Calidad Pty Ltd & Ors v Seiko Epson Corporation & Anor

[2019] HCATrans 225

[2019] HCATrans 225

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S239 of 2019

B e t w e e n -

CALIDAD PTY LTD ACN 002 758 312

First Applicant

CALIDAD HOLDINGS PTY LTD ACN 002 105 562

Second Applicant

CALIDAD DISTRIBUTORS PTY LTD ACN 060 504 234

Third Applicant

BUSHTA TRUST REG

Fourth Applicant

and

SEIKO EPSON CORPORATION

First Respondent

EPSON AUSTRALIA PTY LTD ACN 002 625 783

Second Respondent

Application for special leave to appeal

KIEFEL CJ
KEANE J
GORDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 15 NOVEMBER 2019, AT 9.30 AM

Copyright in the High Court of Australia

____________________

MR D. SHAVIN, QC:   May it please the Court, I appear with my learned friend, MR C. DIMITRIADIS, SC, for the applicants.  (instructed by Gilbert + Tobin)

MR A.J.L. BANNON, SC:   May it please the Court, I appear with my learned friends, MS C.L. COCHRANE and MR D. LARISH, for the respondents. (instructed by Allens)

KIEFEL CJ:   Yes, Mr Shavin.

MR SHAVIN:   If the Court please.  This application raises the question as to whether a patentee can control what may be done with a patented product after it is sold, whether it can confine the use of a product to the patentee’s intended purpose, which is the test that was applied by Justice Yates at paragraph 288 below. 

The effect of the Full Court is to enable the patentees to assert an implied condition on the use of patented goods which runs with the goods where the condition purports to restrict the use of the goods to be single use only, precludes a subsequent purchaser making any modifications to convert them to re‑use, does not form any part of the claims, and was not notified as a condition by the patentee to the first buyer, let alone to any subsequent buyer.

Such a condition is not enforceable, either under the decision of this Court in National Phonograph, applying a doctrine of exhaustion, or the Privy Council on appeal in Menck, adopting an implied licence theory.  It is inconsistent with the decision of the United States Supreme Court in Impression Products v Lexmark on almost identical facts, also applying a doctrine of exhaustion, and the principles used by this Court to identify what repairs and modifications are acceptable if an implied licence theory applies. 

The effect of the approach of the Full Court is to expand the monopoly rights of the patentee beyond the claims, beyond the contemplation of the Act and in a way that will inhibit competition.  It is contrary to public policy.

KIEFEL CJ:   Does your essential argument, Mr Shavin, come down to the courts below were obliged to follow Menck and they did, your clients reserved their position and you would argue that Menck should not be followed and the exhaustion of rights principle which was recently confirmed in the Impression Products Case in the United States should be followed?

MR SHAVIN:   That is our primary argument.  We have a secondary argument, and the secondary argument is that the court’s approach to what constitutes making a product is in error.

GORDON J:   Is that because they found that you made a product regardless of which theory applied?

MR SHAVIN:   Yes, and because the way in which they determined that we had made a product was not by reference to whether what we had done constituted something material within the claims, but rather by reference to whether what we were doing was changing the product from the way in which it was first presented by the patentee to the market, and changing the product beyond the purpose the patentee had when putting it to the market. 

It is most clearly seen, if the Court pleases, in paragraph 292 of Justice Yates’ decision.  This is at application book 248 and 249, and perhaps if I could go to three short paragraphs.  At 288 his Honour said – this is adopting the implied licence test:

Further, the licence is one with respect to the article which, as an embodiment of the invention, the patentee has put into the market.  The fact that the article is an embodiment of the invention means that the patentee can exercise control over it –

and I would interpose at that point that is inconsistent with an exhaustion doctrine:

(if the patentee chooses to do so), but the permission (licence) which the patentee gives to the owner is one with respect to the particular article itself—that is to say, the right to use and dispose of that article as an incident of the ownership of it.  If not for that permission, the purpose of the sale would be frustrated so far as use is concerned –

and in parentheses, and we draw attention to this:

(the assumption being that the owner expects to use the article for its intended purpose).

