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Patent owners can no longer use their patent to control the use of a patented product after sale, with the adoption of the “exhaustion of rights” doctrine in Australia. This will have significant impact on planned obsolescence of goods and moves toward permitting repair, improvement and reconditioning of products and better facilitating the “right to repair”.

The majority of the High Court has this month upturned existing patent law to affirm that:

  1. A patent owner’s rights in a patented product (as distinct from a patented process) are exhausted when the product is sold to the first purchaser; and
  2. A purchaser of a patented product can modify or improve their own property, including to prolong its life, so long as that does not constitute manufacture of a new product.

This case was about used printer cartridges. Calidad acquired empty second hand (but genuine) Epson printer cartridges, and reconditioned them for re-sale. This involved some modifications including creating and then plugging holes to allow new ink to be injected into the cartridge, and resetting a memory chip to inform the printer that the cartridge is no longer empty. Seiko Epson sued for patent infringement, arguing that this constituted a new manufacture of the product over which it had a patent. The majority of the High Court agreed with Calidad that it was not impermissibly making a new product, but that the modifications it made were within the rights of an owner of the physical goods to prolong their life, and make them more useful. The patent owner’s rights to control use of goods, once they had been sold, were therefore exhausted.

The implications of this are potentially far reaching. The adoption of the exhaustion of rights doctrine overturns the previously understood position. Since an appeal to the Privy Council from a High Court decision well over a century ago (in 1908 to be specific), it has been assumed that in Australia, the purchaser of a patented product had a “full” implied licence from the patent owner to use its own property (chattels) as it pleased, but only to the extent that it was on notice from the patent owner otherwise.

No more. The “exhaustion of rights” doctrine says that once a patent owner has been rewarded for its exclusive patent rights (the sale of the product), the product is then beyond the scope of the patent owner’s monopoly.

Impacts

Contracts: Now, for any conditions to be enforceable, patentees will need to negotiate them into sale contracts, leaving only contractual remedies for any breach. This seems impractical for mass consumer goods such as printer cartridges, although may be more commercially achievable for high-value, specialist technical equipment or machinery. This could also raise competition law issues, particularly now that section 51(3) of the Competition and Consumer Act was repealed a few years back, with the effect of no longer exempting many intellectual property transactions from competition law. In this regard, patentees who both use a patented product for themselves, and also sell it to others for them to use, may need to be very wary of purporting to contractually impose usage conditions on the sale of patented products.

Extended product lifespans: This case will have a profound impact on the notion of using patents to plan the obsolescence of products. A purchaser is entitled to repair or modify its own goods to prolong their life, so long as that does not constitute the manufacture of a new item.

“Right to repair”: This case will be seen as a positive move for “right to repair” advocates, potentially allowing greater freedom for non-OEM parts and non-authorised repairers. However, this ability will still be limited in cases where proprietary software or other intellectual property is the barrier, rather than a patent right.

“Freedom to use”: This case will have a significant impact on the way that “freedom to use” considerations are approached, at least in respect of patented products obtained in trade channels emanating from from the patentee (as opposed to copy-products). It may create new parallel importation issues, which were not addressed in this decision.

Hiring, no longer selling? This case may also drive a move toward new business models involving patented products being hired to end-users, rather than sold. Along with “sale” and “manufacture, the “hire” of a patented product is expressly an exclusive right of patentees under the Patents Act. This is harder to imagine with fast selling consumer goods such as printer cartridges, but could happen with high value specialist equipment and machinery. This would keep the physical product also within the ownership of the patentee, who can then restrict modifications and improvements, and the manner in which the product is used.

Other IP rights? There are also going to be questions about whether an exhaustion of rights doctrine should also apply to other IP regimes. Stay tuned.

Action required

In the meantime, now is the time to review any sales contracts that purport to impose conditions on the sale of patented products.

Link: Calidad Pty Ltd v Seiko Epson Corporation [2020] HCA 41 (12 November 2020)

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