Burley J) found partly in favour of the applicant, Seiko. The court upheld the legal principle that the rights of owners to use products embodying a patented invention are protected by an implied licence. In Australia, an implied licence to exploit a patented product arises automatically if there has been an unconditional sale.

Whether an implied licence

Burley J noted that National Phonograph Co of Australia Ltd v Menck (1911) 12 CLR 15 (Privy Council) supports the principle that subsequent owners may assume they acquire patented products without any restrictions. Under National Phonograph, the purchasers of the printer cartridges are conferred an implied licence to use and dispose of the product as they wish. Burley J stated that while this approach allows the patent holder to impose limitations, the onus remains on them to communicate any limitations to the purchaser, or subsequent owners, at the point of sale or coming into ownership.

In this case, the Epson cartridges had been refilled, and the memory chips were either reprogrammed or replaced by Ninestar, in order to restore them to their original condition. Interestingly, the court chose to leave the question whether such a modification might be regarded as a ‘repair’ of the patented product.

Therefore, the issue in dispute was not based on any repair assessment, but whether Calidad could rely on the implied licence attached to the printer cartridges at the time of sale, or whether the modifications by Ninestar were such that the implied licence could be considered as having been extinguished. Burley J stated (at [164]):

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.

His Honour found that re-writing the memory did not materially alter the product because it represented an embodiment of the claims of the Seiko patents. However, where the memory chips had been replaced with a generic chip, his Honour found that the modifications materially affected and changed the embodiment, and thereby it represented a material change to the embodiment that Seiko initially sold to purchasers. In such a case, the implied licence was extinguished by the modifications.

Full Court says …

The Full Court confirmed that the sale of a patented product gives a purchaser an implied licence to have “all the normal rights of an owner”, which includes the right to use or resell the product. However, a purchaser cannot rely on this implied licence to make an infringing product. Still, by delivering separate judgments, their Honours have permitted some ambiguity in the law to remain. Jagot J held (at [176]) that Ninestar’s repurposing of the printer cartridges was not covered by the implied licence:

Ninestar, by re-programming the memory, putting a new hole in the cartridge to enable it to be re-filled with ink, re-filling the cartridge with ink, and sealing the new and the existing hole created by the original use, manufactured a new embodiment of the invention, an act which could never have been authorised by the implied licence and could never be the subject of an exhaustion of patent rights by reason of sale.

Yates J stated (at [293]) that the modifications went beyond what Seiko’s initially released to purchasers:

The correct approach was to ask whether, in each particular category, the modifications which Ninestar made to the original Epson cartridges altered them in such a way that they were, in substance, different articles to those which Seiko had put into the market and thus into the hands of the original owners.

After markets thoughts

The Full Court in this case largely reinforced the findings of the primary judge. In addition, it ruled that the purchaser must have actual knowledge of any limitations to an implied licence. It held as well that the limitations do not ‘run with the goods’, meaning that subsequent purchasers will not be bound unless the limitations are brought to their attention.

It would seem that a new test has been established for determining whether an implied licence has been extinguished, this by linking the nature of the modifications to the embodiment of the invention as claimed.

Photo on upper right by unknown author and is licensed the Creative Commons Attribution-Share Alike 3.0 Unported license.

Photo on lower left by Jorge Royan and is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license.