In many jurisdictions, the exhaustion of rights doctrine has been enshrined in patent law for some time. It may be somewhat surprising that this was not the case in Australia prior to the High Court of Australia (“HCA”) decision in Calidad Pty Ltd v Seiko Epson Corporation  HCA 41.
The dispute is long running and complex. Seiko sued Calidad for patent infringement by importation and distribution of a repurposed printer cartridge sold under the EPSON brand that allegedly falls within the scope of Seiko’s patents. The disputed cartridges were genuine EPSON cartridges acquired from consumers that had lawfully purchased the EPSON cartridge, were refilled outside Australia, and imported and distributed in Australia by Calidad.
The Federal Court of Australia (“FCA”) decisions (at first instance and on appeal) found in favour of Seiko insofar as the FCA considered there was an implied license from Seiko permitting consumers to exploit the patent product without infringing Seiko’s patent. On the basis of convoluted and highly technical reasoning, repurposing the printer cartridges did not fall within the scope of the implied license according to the Federal Court as the refilled cartridges were new products that fell within the scope of the patent/s and hence, infringement was found. The exhaustion doctrine was not applied by the FCA.
Calidad appealed to the High Court of Australia. The longstanding precedent regarding the rights of a patentee upon sale and use of a product when the product is sold before this decision arises from the approach taken by the HCA in National Phonograph Co of Australia Ltd v Menck  HCA 96 (“Menck (High Court)”) and that of the Privy Council on appeal (“Menck (Privy Council)”).
In Menck (High Court), the exhaustion doctrine was applied whereas in Menck (Privy Council), the implied license doctrine approach was applied. Of course, the HCA has not been bound by Privy Council decisions for decades.
The majority of the High Court of Australia found in favour in Calidad at paragraph 9:
The modifications made to the original Epson cartridges are within the scope of the rights of an owner (product owner) to prolong the life of a product and make it more useful. They do not amount to an impermissible making of a new product… The rule, that a patentee’s rights with respect to a particular product are exhausted once that product is sold without conditions as to use, should be accepted.
In concluding this to be the case, the majority drew upon approaches in foreign jurisdictions as well as personal property rights at common law arising from being the lawful purchaser of a patented product from the patentee. However, the majority noted that the personal property may not necessarily be unfettered: “a person acquiring a patented product is intended to have all the rights of an owner unless those rights are subject to express restrictions notified to the person, and here there were none.”
But critical to the majority’s determination is the construction of “exploit” in s13(1) which accepts that an exploitation by selling concludes with the first sale of a patent product.
The HCA also criticised the Federal Court approach to determining that the repurposed cartridges amounted to making of a new product that falls within the scope of the claims:
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.
The majority agreed to abandon the implied license doctrine in favour of the exhaustion of rights doctrine. Although this decision may be viewed as restricting a patentee’s rights, it does provide certainty to business owners, and overturns the lower court’s tortured and unclear approach to applying an implied license to a patent right.