The Limitations of Patents in a Globalised Economy

Advances in information technology, transport and communications, along with the implementation of multinational trade agreements, have resulted in a great acceleration in cross-border movement of goods, services, technologies and capital over the past few decades.  Patents, on the other hand, continue to exist as rights having only national scope.  Even within the European Union, which has established a highly-integrated single internal market, and where the European Patent Organisation provides a mechanism for central examination and grant of European patents, ongoing maintenance and enforcement of granted rights remains a matter for the national patent offices and courts.  (This will change once the Unitary Patent and Unified Patent Court come into effect, however since the ‘Brexit’ vote the timetable for their implementation is uncertain.)

The potential difficulties with the limited national scope of patents are illustrated by a recent Australian Federal Court decision, Load and Move Pty Ltd v Container Rotation Systems Pty Ltd [2016] FCA 843. 

In broad terms, Load and Move is an Australian company that owns Australian patents, and which found itself in competition with other Australian companies (including Container Rotation Systems) to supply products to overseas customers (specifically, in Eritrea) that Load and Move believed may be covered by its patents.  Container Rotation Systems (CRS) promotes and sells its products via its website, www.containerrotationsystems.com, which can, of course, be accessed from anywhere in the world with an internet connection.

The potentially infringing products, as it turns out, are manufactured at the same Chinese factory that makes the products for Load and Move.  Profits from the supply of the products no doubt accrue to the Australian competitors, however the products themselves are shipped directly from China to Eritrea, and thus never enter or leave Australian territory.

In these circumstances, it is understandable that Load and Move might feel, at least on some moral level, that its rights are being infringed, and that there ought to be something it could do to prevent competitors operating out of its own home market of Australia from ‘stealing’ business through the expedient of conducting all material (though not operational or financial) activities overseas.

However, ‘feeling’ wronged, and actually being legally wronged, may be two entirely different things.  In this case, the court found that it was not ‘objectively reasonable’ for Load and Move to believe that it had any right to relief in respect of the activities of CRS and other competitors in directing the overseas manufacture and supply, notwithstanding that they were operating out of Australia.

Background

Load and Move owns patents in Australia for equipment known as spreaders or tipplers.  These are large machines designed for loading and tipping over shipping containers that have roofs that are specially adapted to be be loaded and unloaded by the spreaders or tipplers.  In particular, the spreaders or tipplers are operated to open or turn over the containers to allow their contents (e.g. products such as wheat, copper concentrate, coal, mineral sands, nickel and iron ore) to enter or leave through the specially adapted roofs.

CRS and its associated company, Australian Mobile Mining Equipment Systems and Accessories Pty Limited (AMMESA), manufacture and supply similar equipment to that produced by Load and Move.  These companies sold containers to Nevsun Bisha Mine in Eritrea that were manufactured in China and exported from China to Eritrea.  It was not in dispute that the containers never entered Australian territory.

Load and Move applied to the court for preliminary discovery of two categories of documents, which it said were necessary to enable it to determine whether or not it should bring proceedings for infringement of its patents:

1. documents relating to sales of containers by the vendors (i.e. CRS or AMMESA) to a purchaser in Eritrea; and
2. documents relating to sales by the vendors of containers through either of their websites.

The Issue – Could There Be Infringement?

The issue for the court to determine, in order to decide whether or not to grant preliminary discovery, was (at [19]):

... whether objectively it is reasonable for Load and Move to believe ... that it may have the right to obtain relief in the Court from either vendor in respect of the way in which the vendor’s contract for the manufacture of the containers in China, their sale and carriage by sea from China to Eritrea, operated.

In other words, it is not enough to feel wronged.  For the court to make the orders sought, and compel the vendors to hand over the commercial documents, the ‘feeling’ of having been wronged must be, in a legal sense, objectively reasonable.

Significantly, such a belief would not be objectively reasonable if there is no prospect of establishing that any infringement had occurred, regardless of what the discovered documents may reveal.  More particularly, unless supplying products made in China directly to Eritrea, without passing through Australia, could, in principle, infringe an Australian patent, Load and Move’s belief that its patents may have been infringed could not be objectively reasonable.

The ‘Traditional’ Position – No Infringement

The judge (Rares J) dismissed Load and Move’s application for preliminary discovery.  In doing so, he relied on an old English decision, Badische Anilin Und Soda Fabrik (BASF) v Hickson [1906] AC 419 (‘Badische’).  In BASF the defendant had entered into a contract (in England) with a purchaser (also in England) to sell a quantity of a patented article with delivery to be made in Basle, Switzerland.  The goods were subsequently procured and delivered wholly in Switzerland.  This was found not to be an infringement by ‘vending the invention’ in England, which was the test under the law at the time.
 

