30 November 2020

How the Australian High Court Found that Refurbished Ink Cartridges do not Infringe Seiko Patents

InkRecently, I wrote about the decision of the High Court in Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41, with particular focus on the Court’s finding, by a 4-3 majority, that the first sale of a patented product exhausts the patentee’s exclusive rights in that product.  In this article, I will look at the other aspect of the Court’s decision, namely its finding (again by 4-3 majority) that Epson printer ink cartridges that had been refurbished, refilled, and resold in Australia, did not infringe patents relating to aspects of the cartridges, which are owned by Seiko.

As we shall see, the decision of the High Court majority on infringement depended upon a distinction between use of a patented product following sale, and making of a new embodiment of the patented product.  It did not depend upon whether the (old) ‘implied licence’ doctrine, or the (new) ‘exhaustion’ doctrine applies under Australian law.  In this sense, it was not necessary for the Court to overturn over a century of law to replace the doctrine of implied licence with one of exhaustion, although it did so nonetheless, and it is that aspect of the case that has attracted most attention.

The reasoning of the majority on infringement is important, however, in giving guidance to lower courts, patentees, and providers of refurbished goods, on the circumstances in which modifying, repairing, or reconstituting of depleted or otherwise ‘expired’ goods may result in patent infringement.

Recap – The Factual Background

Seiko manufactures and distributes Epson-branded printers and consumables, including ink cartridges that are the subject of its dispute with Calidad Pty Ltd (Calidad) and others.  Empty original Epson cartridges are obtained by Ninestar Image (Malaysia) SDN BHD (Ninestar), from various sources.  Ninestar modifies the cartridges so that they can be be refilled and re-used.  Calidad acquires the refilled cartridges from Ninestar and imports them into Australia for the purpose of sale to the public.

Original Epson cartridges include a memory chip, as part of an integrated circuit assembly, which can be read by compatible printers, and which keeps track of how much ink remains in the cartridge.  Once the ink falls below a threshold level, the memory chip reports – and continues to report – the cartridge as empty, so that the printer will prevent further printing using that cartridge.

Ninestar’s modifications to enable re-use of empty ink cartridges include refilling the cartridge with ink, as well as either reprogramming or replacing the memory chip (or the entire integrated circuit assembly) so that it no longer indicates that the cartridge is empty.

However, the patents asserted by Seiko against Calidad are not directed to these aspects of the structure and operation of the printer cartridges.  The claimed inventions in fact address an electrical problem, namely that such cartridges generally require both a low-voltage supply (for the memory chips), and a high-voltage supply (for the sensors used to monitor the ink level).  The patents describe and claim a particular layout of electrical terminals designed to reduce the risk of shorting between the high- and low-voltage supplies that may result in damage to the cartridge, such as destruction of its memory chip.  Importantly for the reasoning of the High Court majority, Ninestar’s modifications do not involve any remaking or modification of the terminal circuit layouts themselves, which lie at the heart of the Seiko patents.

The Lower Court Decisions, Finding Infringement

There was no question that Justice Burley at first instance (Seiko Epson Corporation v Calidad Pty Ltd [2017] FCA 1403), and Justices Greenwood, Jagot, and Yates on appeal to the Full Court of the Federal Court of Australia (Calidad Pty Ltd v Seiko Epson Corporation [2019] FCAFC 115), were bound by the decision of the Privy Council in National Phonograph Co of Australia Ltd v Menck (1911) 12 CLR 15 to follow the doctrine of ‘implied licence’.  They were therefore required to consider the circumstances in which the notional terms of the licence would be exceeded, such that it could no longer be said to exist, resulting in further dealings in the modified ink cartridges becoming infringements of the Seiko patents.

The High Court majority, at [35], characterised Justice Burley’s approach as follows:

His Honour reasoned that as the licence related only to the particular product sold the modifications made by Ninestar to the original Epson cartridges put the continuation of the licence at risk. The question to be addressed, in his Honour's view, was whether the implied licence "survive[d]" the modifications made to them or was extinguished. (Citations omitted.)

As the majority noted, at [36], the issue, in Justice Burley’s view, was not whether the cartridges were repaired, altered, or re-made, but rather ‘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 identified nine different categories of modified cartridges, depending upon the specific sets of modifications applied, and found that in five of these categories the modifications were such as to extinguish the implied licence.

