The recent High Court decision of Calidad Pty Ltd & Ors v Seiko Epson Corporation & Anor  HCA 41 (“Calidad”) has changed the balance of rights between patent rights holders selling OEM products, end-user purchasers of those products, and aftermarket service businesses offering repair and refurbishment services to extend the life of those OEM products.
However, despite several commentators suggesting otherwise, the decision in Calidad is unlikely to be the final word and some ambiguity still remains concerning the boundary between a “permissible repair” and infringement from making a new product by “reconstruction” of parts.
The Calidad decision is important for at least two reasons. Firstly, it has overturned the previous position under Australian patent law of the “implied licence” doctrine and potentially provided greater certainty for defining a patentee’s rights after the first sale of a patented product through the adoption of the “patent exhaustion” doctrine. The “implied licence” doctrine was imported into Australian law from UK law in the early 1900s and allows the purchaser of a patented product to use or dispose of the product without the need for the patentee’s consent but allows the patentee to restrict and impose conditions via licence on subsequent use. Conversely, the exhaustion doctrine does not accept that a patentee’s rights of use with respect to the particular product survive its sale. Secondly, it is one of the first decisions to consider the newly introduced “object” clause in the Australian Patents Act 1990 (Cth), which was introduced as an aid to interpretation of the Patents Act.
The adoption of the “patent exhaustion” doctrine will likely open up many new opportunities for operators in several service sectors, particularly in the remanufacturing, medical, automotive and construction and mining equipment industries. However, the precise nature of the rights that purchasers of patented OEM products have still remains unclear when a modification is made to the product after it has been purchased and that modification is anything more than a repair or refurbishment designed to extend the product lifetime. Defining the extent of this “grey” area will undoubtedly be the basis of future litigation in this area. This article explores the potential effect of the Calidad decision on various industries and provides guidance to Australian businesses in those industries as to how they might navigate and benefit from these new business opportunities.
The old position – the doctrine of ‘implied licence’
For the century preceding the Calidad decision the position under Australian law in relation to patented products was that after a patented product was sold, the purchaser had an implied licence to use the patented product for specific purposes. If the purchaser did anything beyond the scope of that implied licence, they risked infringing the patent. This was referred to as the “implied licence” doctrine.
There were three main issues with the doctrine of “implied licence”. First, it was difficult to identify the precise terms of the licence, which varied in the circumstances. Second, Courts found it difficult to reconcile the existence of an implied licence with the “rights of an owner of a chattel to the full use and control of it.” This was in large part due to the boundaries of any “implied licence” being unclear. Businesses need to have certainty in regard to what they can and cannot do. This is particularly the case when their actions of repairing a product or modifying it could expose them to very costly patent infringement suits. As a consequence, some businesses simply avoided the issue by not availing certain opportunities in relation to repair and maintenance services.
Finally, the “implied licence” doctrine is based on a fictional licence. Chief Justice Kiefel, and Justices Bell and Keane described the doctrine as ‘likely to cause confusion in part because it combines a fictional licence with the possibility of real restrictions’.
The new position – the doctrine of ‘exhaustion’ of patent rights
The High Court has now stated – by a 4-3 majority – that the position in Australia in relation to patented products is that once a patent product is purchased, the patentee’s rights in respect of that particular product are extinguished. This is referred to as the “patent exhaustion” doctrine. The patent exhaustion doctrine does not stop a patentee imposing conditions on a purchaser’s use of a patented product, but it does require any such restriction to be by way of a contract (rather than an implied licence). However, caution should be exercised in such an approach as this in turn may create competitive tensions leading to misuse of market power in certain circumstances.
Despite this, the patent exhaustion doctrine is not a carte blanche authorisation for purchasers of patented products to do whatever they like. Notably, it does not allow service companies to make such changes to the patented product (after the first sale) that would result in the making of a new product that infringes the patent. However, the boundaries of ‘repair’ and ‘making’ – i.e what is and what is not permissible – are difficult to define and are circumstances dependent, and what may constitute ‘repair’ in one instance may amount to ‘making’ in another.