Then at 292, if I could go to the middle of the paragraph, if the Court can see the sentence “But the licence was that implied”:

But the licence that was implied was with respect to the articles themselves, in the form in which they were got up by the patentee and put into the market.  Once Seiko’s authority as patentee to control the use of those articles is recognised, as it must be, and once the limited nature of the implied licence is recognised, a consideration of the materiality of the modifications made by Ninestar to the original Epson cartridges is not confined to only those features of the articles that are claimed features of the invention.

KIEFEL CJ:   You say that you should have regard to the integers of the ‑ ‑ ‑

MR SHAVIN:   Yes.

GORDON J:   Is that not what Justice Jagot did at 91 at application book 185?

MR SHAVIN:   In Justice Jagot’s approach ‑ ‑ ‑

GORDON J:   In other words, her Honour was saying, “I don’t mind whether it’s implied licence or exhaustion really, but as a matter of fact what you did constituted the making of a new embodiment of the invention claimed in the patent”.

MR SHAVIN:   But if I could take your Honour to paragraph 166 at page 217 of the application book, the way in which her Honour approached that task was tainted by giving materiality to the purpose.  So, having set out the steps, if your Honour could see in the middle of the paragraph:

Nor do I see how it could be concluded that the implied licence which arose on sale enabling the purchaser to use and repair the original Epson printer cartridge could be thought to extend to re‑purposing the cartridge once it was empty of ink by creating a new injection hole for ink to enable to cartridge to be re‑filled and sealing the original and new holes so that the cartridge, which had ceased to be a printing material container, was made into a new printing material container . . . As re‑purposed, the product was still an embodiment of the invention but was capable ‑ ‑ ‑

GORDON J:   I am sorry, Mr Shavin, I thought both at the beginning of 166 and then in the next sentence following that you have just read to us was the finding that regardless of what happened, it was the making of a new article within the scope of the patent, so it did not matter which test applied, you did not succeed.

MR SHAVIN:   I am sorry, yes, your Honour, and that is why I said we have as our secondary argument that regardless of the position on the doctrine of exhaustion, the court below erred by testing for infringement, not by reference to whether a material part of the invention claimed to have been taken, but by reference to whether something which would otherwise have been regarded as immaterial changed the purpose for which the patentee had put the product onto the market. 

It is at that point that we say where the court is determining infringement, not by reference to the substance of the claim which this Court identified in Myriad as being the way to approach the construction of claims – and Myriad at paragraph 144 and paragraphs 86 to 87 in the plurality - and in that case this Court said it is not a matter of the form of the words of the claim which our friends referred to in paragraph 10 of their outline, but it is a matter of looking at the substance of the invention, and the substance of the invention here was the spacing of the contacts which is identified in integers 5 to 11, and that is agreed by the court below.

What is done – the two matters that have been done and the relevant first category – was to drill a hole and put a cover over the top of it and to reprogram a microchip.  Now, reprogramming is not an integer of the claim at all.  The microchip itself is a claim, but not its content.  What is being said is that by drilling a hole and putting a piece of material over it once it has been refilled has remade the cartridge and ‑ ‑ ‑

KIEFEL CJ:   To what extent do you need to challenge the findings about what was done?

MR SHAVIN:   Not at all, because the findings were not in issue below.

KIEFEL CJ:   Do you say it is just the findings as applied to the essential integers of the claims?

MR SHAVIN:   It is a question of characterisation.  So there was no challenge below on the findings, and that is articulated by the court.  The court below – each of the judges below accepted - Justice Jagot below accepted the findings of the primary judge.  There was no challenge to any finding of fact.  The question is the characterisation of those findings.  So Justice Jagot at paragraph 92 at page 186 of the application book:

The primary judge’s reasons . . . disclose all relevant primary facts.  I adopt the same abbreviations as the primary judge.

That was not disputed by any of the judges below.  So there is no issue of fact before this Court.  The questions before this Court are, first, does the doctrine of exhaustion apply, and we say the decision of this Court in 1908 should be followed and it is consistent with the United States Supreme Court and it is consistent with the explanatory memorandum to the Bill which said that to the extent that the doctrine of exhaustion applies it is meant to continue, and it is consistent with the reasons of Lord Hoffmann in the United Case to which her Honour Justice Jagot referred when she refers to an implied licence or the doctrine of exhaustion. 