On appeal, the Full Court found that in none of the nine categories of modified cartridges did the implied licence survive the modifications.  While the judges authored three separate opinions, and differed on some details of their reasoning, all agreed that the correct question ‘was not whether the licence was terminated by the unauthorised modifications, but rather what was the scope of the licence’, which ‘was to be determined, at least in part, by reference to the nature of the article sold’ (as summarised by the High Court majority, at [40]).  Since the products were specifically manufactured and sold to have a specific lifespan, it could not have been Seiko’s intention that they would be repurposed and resold as Calidad had done.

Were Cartridges Remade, or Merely Modified?

The High Court majority adopted a different approach, taking the view that the issue was not about the extent of the modifications made by Ninestar – which might well constitute a perfectly legitimate use of the products – but, rather, whether a new product had been made.  On this view, the distinction between ‘implied licence’ and ‘exhaustion’ was not, in any event, relevant.

As the majority explained, at [45]:

Regardless of whether the exhaustion doctrine or the implied licence doctrine is to be preferred, neither doctrine has any part to play in determining whether there has been an infringement of a patent by reason that a new product embodying the claimed invention has been made. The sale of a patented product cannot confer an implied licence to make another and it cannot exhaust the right of a patentee to prevent others from being made. (Citation omitted.)

It is trite law that the manufacture of a product will infringe a patent claim if it involves taking each of the essential features of the claim.  Calidad argued, in essence, that not all of the modifications made to the cartridges involved claimed elements, and that the essential elements of the claimed invention – namely the specific layout of the electrical terminals – were simply sourced from other genuine Epson cartridges, and were not changed in any relevant manner.

The majority agreed with Calidad, finding (at [49]) that its submission:

… directs attention to the real issue in relation to infringement, namely whether the modifications resulted in a new product being made. The conclusion for which it contends, that the refilled and restored cartridges were merely modified versions of the products sold by Seiko, should be accepted.

More particularly, the majority found, at [69]-[70], that:

When all of Ninestar's modifications to each of the categories of cartridges were completed what remained were the original Epson cartridges with some modifications which enabled their re-use. The modifications did not involve the replication of parts and features of the invention claimed. There was no true manufacture or construction of a cartridge which embodied the features of the patent claim.

The modifications to the original Epson cartridges were consistent with the exercise of the rights of an owner to alter an article to improve its usefulness and enable its re-use. Both English and United States authority accept the prolonging of the life of a product to be within an owner's rights of use of a patented product. Regardless of whether it is said to be something done which is closer to “repair” than “making”, it clearly does not involve a manufacture or making. And this is so regardless of whether the exhaustion doctrine or the implied licence doctrine is applied. (Citation omitted.)

The High Court Interpreting Policy

In writing about the High Court’s adoption of the exhaustion doctrine, I noted the influence of policy considerations on the reasoning of the majority, in light of the recent addition of an ‘objects clause’ in section 2A of the Patents Act 1990, which came into effect, on 27 February 2020.  Questions of policy also appear to have influenced the majority’s approach to infringement.

In reaching their conclusion on the issue of ‘modification’ versus ‘making’, the majority (at [51] -[63]) reviewed a number of British and US cases in which the distinction between a (permissible) modification or repair, and an (impermissible) remaking of a product was considered.  They found, at [64], that the Full Court erred by reasoning, ‘in effect, that because the original Epson cartridges were sold for a single use and were modified to be re-used, they became new products’, and that ‘[t]his impermissibly elides infringement by use and infringement by making.’

At this point in their judgment, the majority clearly direct their attention to policy considerations.  At [65] they stated that ‘[a] failure to observe the distinction drawn by the Patents Act 1990 between infringement by use and infringement by making renders the task of discerning the difference between modification of a product (an aspect of use) and the making of a new embodiment of the invention an unguided and impressionistic exercise, which is apt to allow the undue expansion of the patentee's monopoly to the detriment of consumers and competitors’ (bold emphasis added).  Furthermore, ‘to fail to appreciate the boundary drawn by the Patents Act 1990 between modification of a product by the purchaser of the product and the making of a new embodiment of the patented invention is to risk the ironic outcome that the patent right becomes a brake on the very kind of innovation that patent rights are meant to encourage’ (bold emphasis again added).

