Infringement By Supply of Products – Still Clear as Mud?

The principle behind the concept of ‘indirect infringement’ that may result from supplying (potentially unpatented) products is straightforward.

Suppose party ‘A’ supplies a product ‘X’ to party ‘B’, who uses ‘X’ in a process ‘Y’ to make product ‘Z’…

OK, so maybe it is not entirely straightforward, considering all of the parties, products and processes potentially involved, but bear with us for just another couple of paragraphs.

Clearly if the process ‘Y’ and/or the product ‘Z’ is/are covered by a patent, then ‘B’ is an infringer.  But what about ‘A’?  If ‘X’ is not patented, then ‘A’ is not an infringer.  So should ‘A’ get off scot-free?

The answer, typically, is that it all depends.  For example, ‘X’ may be a common staple product, such as sugar, oil or ball-bearings, and ‘A’ may have no idea of ‘B’s purpose with ‘X’.  In this case, it is hardly fair for ‘A’ to bear any liability for ‘B’s infringement.  Alternatively, ‘X’ may have only one known application, i.e. the infringing use, or ‘A’ may may otherwise be fully aware that ‘B’ intends to use the product in an infringing manner.  In such cases, ‘A’ is knowingly profiting from ‘B’s infringement, and should probably not be permitted to escape liability just because the actual infringement occurs at arm’s length.

In Australia, section 117 of the Patents Act 1990 is supposed to address ‘infringement by supply of products’, and in particular to distinguish those cases in which the supplier bears liability for subsequent infringement, from those in which they do not.

However, this provision has had a chequered history in the courts.  Many practitioners seem to have thought that the troubles with section 117 had been finally laid to rest with the High Court’s decision in Northern Territory v Collins [2008] HCA 49.  But the recent decision of Justice Kenny in SNF (Australia) Pty Ltd v Ciba Speciality Chemicals Water Treatments Limited [2011] FCA 452 suggests that uncertainty remains about the correct application of section 117.

LEGISLATIVE HISTORY

Boring as it may be, the history behind the inclusion of section 117 in the Patents Act 1990 is relevant to its interpretation.

The difficulties of enforcing patents against indirect or contributory infringers at common law were considered in the Industrial Property Advisory Committee report, Patents, Innovation and Competition in Australia, 1984.  The IPAC report (in section 14.2) stated that:

A patentee may encounter serious difficulty in enforcing his patent where it is prone to infringement by an eventual consumer who is supplied by an unauthorised person with the means to infringe.

For example, a process patent for using a selective herbicide which is a known chemical would be infringed by a farmer who bought a container and followed instructions for use which … resulted in infringement of the patent.  Even if the patentee were prepared to bear the high cost of detecting infringement by the farmer and then to bring infringement proceedings, the result would almost certainly be unsatisfactory.  …  The farmer would be left with a stock of herbicide he was forbidden to use, and the patentee would find himself with no damages and a dissatisfied potential customer. …

It is unreasonable and wasteful of resources for a patentee to have to sue all of the direct infringers with so unsatisfactory a result in each case, when the supplier is, in a real sense, far more responsible for the commission of the infringing acts.

Note that the scenario envisaged by ACIP is one in which the infringement specifically relates to a patented method.

SECTION 117

In response to ACIP’s recommendations, section 117 was included in the Patents Act 1990.  The provision reads as follows:

(1)      If the use of a product by a person would infringe a patent, the supply of that product by one person to another is an infringement of the patent by the supplier unless the supplier is the patentee or licensee of the patent. (2)      A reference in subsection (1) to the use of a product by a person is a reference to: (a) if the product is capable of only one reasonable use, having regard to its nature or design—that use; or (b) if the product is not a staple commercial product—any use of the product, if the supplier had reason to believe that the person would put it to that use; or (c) in any case—the use of the product in accordance with any instructions for the use of the product, or any inducement to use the product, given to the person by the supplier or contained in an advertisement published by or with the authority of the supplier.

This does not appear obscure on its face, particularly viewed in light of ACIP’s recommendations.  Subsection (1) simply says that if person ‘B’ would use product ‘X’ to infringe a patent, then supply of ‘X’ to ‘B’ by ‘A’ is also an infringement of the patent.

Subsection (2) then defines what is meant by ‘use’ in subsection (1), so that only those circumstances considered objectionable will result in liability to ‘A’.  The three relevant circumstances were succinctly summed up by Justice Hayne in Northern Territory v Collins as: (a) ‘only use’; (b) ‘known use’; and (c) ‘instructed use’.  And unless the use by ‘B’ of ‘X’ falls into one of these three categories, then ‘A’ is not an infringer.

HOW THINGS WENT HORRIBLY WRONG – THE RESCARE CASE

Although section 117 seems reasonably simple, in Anaesthetic Supplies Pty Ltd v Rescare Ltd [1992] FCA 537, Justice Gummow exposed some hidden drafting problems with the provision.  In particular, his Honour considered that the notion of ‘infringement’ must be assessed in view of the exclusive rights provided to the patentee by subsection 13(1) of the Act, which in turn rely on the definition of ‘exploit’ appearing in the Dictionary in Schedule 1. 

