Repair v Rebuild – when modifications to patented article will and will not enable a patentee to maintain control post-sale

Seiko Epson Corporation v Calidad Pty Ltd [2017] FCA 1403

Infringement Repair v rebuild Implied licence Mechanical Electrical

 

Burley J

In this first instance Federal Court of Australia proceeding, Burley J considered the tension between the rights of the purchaser of a patented product, and the rights of the patentee to maintain control of the product in order to determine under what circumstances the importation and sale of refilled printer cartridge will infringe patent rights applicable to the original cartridge. Ultimately his Honour confirmed the “implied licence” approach applied in National Phonograph Co of Australia Ltd v Menck (1911) 12 CLR 15 and cast a new test to determine whether the repair or refurbishment of a patent product will extinguish the implied licence.

The proceeding also covered issues of trademark infringement, misleading and deceptive conduct and breach of contract.

Background

Seiko Epson Corporation (Seiko) is a global manufacturing company which manufactures and sells printer products, including printer cartridges under the trademark Epson. Epson products are sold within Australia via its exclusive distributor, Epson Australia Pty Ltd. (EAP).

The respondents, comprising the Calidad group of companies (Calidad), purchased “refilled” Epson cartridges from Ninestar Image (Malaysia) SDN. BHD (Ninestar) and imported the refilled cartridges into Australia for resale as Calidad branded cartridges fully compatible with Epson printers (Calidad cartridges).

The process used by Ninestar to refill the cartridges is relatively complex requiring more than simply replenishing the ink reservoir with ink. Each cartridge includes a memory chip which records and stores data indicative of the amount of ink in the cartridge. This ink data is used to prevent printing if the amount of ink remaining in the cartridge falls below a threshold level. The chip also acts as an inbuilt restriction since simply refilling a depleted cartridge will not restore it to a functional state. Accordingly, Ninestar’s process necessarily made an un-trivial modification to the cartridge to either “reset, reprogram or replace” the memory chip.

Issues and decision

The proceedings brought by Seiko and EAP against Calidad contended that the importation and sale of the Calidad cartridges infringed the claims of its Australian patents (Australian Patents Nos. 2009233643 and 2013219239).

Both patents relate to a printing ink cartridge adapted to be attached to an inkjet printer by means of a plurality of electrical terminals. The patents propose “a structure for preventing the information storage medium [or memory] from shorting and becoming damaged due to a drop of liquid being deposited on the terminals connecting the printing apparatus with the storage medium”.

Calidad did not dispute that the refilled cartridges fall within the relevant claims of the patents. Rather, Calidad submitted that under principles established in National Phonograph it is the beneficiary of an implied licence to use the cartridges including the right to resale.

The central dispute in these proceedings concerns the intersection of a patentee’s rights to control the use of patented goods after sale with the rights of the purchaser as the owner of those goods to deal with them.

Implied Licence

In some jurisdictions, this tension is dealt with by a “doctrine of exhaustion” under which the patent right is said to be exhausted following the first sale (eg, the recent landmark United States Supreme Court decision in Impression Products, Inc. v Lexmark Intern., Inc.137 SCt 1523 (2017)). However, under Australian law, the most relevant authority is National Phonograph, in which the Privy Council adopted the implied licence approach.

Under this approach, where the sale of goods is made without any restriction by the patentee, (sale sub modo) the purchaser or subsequent owner of a patented product is conferred an unrestricted right of use or an implied licence, which covers at least the rights to import, use and dispose of the product. In his Honour’s view, as supported by more recent Australian judgments (Austshade Pty Ltd v Boss Shade Pty Ltd[2016] FCA 287; (2016) 118 IPR 93), this remains the correct approach under Australian law.

Burley J noted that while the implied licence approach allows the patentee to impose limitations on the implied licence, the onus lies upon the patentee to notify the purchaser of those restrictions at the time of sale otherwise they may not hold. Furthermore, any restriction or limitation notified by the patentee does not reside or run with the goods so that any restriction will not be encumbered on subsequent owners unless they are made aware of the restrictive conditions upon taking title.

Significantly his Honour saw no difficulty, with reference to the authorities, of implying the licence where the patented goods are first sold outside of the patent area (that is, broadly, outside Australia). Having examined and established the above law and principles, his Honour found that the initial sale of the Epson Cartridges to purchasers overseas granted an implied licence to those purchasers to dispose of the cartridges as they wished, including giving or selling them to another party. Furthermore, his Honour was not satisfied by Seiko’s submission that the cartridges included an “inbuilt restriction” by virtue of the technical limitations imposed by the memory chip. Therefore, the implied licence was without restriction and could be attached to cartridges imported and sold in Australia irrespective of the original sale being made elsewhere or that the cartridges may have been discarded by the original purchaser and collected by Ninestar.

