3.2 A patentee's rights to control the use of patented goods after sale
80 The exclusive rights of the patentee pursuant to s 13(1) of the Act are, during the term of the patent, to exploit the invention and to authorise another person to do so. The definition of "exploit" in the Dictionary (Schedule 1 to the Act) is:
exploit, in relation to an invention, includes:
(a) where the invention is a product - make, hire, sell or otherwise dispose of the product, offer to make, sell, hire or otherwise dispose of it, use or import it, or keep it for the purpose of doing any of those things; or
(b) where the invention is a method or process - use the method or process or do any act mentioned in paragraph (a) in respect of a product resulting from such use.
81 The exclusive right to "use" a product the subject of a patent means that upon sale or resale of a product the patentee will have continuing control of the use. The purchaser of a chattel such as a garden hose or a fishing rod which is the subject of a patent can never consider himself or herself to be entitled to all of the usual incidents of ownership, because the patentee could impose limitations on his or her "use". However, there is a level of impracticality about this arrangement. It creates a tension between the notion that the purchaser of a chattel is its owner who can deal with it as he or she wishes, and the notion that a patentee can continue to have control over any use to which the chattel may be put after sale. Historically, 2 competing theories were developed to address this tension, both of which operated to confer on the purchaser of the fishing rod untrammelled rights to use it as its owner.
82 One arises from the notion that upon a first authorised sale of a chattel by or with the approval of a patentee, the patentee exhausts all patent rights in the subject matter of its invention. This is often called the "exhaustion of rights" doctrine. This is the approach that has been adopted for many years in the United States and which was recently confirmed by the United States Supreme Court in Lexmark. The other is that there exists an implied licence to use a chattel in any manner in which the purchaser desires upon purchase, unless the patentee imposes conditions at the time of sale. Both of these theories were considered in the influential decision of National Phonograph. The majority in the High Court (National Phonograph Co of Australia Ltd v Menck (1908) 7 CLR 481) favoured an approach that broadly adopted an exhaustion of rights approach. On appeal to the Privy Council ((1911) 12 CLR 15), this was overturned and an implied licence approach was adopted, in the manner set out below.
83 In National Phonograph the National Phonograph Company (NPC) sold Edison records that were made "in accordance with, and under the protection of, the letters patent" (at 17). That is, the records embodied the invention claimed. NPC's business model was to sell its records to intermediaries ("jobbers") under contracts that enabled them in turn to sell them to dealers. The dealers were themselves subject to contracts with NPC which imposed restrictions upon how they could sell the records. It was a term of the dealer contract that if the dealer was removed from the list of authorised dealers, then he could no longer sell, deal in or use, either directly or indirectly, the records. The defendant had his name removed from the list of dealers and yet declared that he was free to dispose of the goods as he wished. He was found not to have acted in breach of any contract, but was nevertheless bound not to make use of the patented products in any way inconsistent with restrictions imposed by the patentee of which he was given notice.
84 The relevant part of the dispute concerned whether the rights conferred upon a patentee pursuant to s 62 of the Patents Act 1903 (Cth), which gave the patentee full power, sole privilege and authority to "make, use, exercise, and vend the invention", entitled the patentee to constrain Mr Menck (the question of importation did not arise).
85 In the High Court, the majority found that a patentee is not entitled to impose conditions upon the sale or use of patented articles separately from any contract that it might have with a subsequent purchaser. This conclusion arose from a survey of the law of England and the United States as it stood at the time of the decision (that is, 1908), and the conclusion was that neither demonstrated a clear line of authority (7 CLR at 518 per Griffiths CJ). The majority favoured the view that it is an elementary principle of the law of personal property that the owner of chattels has an absolute right to use and dispose of them as he or she thinks fit, and that no restrictions can be imposed upon this right, except by positive law or by contract. The right asserted by NPC depended on whether the words "use" and "vend" in s 62 of the Patents Act 1903 (Cth) imposed such a restriction. Chief Justice Griffiths, as one of the judges in the majority, found that neither term could be construed, on the authorities, in such a way as to warrant a deviation from the elementary principle and broadly found that a patentee exhausts all patent rights upon the first sale of the goods.