So we say, first, the doctrine of exhaustion does apply, should apply.  Secondly, we say if there is an implied licence, nowhere in any of the authorities does the implied licence say that the question as to whether you have remade the product is dependent upon the purpose for which the patentee first projected the product into the marketplace but rather, analogous to the approach in the repair cases, the question as to whether there has been a remaking of the product should be determined by the materiality of the changes in the context of the product as a whole and by reference to the integers of the claim. 

Now, that is the approach that was taken by the primary judge and, as our secondary argument, we say that that approach to what constitutes remaking was correct, that the approach taken by Justice Jagot and Justice Yates we say fell into error, first because Justice Jagot was wrongly influenced by the repurposing, and one can see that at paragraph 172 of her Honour’s reasons where her Honour said, in the middle of the paragraph:

It may be accepted that the actual status of the memory (that is, whether it shows the cartridge as full, empty or anywhere in between) is not part of the claim, but the fact that the claim involves a memory driven by a memory driving voltage is not irrelevant.  Considered in the context of the product as sold, which is essential to the scope of the implied licence to use the product without infringement of the patents, the fact that the re‑purposing of the cartridges, as a minimum, involves re‑programming the chip to change the memory supports the conclusion that the imported Calidad cartridges are outside the scope of any possible implied licence –

We say at that point, with respect, her Honour has fallen into error, just as his Honour Justice Yates at 292 fell into error by saying, “I don’t need to determine the materiality of what was done by reference to the claims.  All I need to do is look at the product”.  So if one stands back and thinks as a matter of principle here the essential integer is the spacing of the connectors, that is dealt with in integers 5 to 11.  But what is being said is that entitles the patentee to claim a monopoly on the use of ink in the printer because taking a cartridge and putting a hole in it is remaking the cartridge. 

Now, we suggest to the Court that if in fact one had melted the cartridge down and put it into an injection mould, that would be remaking the cartridge, but drilling a hole and covering it does not in any normal use of language constitute remaking, nor does it constitute doing something that is material in terms of the claim. 

As the United States Supreme Court said in Lexmark, it is not possible for a patentee to sell something as a single use and claim as patent infringement the fact that it is converted into a reusable cartridge, and as this Court said in 1908 in a passage that we have referred to, if I could take the Court to 509, the Court said that the purchaser can use it or improve upon it in whatever manner he pleases. 

Thus, what is happening here truly is not a remanufacturing of a cartridge; it is the drilling of a hole which is an improvement on it, a refurbishment to enable the cartridge to be reused, and it is not open to a person who invents a small aspect of the cartridge to then say, “I now gain a monopoly over the use of ink because you cannot do anything to that cartridge which would take it from my original purpose of a single use cartridge to being reusable”. 

That is the issue that the United States Supreme Court used to apply the doctrine of exhaustion.  It is the approach that was taken in the United Kingdom in the repair cases where, for example, in Aro Manufacturing to which our friends refer at paragraph 34, the court said:

Mere replacement of individual unpatented parts, one at a time, whether of the same part repeatedly or different parts successively, is no more than the lawful right of the owner to repair his property.  Measured by this test, the replacement of the fabric –

in a roof of a car does not constitute remaking it. 

GORDON J:   What page are you reading from, Mr Shavin?

MR SHAVIN:   I am in paragraph – I am in Aro Manufacturing v Convertible Top Replacement Company. There were two referred to, but 365 US 336.

GORDON J:   Just the page number.

MR SHAVIN:   It is page 604 of the print.

GORDON J:   Thank you.

MR SHAVIN:   There are four passages on that page.  In the left‑hand column at the top in the paragraph numbered 6:

We cannot agree.  For if anything is settled in the patent law, it is that the combination patent covers only the totality of the elements in the claim and that no element, separately viewed, is within the grant.