When do modifications extinguish an implied licence?

In the present case however, the Epson cartridges had been refilled and the memory reset, reprogrammed or replaced by Ninestar to restore the original function. Ordinarily, such a modification might be regarded as a question of either repair to, or the “making” of, a patented product – whereby the former is permissible and the latter an infringement. However, since the modification to the cartridges had been made outside the Australian jurisdiction, the modification could in no way amount to a “making” infringement of the Australian claims, irrespective of degree.

Thus, the critical question was not based on a repair / making analysis, but rather whether Calidad could rely on the umbrella of the original implied licence attached to the cartridges at sale, or whether the modifications were such that the implied licence could be considered as extinguished.

Having not found any authority directly addressing the issue, Burley J was of the view that the threshold question to be considered is “whether or not the modified product is materially the same embodiment of the invention as claimed as the product that the patentee sold without restriction.”

His Honour further explained that in order “to assess whether or not the implied licence continues after modifications are made one must consider the significance of modification work done on a product and how the modifications in question relate to the features of the patented product that are defined by the claim. Where that work done, or alteration made, does not concern a claimed feature, then the work is irrelevant to the analysis. That is because the patentee’s rights to limit the use of the patented product arise because the product represents an embodiment of the claimed features” [178]

Furthermore, Burley J applied a three stage test as follows:

  1. What is the scope of the invention as claimed?
  2. What is the manner in which the patentee’s product is an embodiment of the invention as claimed?
  3. To what extent do the modifications made affect the patented product insofar as it represents an embodiment of the claims?

The Calidad Cartridges

His Honour applied the three step test to the Calidad cartridges. In respect of the claimed invention, the parties had agreed that the trial should be focused entirely upon claim 1 of Australian Patent No. 2009233643. That claim and its relevant features, is broadly summarised by Burley J at [201]:

“It may be seen that the features of the product claimed, broadly, are that it is an ink cartridge that can be attached to a printer by inserting it, with both the ink cartridge and printer having a plurality of terminals. The ink cartridge must have a memory driven by a memory driving voltage (integer [2]), an electronic device driven by a higher voltage (integer [3]), terminals electrically connected to the memory and terminals electrically connected to the electronic device (integer [4]), and contact portions for the terminals which are arranged in a particular way (integers [5]-[11]).”

His Honour interpreted the “memory” feature as being a hardware component rather than information or data.

The modifications made by Ninestar involved eleven different types of Epson cartridges and nine different refilling processes. As previously noted, a key step to refilling the cartridges and restoring them to a functional state was to “reset, reprogram or replace” the memory so that it would not indicate the cartridge as being depleted. Ninestar accomplished this by either:

  • Re-writing the memory without physical replacement of the unit; or
  • Replacing the memory chips entirely – a process which involved cutting out the printed circuit board (including the memory chip) from the cartridge; replacing the memory chip on the board with a generic chip; and refitting the board to a cartridge (which in all likelihood was a different cartridge).

In the former case his Honour found that re-writing the memory did not materially alter the product as it represented an embodiment of the claims of the Seiko Patent. However, where the chips had been replaced with a generic chip, his Honour found that the modifications materially affected, and changed, the embodiment, and thereby represented a material change to the embodiment that Seiko sold. In such cases the implied licence was extinguished by the modification.

Burley J found another modification in Ninestars refilling process which extinguished the implied licence from the original sale. This was where Ninestar’s refilling process included a step of cutting off a physical interface pattern used to “key” the cartridges to a particular model of printer. His Honour noted that the modification to the interface pattern was borderline in the context of the present analysis. He concluded that since the claim recited “A printing material container adapted to be attached to a printing apparatus by being inserted in an insertion direction” the modification fell on the wrong side of the line and would serve to terminate the implied licence.

Implications

The decision provides a contemporary review of the correct legal approach for determining the purchaser’s rights to use a patent good under Australian law.  In particular:

  • The presumption that the sale of a patented good provides the purchaser (and any subsequent owner) with an unrestricted right of use – even across jurisdictional boundaries.
  • Patentees wishing to maintain control of patented goods after sale must clearly and expressly communicate limitations at the time of acquisition. Any limitations do not automatically pass from the initial purchaser to a subsequent owner.

Furthermore, the case breaks new ground by establishing a test for determining the scope of modification which would extinguish an implied licence by linking the modification made to the embodiment of the invention as claimed.

Appeal

Calidad have recently appealed the decision on grounds of non-infringement and that the implied licence of Seiko’s patent rights was not extinguished by the modifications they made in refilling the cartridges.