86 NPC appealed to the Privy Council ((1911) 12 CLR 15), which overturned the decision of the High Court, Lord Shaw delivering the judgment. The Privy Council found that it was not in question that the elementary principle that an owner may use and dispose of ordinary goods as he or she thinks fit remains correct. It recognised that there exists a tension (referred to as a "difficulty" at page 22) between that principle, and the right of property granted under the Patents Act by way of monopoly "to make, use, exercise, and vend the invention … in such manner as to him seems meet". The tension was reflected in the two separate and conflicting strands of reasoning between the majority in the High Court (Griffiths CJ, Barton, and O'Connor JJ) and the dissentient judges (who, on this point were Isaacs J and possibly Higgins J). The former found that upon sale of a chattel the subject of a patent, the product "passed out of the limit of the monopoly". The latter preferred an analysis whereby any conditions imposed by the sale by the patentee simply ran with the goods.
87 The Privy Council rejected both approaches. Lord Shaw said (at 23 to 24, emphasis added):
There is no doubt that, if the doctrine contended for by the appellants and affirmed by the dissentient Judges in the Court below were to be given effect to, namely, that the conditions imposed by the patentee run with the goods, a radical change in the law of personal property would have been made. But if that latter view be an extreme view, and if the restriction upon alienation, use or otherwise of the chattel purchased, be a restriction arising from the fact that the person who has become owner has done so with the knowledge brought home to him of the limitation of his rights of alienation or otherwise, then there seems to be no radical change whatever.… These limitations are merely the respect paid and the effect given to those conditions of transfer of the patented article which the law, laid down by Statute, gave the original patentee power to impose.
88 It is relevant to one of the present arguments that in this passage the Privy Council emphatically rejected that conditions imposed by a patentee "run with the goods". The Court adopted the language of licence. It said (at 24):
It may be added that where a patented article has been acquired by sale, much, if not all, may be implied as to the consent of the licensee to an undisturbed and unrestricted use thereof. In short, such a sale negatives in the ordinary case the imposition of conditions and the bringing home to the knowledge of the owner of the patented goods that restrictions are laid upon him.
89 It was in this way that the Privy Council was able to reconcile the tension that it had earlier identified. It did so by adjusting "the incidence of ownership of ordinary goods with the incidence of ownership of patented goods in such a manner as to avoid any collision of principle" (at 22). In its conclusion (at 28) it said (emphasis added):
In their Lordships' opinion, it is thus demonstrated by a clear course of authority, first, that it is open to the licensee [of the patentee], by virtue of his statutory monopoly, to make a sale sub modo, or accompanied by restrictive conditions which would not apply in the case of ordinary chattels; secondly, that the imposition of these conditions in the case of a sale is not presumed, but, on the contrary, a sale having occurred, the presumption is that the full right of ownership was meant to be vested in the purchaser; while thirdly, the owner's rights in a patented chattel will be limited if there is brought home to him the knowledge of conditions imposed, by the patentee or those representing the patentee, upon him at the time of sale. It will be observed that these propositions do not support the principles relied upon in their absolute sense by any of the Judges of the Court below. On the one hand, the patented goods are not, simply because of their nature as chattels, sold free from restriction. Whether that restriction affects the purchaser is in most cases assumed in the negative from the fact of sale, but depends upon whether it entered the conditions upon which the owner acquired the goods. On the other hand, restrictive conditions do not, in the extreme sense put, run with the goods, because the goods are patented.
90 It is to be noted that in this and other passages, the focus is upon the owner's rights in a "patented chattel". That is, the physical embodiment of the invention, as defined by the claims.
91 Contrary to the view of Griffiths CJ in the High Court, their Lordships did not consider that the law so stated was at all novel. They considered that it arose from a clear lineage that could at least be traced to statements of Lord Hatherley LC in Betts v Willmott (1871) LR 6 Ch App 239 (Betts v Willmott). In that case it was held that if the owner of a patent manufactures and sells the patented article in France, the sale carries with it a licence to use the article in England. Lord Hatherley LC said (at 245):
…unless it can be shewn, not that there is some clear injunction to his agents, but that there is some clear communication to the party to whom the article is sold, I apprehend that, inasmuch as he had the right of vending the goods in France or Belgium or England, or in any other quarter of the globe, he transfers with the goods necessarily the license to use them wherever the purchaser pleases. When a man has purchased an article he expects to have control of it, and there must be some clear and explicit agreement to the contrary to justify the vendor in saying that he has not given the purchaser his license to sell the article, or to use it whereever he pleases against himself.
