Reconceptualising patentee rights by the HCA: Australian contract law to the rescue

For years, the extent of patent rights of a patentee after sale of a patented product has been the subject of much judicial debate. This is especially so as the resolution of this issue required the High Court of Australia recently to strike a balance between the rights of a patentee on the one hand, and those of an owner of a patented product on the other.

Recently, in the case of Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41 (decided on 12 November 2020), the Court had the opportunity to determine the question of whether the patentee’s rights with regard to the sale and use of a particular product are exhausted at the time the product is sold or whether such patentee’s rights continue.

The context in which this question arose is as follows. Epson manufactures and sells printer ink cartridges. The cartridges contain inventions claimed in two patents. The original Epson cartridges are designed to be single-use. Thus, it is necessary to replace the cartridges once the ink runs out. Ninestar collects the empty original Epson Cartridges and makes modifications to the cartridges so as to be refilled and reused. Calidad acquired the modified cartridges from Ninestar and imported them to Australia to sell them to the public.

The exhaustion and the implied licence doctrines

When determining the scope of a patentee’s rights after sale of a patented product, the High Court Justices were divided as to which underlying doctrine should apply. Unlike the minority constituted by Nettle, Gordon and Edelman JJ who applied the ‘implied licence’ doctrine, the majority constituted by Kiefel CJ, Bell J, Keane J and Gageler J, opted for the exhaustion doctrine.

The exhaustion doctrine, which has taken roots in the European Union, suggests that a patentee’s monopoly right of use and sale with respect to a product are exhausted on sale, the rationale being that on the sale or resale of a patented product, the purchaser becomes the owner of such product (at [5]). However, under the implied licence, the law implies that the owner of a product has ordinary rights of ownership by virtue of an implied licence (National Phonograph Co of Australia Ltd v Menck [1911] UKPCHCA 1, (1911) 12 CLR 15, 28).

The fashion in which the High Court Justices synthesised each of the exhaustion and implied licence doctrines has certainly contributed to the perception that both doctrines stand in sharp contrast to each other. In particular, the minority judgment pointed to the fact that unlike the implied licence doctrine for which the statutory grant of patentee’s rights is the starting point, the exhaustion doctrine uses as its premise the common law governing chattels (at [203]).

Contract law shrinking the gap between both doctrines

Despite the discrepancies alluded to in the judgment, it is arguable that the gap between the two doctrines is not as wide as one might think. Indeed, both doctrines operate as defences to an infringement claim by a patentee. Furthermore, both doctrines recognise that a patentee’s rights to ‘make a product’ according to a patented invention and to exclude others from doing so are unaffected by the sale of a patented product (at [87], [249]).

More importantly, either doctrine would have had a similar effect if conditions were imposed by way of contract on the sale and use of a patented product by a patentee. In other words, if a patentee wishes to preserve the monopoly of their rights in relation to a patented product at the time of its sale, such patentee may want to consider imposing contractual conditions on the sale and use of a patented product. In such case, a patentee would not be affected by the Court’s binary choice as both the exhaustion and implied licence doctrines afford a patentee protection within the realm of contract law (at [5]-[6], [76]). Thus, contract law seems to come to the rescue of a patentee whose patent rights have been infringed since contractual remedies are neutral to the fact that a court which chooses to apply the exhaustion doctrine will treat a patented product, after its sale, as an ordinary chattel whose ownership rights vest fully in the purchaser of a patented product.

Nevertheless, the overemphasis that has been so far laid on the benefits of contract law in protecting a patentee’s rights should not create the false impression that contract clauses imposing conditions on the use and or sale of a patented product will always be enforceable. This is because contract clauses might be subject to the patents legislation. Indeed, section 144 of the Patents Act provides in general terms that a condition in a contract relating to the sale of a patented product is void if its effect includes the restriction of the buyer from using a product supplied or owned by a person other than the seller. The rationale behind this legislative provision is to target the anti-competitive conduct of patentees which can manifest in contractual conditions and restrictions.

Thus, by way of conclusion, it suffices to observe that contractual remedies will be available to a patentee whose patent rights were infringed and who has imposed conditions on the use and sale of a patented product; this is regardless of which doctrine has been opted for by the Court. However, contractual law will not always come to the rescue of a patentee as certain clauses may be deemed void. This, if anything, demonstrates that a patent is certainly not a carte blanche, given patent law’s interaction with competition law.

Samar Ashour is currently admitted as a solicitor at the Supreme Court of New South Wales.