Summary:

• The exhaustion of rights doctrine has become the law in Australia, superseding the ‘implied licence’ doctrine. While patentees maintain the exclusive right to ‘make’ products that embody the invention, all other exclusive rights are considered exhausted once the patented products are first sold, unless the patentee explicitly sets conditions on their use through a contract.
• Patentees will have to depend on contracts with downstream suppliers and buyers to manage post-sale activities.

What is the Doctrine of Exhaustion?

The doctrine of exhaustion, also known as the “exhaustion of rights” or “first sale” doctrine, is a legal principle in intellectual property law, particularly patent law. It holds that once a patented product has been sold by the patent holder or with their consent, the patent holder’s exclusive rights over that specific item are considered “exhausted.” This means the patent holder can no longer control the use, resale, or distribution of the product after it has been sold.

Case background – Calidad v Seiko Epson [2020] HCA 41

Seiko manufactures and sells patented ink cartridges branded as ‘Epson’. Ninestar Image (Malaysia) legally acquired used Epson cartridges from recyclers and consumers, then modified them for reuse. Calidad sourced the repurposed cartridges from Ninestar and imported and sold them in Australia.

Seiko asserted that Calidad infringed its patents by importing and selling the repurposed Epson Cartridges in Australia. In response, Calidad counterclaimed, asserting, among other things, that it has an implied licence to import and sell the repurposed cartridges.

Decision

A narrow four-to-three majority of the High Court of Australia ruled in favour of adoption of the ‘exhaustion of rights’ doctrine for patents, marking a departure from over a century of reliance on the ‘implied licence’ doctrine.

Preference of exhaustions of rights doctrine over implied licence

The Honourable Justice Gageler noted that implied licence doctrine is a mess because there is no settled understanding of the doctrine and contrary to the preferred exhaustions of rights doctrine:

“The exhaustion of rights doctrine cuts through that mess. It does so as a matter of statutory construction, on the clear-eyed understanding that “the purpose of the patent law is fulfilled with respect to any particular article when the patentee has received his reward for the use of his invention by the sale of the article, and that once that purpose is realized the patent law affords no basis for restraining the use and enjoyment of the thing sold”. Applied to the Patents Act 1990, it involves nothing more than construing the references to “hire”, “sell”, “otherwise dispose of”, “use” and “import” in the definition of “exploit” in relation to an invention as having no application to a product in relation to which the patentee has already exploited the invention by exercising the patentee’s common law right to sell the product.”

“The exhaustion of rights doctrine has a lineage that is decades longer than the lineage of the implied licence doctrine. It has been shown by repeated application in the United States to be workable and coherent. It sets clear statutory boundaries. It respects longstanding common law principle. It does not need to enlist equity in some way to prop it up. It strikes an appropriate balance between the interests of patentees and the owners of patented products. In so doing, it fits comfortably with the statutory object of the Patents Act 1990 as well as with the statutory language.”

Similarly, the majority of the High Court including Chief Justice Susan Kiefal expressed praised the exhaustion of rights doctrine noting that the doctrine has virtues of logic, simplicity and coherence with legal principles:

“…It is comprehensible and consistent with the fundamental principle of the common law respecting chattels and an owner’s rights respecting their use. At the same time, it does not prevent a patentee from imposing restrictions and conditions as to the use of a patented product after its sale but simply requires that they be obtained by negotiation in the usual way and enforced according to the law of contract or in equity.”

“The implied licence doctrine is complicated in its operation and effects. It can achieve only a partial alignment with the fundamental principle of the law and then only when it is clear that no restrictions have been imposed at the point of first sale. It may give rise to difficult questions concerning whether restrictions were imposed…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.”

Implication

The High Court’s ruling in favour of the exhaustion of rights doctrine meant that once Seiko sold the original Epson cartridges, its exclusive rights were considered exhausted. This essentially means that Seiko could no longer control the downstream use or resale of those cartridges after the first sale, unless express conditions had been set. The court’s decision significantly limits the scope of patent holders’ control over patented products once they have been sold to a third party.

For patentees, this decision means they must now be more proactive in imposing explicit contractual conditions if they want to control the use or resale of their patented products after the initial sale. Without such conditions, their patent rights are deemed exhausted, and downstream activities like repair, refurbishment, or resale would generally not constitute infringement.

The ruling also has broader implications for industries that rely on the resale or modification of patented products, such as the printer cartridge industry in this case. It underscores the importance of carefully considering how patents interact with other forms of intellectual property (e.g., design rights, trade secrets, and copyrights) when attempting to control the use of products post-sale.