92 It is particularly relevant to the present case that this passage identifies that the implied licence arising upon the sale includes a licence upon the part of a person who has acquired a patented product abroad to import it into the country. Here, Ninestar acquired the original Epson cartridges abroad, modified them and then CDP acquired those products from Ninestar and imported them into Australia for subsequent sale.
93 As to the nature of the right of the patentee to limit subsequent use, the Privy Council endorsed the following reasoning of Farwell J in British Mutoscope and Biograph Co Ltd v Homer (1901) 1 Ch 671 (British Mutoscope) at 673 - 674 (emphasis added):
… it has recently been held in Incandescent Gas Light Co. Ltd. v Brogden that a purchaser who buys with knowledge of the conditions under which his vendor is authorised to use the patented invention is bound by such conditions, and that such conditions are not contractual, but are incident to and a limitation of the grant of the license to use, so that if the conditions are broken there is no grant at all.
94 This passage provides an indication that whilst the patentee may impose restrictions upon a purchaser or subsequent title holder of the patented product, the licence does not arise strictly from contract but rather as an incident of the nature of the patent rights.
95 The Privy Council in National Phonograph moved on to approve the observations of Cozens-Hardy LJ in McGruther v Pitcher (1904) 2 Ch 306 at 312 who remarked that in an action by a patentee claiming an injunction to restrain an infringement of patent it is open to the defendant to plead a licence by the plaintiff. His Lordship said:
That license may be express, or it may be implied from the sale by the patentee of the patented article, but, if the defendant pleads a license, then it is competent for the plaintiff to reply, "The license which I granted is a limited licence, and you, the person who has now got the patented article, were aware it was only a limited licence, and you cannot therefore defend yourself against my claim for an infringement of my patent, because you are going outside the license which to your knowledge I gave with reference to this article".
96 It is apparent from this passage, as well as from the passage quoted from page 28 of National Phonograph in [89] above that the onus lies upon the patentee to establish that upon sale, conditions limiting the use that may be made of the patented product are notified to the owner, and that in the case of any subsequent owner, they too have notice prior to coming into ownership.
97 On the facts of National Phonograph the defendant was not free to deal with the goods as he wished, because the NPC had given him notice of restrictions that it wished to impose upon any dealings with goods. Despite having acquired the patented records, that notice was sufficient to constrain the defendant. The conclusion of the Privy Council was as follows (at 28-29, emphasis added):
Applying these principles to the present case, the result is this: the respondent, Mr Menck, has been acquitted of every charge of violation of contract which was laid against him by the appellants. He has also succeeded in showing that the claim made by the appellants as patentees was in its nature extreme and unsound in law. But he made this mistake: he assumed that, being guiltless of violation of contract, he was as free as an ordinary member of the public who had acquired possession of articles embodying the appellants' patent. His misfortune, however, consists in this, that by the very fact that he entered into contractual relations with the appellants, he has become seized with the knowledge of the conditions on which they dispose of their goods, and he is not free to propone the plea that such conditions have not been brought home to him. When he therefore announced his intention to deal in these articles as ordinary articles of commerce, he must be held to have pursued a mistaken course, the course of treating himself as an unrestricted instead of a restricted trader. In this particular case the result may involve some hardship to him, but their Lordships cannot see their way to a departure from the principle that a restriction rests upon a purchaser of goods which are covered by a grant of patent, and which have come into the possession of a purchaser in the full knowledge of the restrictions imposed by the patentee upon their disposal.