Regrettably (as it turned out), the definition of ‘exploit’ itself relies on the term ‘use’  to define, amongst other things, the types of activities that may infringe a method or process claim.  As a result of these definitions, Justice Gummow found that the ‘use of a product’ in subsection 117(1) could only be the use of a product resulting from the use of the patented method (Rescare at [181]).

So, according to Justice Gummow’s construction, where the invention is a method section 117(1) is only invoked by the supply of a product resulting from use of the method.  Since this is an infringement of a method claim in any event, this would deprive section 117 of any practical effect in relation to method claims.  Furthermore, many methods so not result in any product that may be supplied by one person to another.  This includes  ACIP’s herbicide example, where the result is an effect on the land, and not a ‘product’ as such.

On appeal, the Full Federal Court did not find it necessary to consider the section 117 issue in detail, because the relevant claim was found to be invalid.  However, Justice Lockhart, with whom Justice Wilcox agreed, approved, obiter dictum, the approach taken by Justice Gummow (Anaesthetic Supplies Pty Limited v Rescare Limited [1994] FCA 1065, at [106]).

Rescare was subsequently also followed in Sartas No 1 Pty Ltd v Koukourou & Partners Pty Ltd [1994] FCA 1529 (at [70]-[72]).

WAS THE WORLD SET TO RIGHTS IN BMS v FAULDING?

In our experience, it is widely considered by Australian patent practitioners that the unfortunate construction of section 117 in Rescare was reversed, and replaced with a literal interpretation consistent with ACIP’s intentions in Bristol-Myers Squibb Company v FH Faulding & Co Limited [2000] FCA 316 (at [85]-[97]).  Chief Justice Black and Justice Lehane (with whom Justice Finkelstein agreed) quoted the above passage of the ACIP report, and were at pains to establish that the approval of Justice Gummow’s approach by Justice Lockhard in the Rescare appeal was truly obiter dictum, and in any event only the stated opinion of a single member of the court.

On this basis, the Bristol-Myers court felt that it was free to reinterpret section 177, and effectively overrule Justice Gummow.

Regrettably (again), the court also found all of the claims of the patent to be invalid for lack of novelty, and thus an analysis of the issue of infringement under section 117 was not strictly necessary.

SECTION 117 IN THE HIGH COURT

It seems also to be widely believed that the decision of the High Court in Northern Territory v Collins is an endorsement of the approach taken by the Full Federal Court in Bristol-Myers.  This seems to be the approach of Justice Crennan, with whom Justice Heydon agreed, at [117]-[128].

Justice Hayne, however, effectively side-stepped the issue (at [39]), moving on to consider whether or not the product supplied in that case (timber) was a ‘staple commercial product’.  Find that it was had the result that it was not necessary to resolve any dispute over the construction of subsection 117(1), because any ‘use’ would not, in any event, fall within on of the three relevant categories in subsection (2).

Justice Gummow (acting, at the time, as Chief Justice), joined by Justice Kirby, similarly side-stepped the need to expressly overrule himself, agreeing with Justice Hayne that ‘the variety of quite different cases that may arise for consideration under s 117 provides a powerful reason not to attempt some singular answer to a general question  [regarding the acts that might activate subsection 117(1)]’ (at [14]), also moving on to consider whether any of the categories in subsection (2) would apply.

Thus three out of five judges of the High Court expressed no concluded view on the operation of subsection 117(1).  While this might be explained by the presence of Justice Gummow on the bench, as Acting Chief Justice, it is nonetheless hardly a ringing endorsement of Bristol-Myers.

RECENT DECISIONS CONCERNING ‘INFRINGEMENT BY SUPPLY’

There have been two recent decisions of the Federal Court of Australia in which the operation of section 117 was again considered.

In Danisco A/S v Novozymes A/S (No 2) [2011] FCA 282, Justice Bennett followed the approach of Justices Hayne, Gummow and Kirby in commencing with an assessment of the relevant category of use under subsection 117(2), and appears to have found the applicability of subsection 117(1), in accordance with the Bristol-Myers approach to be uncontroversial (see, esp. at [149]).

However, in SNF v Ciba, Justice Kenny again returned to Rescare (at [316]), considering the discussion of section 117 in Bristol-Myers to be obiter dictum (at [317]), and noting the different approaches taken by the judges in Northern Territory v Collins (at [318]-[320]).

Ultimately, Justice Kenny found it unnecessary to resolve the different approaches to section 117.  However, the discussion certainly highlights the fact that, Bristol-Myers and Northern Territory v Collins notwithstanding, the proper operation of section 117 remains in some doubt.

CONCLUSION

It is concerning that 20 years after commencement of the Patents Act 1990, and 27 years after ACIP issued its report, a provision whose purpose was clearly articulated in that report, and taken up by the Government of the day, remains of questionable effect.

With the Raising the Bar bill currently before parliament, it is also a shame that this issue has not been taken up by way of a suitable clarifying amendment to section 117.

We wonder if it is perhaps not too late?

Tags: Australia, Indirect infringement, Infringement, Legislation, Patent law