We would interpose here that it is plain that claim 1 is a combination claim.  Secondly:

The basic fallacy in respondent’s position is that it requires the ascribing to one element of the patented combination the status of patented invention in itself.  Yet this Court has made it clear in the two Mercoid cases that there is no legally recognizable or protected ‘essential’ element, ‘gist’ or ‘heart’ of the invention in a combination patent.

Then on the second – right‑hand column at the top:

No element, not itself separately patented, that constitutes one of the elements of a combination patent is entitled to patent monopoly -

Here of course the only part in the first category where there is a change to anything that is within the claim is the drilling of a hole into a cartridge and the finding below was that that was a remanufacturing of the cartridge and it was done not by reference to assessing the claim, assessing the integer in the claim and assessing its importance overall, but rather because it was said to be assessed by reference to the purpose. 

Thus, what the court below is saying is that although there is no part of the claim which says that the product is a single use product, there is no part of the claim which says that the product cannot be reused, nevertheless the court will imply a condition or a term or an integer into the claim that renders it an infringement to convert the single use product into a reusable product and that, in our respectful submission, is wrong as a matter of law and under the exhaustion doctrine by this Court.  We say, in our respectful submission, it is appropriate for this Court to consider restating the principles affirmed by this Court in 1908 as being a true statement of the law.

Once the patentee has sold the product, then the purchaser can do with it as they will and, in our respectful submission, by failing to give effect to that principle, whether as an exhaustion doctrine or by reference to an implied term or by whether the court is considering simply what is meant by “make”, the court below has fallen into error in a way that constitutes a matter of general application because the way in which the court has reasoned that there was a remaking and thus an infringement was contrary to principle by ignoring the terms.  That is the significance really of Justice Yates’ reasoning at paragraph 292 where his Honour said:

a consideration of the materiality of the modifications made by Ninestar to the original Epson cartridges is not confined to only those features of the articles that are claimed features of the invention.  To so find is not to extent the patentee’s statutory rights.  It is to do no more than recognise the patentee’s rights in the patented article itself as it comes into the hands of the first owner.

That, in our respectful submission, is an error of principle because in fact the infringement should be determined by the materiality of what is being done to the integers, the elements that are the subject of the claim.  To then say no, the right is in the product itself, is to in fact extend the statutory rights beyond the scope of the Act, beyond any principle that has been applied.  There is no case which has held, so far as we can find, and none to which our friends have referred, where a court has said we will determine whether a product has been made, not by reference to the integers of the claim, but by reference to the purpose for which the patentee intended the product to be used. 

That is a novel point.  That is a point that is inconsistent, in our respectful submission, with the clear findings of this Court below.  It finds no support in the Privy Council in Menck.  It is inconsistent with the approach adopted in the United States Supreme Court and, to the extent that the courts have analogously looked at what constitutes make, it is inconsistent with the approach adopted in the repair cases and, in our respectful submission, there is a serious question of error below on a matter of general application which is of significant importance to the scope and extent and enforceability of patent rights.

KIEFEL CJ:   Thank you, Mr Shavin.

MR SHAVIN:   If the Court pleases.

KIEFEL CJ:   Yes, Mr Bannon.

MR BANNON:   Your Honours, a patentee may exploit its patent as it sees fit.  It can choose which number of claims on a patent it will exploit and within each single claim it will ordinarily have a choice as to - between variant products, each of which is covered by the same claim.  The patentee in this case chose to exploit its patent by manufacturing and selling a single use printer ink cartridge with all of the features of one of the claims.  They were sold as single use cartridges and bought as such, so that when the ink ran out they were discarded by end users.  The finding of discard was made by all four judges at the trial and all three members of the Full Court. 

The commercial benefit of the vendor and acquirer was underpinned by this single use nature of the product.  Because of the nature of the exclusive rights given to a patentee, it was necessarily implied in the original sale transaction a licence to use and sell that product.  The logic of that is captured, and was captured, by this Court in Time‑Life, and can I refer to passages from that which appear in the Full Court judgment, first at AB 212 of the application book.  It is the passage in paragraph 151 at the bottom of the page of Justice Stephen as to the need for an implied licence because otherwise the acquirer of the patentee’s goods would not be able to use the goods or indeed sell them.

