Seiko sold EPSON branded printers and printer cartridges. A third party (Ninestar) obtained spent EPSON cartridges that had originally been sold by Seiko, refurbished them by refilling and modifying them so they would work again, and then Calidad sold them in Australia as refills. Calidad argued that this did not infringe Seiko's patent rights because, once a patented article is sold, the purchaser has the right "to treat it as an ordinary chattel". The changes to the cartridges varied, and included reprogramming or replacing embedded computer chips, and, in some cases, making changes to the outside of the cartridge.
At first instance, Justice Burley had held that some of the refurbished cartridges – those in which the changes "materially altered" the product – involved infringement of Seiko's patent rights. On appeal, the Full Federal Court extended this finding to all of the categories of cartridge in the case. In determining that the modified cartridges infringed the patents, the Full Court looked to the nature of the original EPSON cartridges, which were intended to have a short lifespan, and decided that the modification of the cartridges resulted in infringement.
Both the first instance and Full Court decisions had applied the reasoning from a 1911 decision of the Privy Council in the United Kingdom – which Calidad had reserved the right to challenge in the High Court. This reasoning was that the purchaser of a patented article has an "implied licence" to use the article without infringing the patent. Inherent in that concept of an "implied licence" was that the patentee continued to have rights over the article and could limit the scope of the implied licence by placing express restrictions on its sale or use.
In contrast, under US patent law, the doctrine of "exhaustion of rights" means that once an article is sold, the patentee has no further right to enforce the patent in relation to that article and the owner or subsequent users of the article are free to deal with it as they see fit (subject to any express contractual restrictions which may be imposed by the patentee at the time of sale).
Noting that it is no longer bound by decisions of the Privy Council, the High Court preferred the "exhaustion of rights" approach. The Court considered the doctrine of exhaustion conceptually simpler and in line with the overarching purposes of the patent system to promote technological advancement and "balance" the interests of producers, owners and users of technology and the public. It is also consistent with the fundamental legal premise that the owner of a chattel has the right to choose what to do with it – including reselling or reusing it, and "prolonging its life". In contrast, the High Court observed, the "implied licence" doctrine is a more artificial concept with the potential to lead Courts into error in assessing alleged infringements.
The High Court held that the modifications made to the cartridges did not amount to manufacture of new products by reference to the essential features of the patents. The majority held that "When all of Ninestar's modifications to each of the categories of cartridges were completed what remained were the original Epson cartridges with some modifications which enabled their re-use.” As a result there was no "manufacture or construction of a cartridge which embodied the features of the patent claim." – and, thus, no infringement of the patent.
The High Court's approach brings greater consistency to this important aspect of Australian patent law, giving businesses whose activities involve the repair, refurbishment or re-use of existing products greater certainty in relation to potential claims of patent infringement.
Owners of patents may still be able to impose restrictions over the post-sale use of patented products, but may only do so under ordinary principles of contract law. Any conditions will also be subject to laws relating to anti-competitive conduct and consumer protection (including unfair contract terms).