‘Exhaustion’ versus ‘Implied Licence’ – Does it Really Matter?

As the passages I have quoted above clearly indicate, the High Court majority did not consider that the outcome of the inquiry into infringement depended in any way upon whether an exhaustion doctrine or an implied licence doctrine applied.  The key distinction that they drew was between a use of the patented product, which is clearly permissible by any subsequent owner under either doctrine, and a new making of the product, which is not.  Once this distinction is clearly established, it is frankly difficult to imagine circumstances in which a choice between the two doctrines would make any difference to the outcome.

Indeed, the majority noted, at [77], that any difference between the two doctrines might be even less relevant today, under modern laws restricting anti-competitive conduct, than it might have been in the past:

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. It may well be that the practice of patentees upon which the doctrine is founded has less relevance today.

The majority also suggested (rather generously) that the more complex nature of the implied license doctrine, by which the lower courts were bound, might have contributed to error (at [81]):

The result reached by the Full Court with respect to infringement is likely to have been very different had the Court been in a position to apply the exhaustion doctrine. The starting point would have been that Seiko had no rights with respect to the cartridges after they were first sold. Attention would then have been directed to the rights of an owner with respect to a chattel and whether the modifications made to the cartridges were consistent with those ordinary rights – to adapt a chattel to improve its usefulness and extend its life. A conclusion that the modifications did not thereby amount to a manufacture would more likely have been reached.

Nonetheless, it is legitimate to ask why, if it was not necessary to decide the matter before it, did the Court expend considerable effort presenting its reasons and conclusions on the question of implied licence versus exhaustion?  This is a good question because – contrary to the way in which the decision has been described in most reports and commentary on the case (including mine, and with the notable exception of Melbourne barrister Warwick Rothnie on his IP Wars blog) – technically this means that the Court’s reasoning on this point is obiter dicta, and thus not actually binding precedent!

I think the answer probably lies partly in the fact that the Court was specifically asked in the appeal to address the issue, which had not been reconsidered for over 100 years – and which had, in fact, never been considered by a truly Australian court of final appeal (bearing in mind that the Privy Council in Menck had overruled the Australian High Court of the day, which had preferred the exhaustion doctrine).  Clearly, the Court thought that it was therefore important to take the opportunity to express its opinion.

In practice, I think that most commentators (again, me included) have taken the view that the Court’s obiter dicta in this case has involved such serious consideration – including historic, international, and policy factors – that it is, for all intents and purposes, persuasive to the point of being effectively binding, and should therefore now be regarded as settled law in Australia.

Conclusion – ‘Making’ Matters

There is, it seems to me, a pretty simple take-away from the High Court’s decision on infringement in Calidad, which is that the key distinction that must be made is between the use of a patented product by a purchaser or subsequent owner, and the making of a new product falling within the scope of the patent.

The right to use a product is one of a bundle of rights that is exhausted upon first sale of the product, and use of the product is thus always permissible.  (Similarly, even under the implied licence doctrine, the fictional licence would always necessarily permit ongoing use of the product.)  However, the right to make the product is not something associated with any particular article, but remains an exclusive right of the patentee (and any authorised licensees) that is not exhausted by a sale.

For infringement, then, the only question that arises is whether what has been done amounts to a new making of a patented product.  And that, as in any case of alleged patent infringement, is tied to what is actually claimed in the patent.  This is ultimately dependent upon the particular facts in any case, and it does not follow from Calidad that every instance of refurbishment of a patented product will be permissible and non-infringing.  If, for example, Ninestar had been required to reconstruct, rather than simply reuse, the terminal circuit layout that was claimed in Seiko’s patents, then the outcome in this case could have been different.

Finally, it is probably worth noting that there is nothing in the Calidad decision to prevent a seller of patented goods from seeking to impose restrictions on a purchaser by way of contract.  There might, in some circumstances, be prohibitions on such contractual terms under, e.g., laws relating to anti-competitive conduct.  But that would be a question for another day, and another set of facts!


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