Australia aligns with the U.S. and EU by adopting ‘exhaustion of rights’ doctrine

The High Court of Australia’s recent decision Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41 (Calidad) has more closely aligned Australian patent law with its U.S. and European counterparts. Key takeaways from this decision are:

  • the ‘doctrine of exhaustion of rights’ has replaced the ‘implied licence doctrine’;
  • a patent owner’s exclusive rights are extinguished by the first sale of the patented goods;
  • innovators have greater scope to reuse products without risking patent infringement; and
  • patentees seeking greater control over post-sale use should do so through contract law.

Background
A third party made modifications to spent Epson-branded ink cartridges that enabled them to be refilled with ink for reuse. Calidad subsequently imported and intended to sell the rejuvenated ink cartridges in Australia. Calidad argued that selling the cartridges did not infringe Seiko’s patent rights because, once a patented article is sold, the patentees rights were exhausted.

Previous position
The decisions of Australia’s Federal Court, at first instance and subsequently by Full Court, held that the implied licence doctrine applied in Australia (based on a 1911 decision of the UK Privy Council). This doctrine ensured the patentee retained its rights following a product purchase, while a purchaser was granted an ‘implied licence’ to use the product as they saw fit.

The majority in Calidad found the implied licence doctrine was confusing and inconsistent with the certainty demanded by modern trade and commerce.

New approach
Conversely, the exhaustion of rights doctrine provides that a patentee’s rights in a product are extinguished when that product is sold. Purchasers obtain “the use of the whole of the combination” which grants them more scope to deal with the product, such as by recycling empty ink cartridges. That is, as noted at paragraph 75 of the decision by the majority, ‘the sale takes the product outside the scope of the patentee’s monopoly rights’.

However, the exhaustion doctrine does not prevent a patentee from restricting the use of a product after sale. Rather, a patentee may still exercise control over a purchaser’s subsequent use of a product through the ordinary operation of contract law.

Concluding remarks
Patentees and consumers alike should benefit from greater certainty in this area of patent law and the adoption of a doctrine well established in the US and Europe. Patentees should obtain additional contractual protection if they wish to protect their rights in a patent post-sale.

By Chris Vindurampulle and Nicholas Fellows

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