98 Accordingly, there is a presumption that a sale sub modo (sale without restriction) confers an unrestricted right of use upon the purchaser or subsequent owner of the patented product, which covers at least the rights to import, use and dispose of the product. To avoid this consequence, a patentee must make a sale subject to limitations which are effective to restrict the importation, use or disposal of the product by the purchaser or successor in title to the purchaser. It must show that notice of any restriction was brought to the knowledge of the purchaser at the time of sale.
99 In T. A. Blanco White's Patents for Inventions, 4th ed (1974) at 3-219 (Blanco White) the learned authors say (emphasis added):
A sale of a patented article made by a patentee gives to the purchaser, in the absence of notice to the contrary, license under the patent to exercise in relation to that article all the normal rights of an owner, including the right to resell. It follows that in order to establish infringement the patentee must prove that alleged infringing articles were not made by him, either here or abroad [citing Betts v Willmott at 242, 244]. The position is the same where the article has been made in the United Kingdom under license from the patentee, or (it would seem) where in any other way it comes upon the United Kingdom market with his consent;… The implied license extends to repair of the article bought - to the "prolonging of its life" - but not to renewal under pretence of repair; for repair is one of the normal activities of an owner, but sale of one patented article gives the purchaser no license to make himself others.
100 In Interstate Parcel Express Co Pty Ltd v Time-Life International (Netherlands) BV (1977) 138 CLR 534 (Interstate Parcel) the High Court referred to National Phonograph in obiter dicta. In that case, a bookseller imported books from an American wholesaler and sold them in Australia. In response to an allegation of copyright infringement, the bookseller submitted that it took the books free of any restrictions, relying on National Phonograph. Justice Gibbs quoted (at 540) the first sentence of the passage in Blanco White set out above, and also the following passage from 10-104, as summarising the decided case law in relation to implied licences upon sale of patented products:
In the absence of any express term to the contrary, when a patented article is sold by or with the consent of the patentee (or the proprietor of a registered design) the purchaser will take it together with a full license to deal with it as if it were not patented. Further, any person into whose hands it may later come is entitled to assume that such a full license has been given with it; it makes no difference that he may later discover that this was not so, if he was ignorant of it at the time of purchase.
101 After setting out aspects of the reasoning of the Privy Council in National Phonograph, Gibbs J expressed doubt that the conditions that may be imposed by a patentee conformed with normal principles of licences, but nevertheless, noting that the long line of distinguished judges had concluded that it was so, accepted that it was indeed the consent or licence of the patentee to use the article that might be implied from the sale (at 542). Justice Stephen considered that such a licence arises from the "quite special case" of the sale by a patentee of patented goods, which turned upon the unique ability which the law confers upon patentees of imposing restrictions upon what use may, after sale, be made of those goods (at 549). His Honour said (at 549 - 550);
But, to ensure that consequence despite the existence, albeit in the instance unexercised, of this power on the patentee's part, the law treats the sale without express restriction as involving the grant of a license from the patentee authorising such future use of the goods as the owner for the time being sees fit. The law does this because, without such a license, any use or dealing with the goods would constitute an infringement of the patentee's monopoly in respect of the use, exercise and vending of the patent. A sale of goods manufactured under patent is thus a transaction of a unique kind because of the special nature of the monopoly accorded to a patentee; the license, whether absolute or qualified, which arises upon such a sale is attributable to the existence and character of that monopoly.
102 It follows from the principles set out in National Phonograph and as subsequently interpreted that, if a restriction of the right to use was not imposed as a condition of the purchaser's acquisition of the goods, but at another time or by some other means is sought to be imposed by the patentee, it is not effective.
103 This was the view taken by Jacob J (sitting in the United Kingdom Patents Court) in Roussel-Uclaf v Hockley International Ltd [1996] RPC 441 (Roussel). In that case, the patentee, Roussel, made a pharmaceutical product in France and supplied it to a Chinese joint venture company. The defendant, Hockley International, an English company, acquired the product directly or indirectly from the Chinese company. The European law of patent exhaustion did not apply, because there was no relevant sale inside the European economic zone. Hockley International relied upon the National Phonograph principles in asserting that it took the product free of any restrictions. Justice Jacob found that it did, and stated the applicable principle as follows (at 443):
It is the law that where the patentee supplies his product and at the time of the supply informs the person supplied (normally via the contract) that there are limitations as to what may be done with the product supplied then, provided those terms are brought home first to the person originally supplied and, second, to subsequent dealers in the product, no license to carry out or do any act outside the terms of the license runs with the goods. If no limited license is imposed on them at the time of the first supply no amount of notice thereafter either to the original supplyee (if that is the appropriate word) or persons who derive title from him and turn the general license into a limited licence.