In Load and Move, the judge reasoned (at [30]):
 

In my opinion, the reasoning in Badische ... is compelling as to the way in which the Patents Act should be construed in respect of the construction of the definition of “exploit” in the dictionary to that Act. Their Lordships found that the sale occurred wholly in Switzerland because the goods were delivered there and property in the goods passed to the purchaser there, so that the sale itself, that is, the exchange of the goods for money, was completed in Switzerland and that no infringement of the patent occurred in the United Kingdom, even though the money was paid in the latter place.

As a result, the judge concluded that it was not objectively reasonable for Load and Move to believe that it would have any right to obtain relief.  It was therefore not entitled to preliminary discovery, which would, in any event, presumably serve no purpose.

Is the Decision Correct?

Badische was decided in 1906, when the world was a much ‘larger’ and simpler place.  There was no internet, no World Trade Organization (WTO), no commercial air travel, no single European market... not even an international telephony network.  The law at the time, in England and Australia, granted a patentee the exclusive right to ‘make, use, exercise, and vend the invention’ within the relevant territory.  It is clear that this language is very much focussed on the manufacture, sale and use of material goods, presumably on the basis that these were activities that generally took place within the territory.  The statute at the time did not even make express mention of the consequences of importing or exporting a patented invention, although one might suppose that in the vast majority of cases these activities would be associated with separate acts of making, using, exercising or vending the goods.

Fast forward to Australia in 2016, where a patentee has the exclusive right to ‘exploit’ the invention.  The scope of the term ‘exploit’ is defined in Schedule 1 of the Patents Act 1990 as follows:

‘exploit’ , in relation to an invention, includes:
                     (a)  where the invention is a product--make, hire, sell or otherwise dispose of the product, offer to make, sell, hire or otherwise dispose of it, use or import it, or keep it for the purpose of doing any of those things; or
                     (b)  where the invention is a method or process--use the method or process or do any act mentioned in paragraph (a) in respect of a product resulting from such use.

A number of advances over the 1906 position are notable.  First, the definition expressly recognises that an invention may be either a product or a method or process.  Second, the list of activities that are explicitly defined as ‘exploitation’ is more extensive than ‘make, use, exercise and vend’, and includes any manner of ‘disposing’ of the invention, as well as importing it.  Third, the definition is not exhaustive.  The definition of ‘exploit’ includes the acts mentioned, but is not limited to those acts.

In my view, and contrary to the conclusion reached by Rares J, the scope of the term ‘exploit’ could quite easily encompass making offers for sale via a web site controlled from Australia, and subsequently profiting, in Australia, from sales of goods manufactured in a second country and delivered to a customer in a third country.  I can see no reason whatsoever why such activities could not constitute an ‘exploitation’ of the invention in Australia.

Previously, in other circumstances, a different judge of the Federal Court (Dowsett J) was required to consider whether the manufacture in China or retractable syringes by an Australian patentee, Occupational and Medical Innovations Ltd (‘OMI’) constituted an ‘exploitation’ of its own Australian patent: Occupational and Medical Innovations Ltd v Retractable Technologies Inc [2008] FCA 1102.  At [37], the court found that:

As to manufacture in China, I am presently concerned only with whether OMI’s proposed conduct constitutes an exploitation of the OMI invention and whether such exploitation would infringe the RTI patent. Causing manufacture to occur in China is, in my view, an exploitation of the invention in the OMI patent, regardless of the legal position in China.  (Emphasis added.)

I therefore do not consider that it is a settled question whether or not it can be an ‘exploitation’ of an invention patented in Australia to direct, from Australia, activities which subsequently occur overseas.  Certainly, despite the different circumstances in each case, the courts have not articulated any clear reason why the scope of ‘exploit’ should be different in the Load and Move and OMI cases.

Conclusion – Tradition vs Progress?

As Melbourne barrister Warwick Rothnie has quite rightly pointed out on his IPwars blog, the decision in Load and Move is entirely in accordance with the ‘traditional view’ that patent rights are territorial, and that when a product is manufactured, exported, imported, and ultimately delivered without ever entering the patent territory, then there can be no infringement.

If I may say so, however, that strikes me as a very twentieth (or possibly even nineteenth) century view.  In the twenty-first century, most financial transactions are completed within the electronic spaces that know no national borders.  While you can be sure of avoiding the risk of infringing an Australian patent by keeping entirely clear of the territory in all aspects of commercial operations, it is less clear that an Australian-based company should be able to avoid liability by the expedient of directing that all material operations occur overseas.

On the other hand, patent rights are territorial, even in our modern globalised economy.  If you wish to be able to prevent competitors from manufacturing patented goods in China, then the best strategy is still to obtain a Chinese patent.  Otherwise, you may have little cause for complaint if an Australian court declines to entertain claims of infringement in this country.

Tags: Australia, Discovery, Infringement