Two useful statements of principle from the High Court (citing decisions from the UK and the USA) are:
- “where what has been done does not involve the replication of the combination of integers that describe the invention, it cannot be said that what has been done is the making of it”; and
- “the replacement of individual unpatented parts may involve a right to repair where what is done bears on the usefulness of the old combination of the product”.
The High Court has also provided some additional guidance on when a ‘repair’ might turn into ‘making’. The Court has indicated that the boundary is crossed when the particular product ‘ceases to exist’. Whether a patented product ‘ceases to exist’ for the purpose of identifying whether a purchaser’s actions constitute ‘repair’ or ‘making’ will be a highly factual inquiry. The cases followed by the High Court indicate that where there is ‘replacement of unpatented parts that were worn or spent in order to preserve the utility of the article’ will be treated as ‘repair’. ‘Making’ or ‘reconstruction’ (which is the American term) requires much more “extensive rebuilding”. As such, conduct may exist on a spectrum there can be no hard and fast rules as to what is permissible and impermissible.
However, it is helpful to remember that the crux of the patent exhaustion doctrine is that the repair, modification or refurbishment of the patented product has to be such that it is not a ‘reconstruction so as to in fact make a new article.’ The new article necessarily has to possess all the integers of the claimed invention in order to infringe the patent.
The objects clause in the Patents Act
The object of the Patents Act is stated in section 2A is to:
…provide a patent system in Australia that promotes economic wellbeing through technological innovation and the transfer and dissemination of technology. In doing so, the patent system balances over time the interests of producers, owners and use of technology and the public.
Businesses rely on certainty in trade and commerce, and the High Court acknowledged the difficulty posed by the “implied licence” doctrine in that regard. The patent exhaustion doctrine has the benefit of being able (at least to a greater extent) to balance the rights of patentees against those of users of patented technology and the general public.
Since the Calidad decision and the willingness of the High Court to consider the object clause in statutory interpretation, one might expect similar consideration in future patent decisions in areas where the law is less well developed.
What’s the likely impact the Calidad decision will have on the industry?
The aftermarket and remanufacturing industries will feel the greatest impact from the adoption of the patent exhaustion doctrine in Australia. Businesses who repair products overseas will also likely benefit from increased opportunities and more assurance that they may be less exposed to patent infringement suits.
Broadly speaking, the activities that appear to be permissible under the patent exhaustion doctrine fall under two heads:
- prolonging the life of a patented product by replacing an individual unpatented part; and
- modifying or refurbishing a single-use article to enable it to be re-used (provided that single-use is not a feature of the invention claimed).
The Australian industries most likely to benefit and respond as a result of the Calidad decision include:
- the construction equipment maintenance and repair industry, where maintenance and repair can extend the life of machines;
- the medical devices industry where single-use devices can be remanufactured for multiple uses cost effectively and safely;
- the automotive industry, where the increased presence of electric and hybrid vehicles creates opportunities for remanufacturing and repair; and
- printer consumables, where there have already been several instances of single-use printer cartridges being modified to refillable cartridges.
It is important to note that any extent of repair or modification that may be permissible under patent law only applies to the particular article in question. The sale does not exhaust the patentee’s right to prevent others from making products embodying the patented invention, and this is consistent with the boundaries of the patent exhaustion doctrine ending at the ‘making’ of a new product that embodies the invention.
Despite the new opportunities that the application of the patent exhaustion doctrine will likely provide various industries, there are still risks that businesses need to be aware of. Just because a business categorises its activities as “repair” does not necessarily make it so. It is ultimately a decision for the Courts as to whether particular conduct constitutes “repair” or whether it is a reconstruction amounting to the “making of a new product” that may infringe the claimed invention.
It is important that if businesses are seeking to take advantage of the new opportunities that arise as a result of the Calidad decision in terms of remanufacturing, maintenance and repair services, they seek legal advice about their particular circumstances. The intellectual property team at Bennett & Philp are able to assist.
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