104 That reasoning was adopted by Arnold J in HTC Corporation v Nokia Corporation [2013] EWHC 3247; [2014] RPC 19 at [156].
105 Justice Jacob confirmed that Roussel, as the patentee, must establish the relevant restriction (at 443), and accordingly, bore the onus. In relation to the supply by Roussel to the Chinese company, Roussel relied upon a practice of labelling the goods with restrictions as to re-export. However, the Court held that it had not established that the particular products in question bore those labels, or that a restriction was imposed or brought home by any other means (at 443 - 444). Accordingly, no conditions were imposed on that subsequent supply.
106 In relation to supply to Hockley International, Roussel relied upon a letter sent directly by Roussel to Hockley asserting that the products were subject to conditions as to sale and use. Justice Jacob considered that this was not a restriction imposed as a condition of Hockley's acquisition of the products; the time for imposing such condition having passed with the making of the contract of supply (at 444):
Next I turn to the position of the defendants as subsequent supplyees. Had it been brought home to them that there are such conditions? In a sense it is virtually impossible to do this once it has not been established that it was not brought home to the original purchasers. What is relied upon is indeed the letter which I have just quoted. That says in the previous sentence: "it is not correct that our client's technical grade material is freely available to the world market without conditions as to its use". That is a pretty opaque way, if it be intended, to say that there is a positive imposition of a limited permission to use. … The question is not whether the market is grey or any other colour or shade, but whether or not conditions of a limited licence were imposed when the product was first supplied by Roussel. This letter of 24 December 1993 does not convey to the defendants that the product was originally supplied subject to a limited licence.
107 The essence of the licence is that it arises automatically upon the unconditional sale of the patented product. The patentee must act to negative the licence if limitations are to apply.
108 National Phonograph was recently considered and applied by Dowsett J in Austshade Pty Ltd v Boss Shade Pty Ltd [2016] FCA 287; (2016) 118 IPR 93 (Austshade). In that case, at [80], his Honour drew the following conclusions in relation to the application of National Phonograph:
80. The decision in National Phonograph establishes three primary propositions:
• First, the principle applicable to ordinary goods bought and sold is that the owner may use and dispose of those goods as he or she thinks fit. Notwithstanding any agreement which such owner may have made with the person from whom he or she bought the goods (by which he or she is bound contractually), he or she is not bound, in his or her capacity as owner, by any restrictions concerning the use or sale of the goods. Hence it is, "out of the question" to suggest that any such restrictive conditions run with the goods. The rights of an intermediate owner in that "capacity" are to be distinguished from the contractual arrangements which may bind him or her in dealing with the person from whom the goods were acquired. The point is that the intermediate owner may give to his or her purchaser, good title to the goods, notwithstanding any contractual restriction imposed upon the intermediate owner at the time of his or her acquisition of the goods.
• Second, the general doctrine of absolute freedom in the disposal of chattels of an ordinary kind is, in the case of patented chattels, subject to the restriction that the person purchasing them, having knowledge of the conditions attached by the patentee, which knowledge is clearly brought home to him at the time of sale, is bound by that knowledge and accepts the situation of ownership subject to the limitations. In other words, a patentee may bind the power of a purchaser to deal with the goods, but such limitation will only bind a subsequent purchaser from that purchaser if the former has, at the time or purchase, actual knowledge of the limitations.
• Third, in the case of such a resale, it is not presumed that conditions imposed on the vendor by the patentee will bind the subsequent purchaser. Rather, the sale will be presumed to have vested the full right of ownership in the subsequent purchaser unless the conditions imposed by the patentee have been brought home to him or her at the time of sale. Hence it is not sufficient that the ultimate purchaser may know of the patent and its application to the goods acquired. There must be actual knowledge of the limitations imposed by the patentee at the time of the first sale.
109 The following propositions are relevant to the consideration of the present dispute, and arise from the cases above.
110 First, it is important to be clear about references to "a patented product" or a "patented chattel" or similar language. In each instance this is a reference to a product that embodies the invention as claimed in the patent in suit. It was in this manner that the cases referred above used these and similar terms.
111 Secondly, any restriction or limitation notified by the patentee does not run with the patent and goods in rem, but rather applies in personam as an obligation on the owner of the goods from time to time, contingent upon the provision to the owner of notice prior to or at the time of taking title to the patented product; National Phonograph at 23 - 24 and 28 - 29; Betts v Willmott at 245; Austshade at [80].
112 Thirdly, the onus lies on the patentee to establish that the first and subsequent dispositions were subject to restrictive conditions; National Phonograph at 28; Interstate Parcel at 540; Rousel at [443]. Although Seiko contends that an evidentiary onus lies on the Calidad parties to establish their entitlement to re-sell repaired or modified original Epson cartridges, there is no dispute between the parties that Seiko bears the legal onus in respect of the imposition of any restrictive conditions.
113 Fourthly, the rights conferred by an acquisition of patented goods without notice of any restriction from the patentee are in the nature of a somewhat unusual implied licence that arises from the intersection of patent rights and the "elementary principle" of the law of personal property that the owner of chattels has an absolute right to use and dispose of them as he or she thinks fit; National Phonograph at 22, 28; British Mutoscope at 673 - 674; Interstate Parcel at 542 (Gibbs J), and 549 (Stephen J). Seiko submits that an aspect of the implied licence is that it arises in order to give "business efficacy" to a transaction involving a patented article in line with the purchaser's commercial expectations, citing BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283 (BP Refinery), and the reference by Gibbs J in Interstate Parcel to "business efficacy" (at 542). In this context, it submits that whilst upon a sale of a patented product the implied licence would arise, on the facts of the present case an uncertain number of the original Epson cartridges were discarded by the first purchaser (in recycling bins and the like). Upon that occurring, it is no longer necessary to give business efficacy to the initial or any subsequent sale. To infer the grant of an implied licence to an entity which obtains patented goods after they have been discarded would, it submits, be contrary to the purpose of granting an implied licence, which is giving effect to a purchaser's commercial expectations so as to give business efficacy to the sale.
114 However, Seiko's submission tends to load the use of the words "business efficacy" by Gibbs J in Interstate Parcel with freight that his Honour did not intend. His Honour had already noted (at 541) the unique nature of the implied licence that arises from the intersection of patent rights and the "elementary principle". There is no suggestion in the authorities, including Interstate Parcel, that the implied licence arises only in circumstances where business efficacy was required. Indeed, Seiko's submission tends to isolate but 1 of the 5 conditions that the Privy Council found in BP Refinery (at 283) must be satisfied in order for a term of a contract to be implied.
115 Furthermore, a first owner of patented goods obtained without restriction may do with them as he or she thinks fit; National Phonograph at 24. That includes selling the goods, giving them away or throwing them away. As Blanco White noted at 10-104, any person in whose hands the patented product subsequently falls is entitled to assume that such a full licence has been given with it. Unless the patentee makes it clear to all concerned that it is not giving the usual licence, then no restriction is applicable.
116 It is irrelevant whether a person acquires title from the first purchaser by a subsequent sale or by other means such as a gift. In this context, once title has passed from the patentee to the first purchaser without a restrictive condition of sale, the patentee is unlikely to have any ability to impose such a condition upon subsequent title holders; see Interstate Parcel at 549 (Stephen J); Austshade at [80] (third bullet point); Rousel at 444.
117 Fifthly, the authorities demonstrate that there is no difficulty implying the licence where the patented goods are first sold outside of the patent area (that is, broadly, outside Australia); Betts v Willmott at 245; National Phonograph at 24; Rousel. This has direct application in the present case, where Ninestar purchased the original Epson cartridges from a third party overseas, who in turn appears to have obtained those cartridges from users overseas. CDP in turn acquired the Calidad products from Ninestar and imported those products into Australia.