Chief Justice Barwick agreed with the reasons of Justice Stephen, as did Justice Jacob.  At 556, Justice Murphy came to a similar view and Justice Gibbs’ statement of the principle and the logic of it appears at 149 on the same page.  It is the same principle.  Inherent in that analysis is that the exclusive right in the patentee to use or vend or exploit a product within a claim survives sale of the patented product.  That is the only logic behind that statement of principle.

KIEFEL CJ:   If the exhaustion of rights doctrine had been applied, what would have been the outcome?

MR BANNON:   In that particular case?

KIEFEL CJ:   No, in this case.

MR BANNON:   In this case, no different outcome because exhaustion of rights is subject to a principle that it does not permit a reconstruction of the article.  We have provided some cases in relation to that and I will take your Honours to that very briefly at the conclusion. 

KEANE J:   In Lexmark Chief Justice Roberts points out the difficulties that that approach has for the orderly conduct of commerce.

MR BANNON:   Indeed.  Perhaps I will go to that now if I may, your Honours.  There is a bundle we have provided of the cases.  The Lexmark decision if one looks at 53 – this bundle has some numbering in the top right‑hand corner - looking at the big numbering in the top right‑hand corner - identifies the questions which were considered in Lexmark, and there were only two, and the question is whether a patentee that sells an item under an express restriction to reuse or resell enforced a restriction. 

So in that case they sold products in two forms.  One was at a higher price with no restriction, at a lower price on condition they did not resell it or they gave it back to the vendor.  The second principle sought to be raised was whether exhaustion theory applied to goods exported overseas and which came back to America. 

So there was no issue in that case, contrary to what may appear from our learned friends’ submissions, of the nature in this case.  In other words, it was not suggested that the changes had an impact on exhaustion theory.  The only issues being addressed were these attachment of conditions 1 and, second, the question of whether exhaustion theory survived export.  In other words ‑ ‑ ‑

KEANE J:   But in relation to exhaustion theory, as one sees at page 55 of the bundle, Part IIA, paragraphs [2] and [3] of the judgment, the American Supreme Court adopts and affirms the correctness of the proposition of the exhaustion theory from Bloomer v McQuewan, the same case that Justice Barton in this Court in Menck followed, as did Chief Justice Griffith and Justice Higgins and Justice O’Connor.

MR BANNON:   I am not sure if it is the same Bloomer.

KEANE J:   Yes, there is another Bloomer.  Bloomer v McQuewan is the - Chief Justice Griffith referred to the other Bloomer Case, but Justice Barton referred to Bloomer v McQuewan for the proposition that is stated there by Chief Justice Roberts.  So this is the exhaustion theory, and on the exhaustion theory, once you have exploited by sale, as they say, the article passes beyond the scope of the monopoly.  Now, what is wrong with that?

MR BANNON:   A number of things but, to the extent there was a reference to repair, no argument was put in Lexmark and none addressed that the changes which were made created a new product, a reconstruction.

GORDON J:   A new product in breach of the patent.

MR BANNON:   Yes.  So exhaustion theory accommodates reconstruction.  It is the same principle as is applied but under a different guise.  So the reference to repair in this case, if one looks at 56 of this bundle, right‑hand column:

But an illustration never hurts.  Take a shop that restores and sells used cars. 

That is all about repair and that is consistent with exhaustion theory.

KIEFEL CJ:   Mr Bannon, does that mean that there are potentially two questions of general principle in this case?  The first is whether exhaustion theory should be followed, and the second is what exhaustion theory contemplates or involves.

MR BANNON:   Well, the second question is a US question.

KIEFEL CJ:   That seems to be what you were saying.

MR BANNON:   We say there is no issue because if one goes to Aro, in this bundle at least, which starts at 2, in the bundle at page 8 in the first complete paragraph:

This Court’s decisions specifically dealing with whether the replacement of an unpatented part, in a patented combination, that has worn out, been broken or otherwise spent, is permissible “repair” or infringing “reconstruction” -

There is a reference there to a case - Wilson v Simpson which is an 1850 case, and if we go over to page 9 there is a paragraph which starts:

The distilled essence of the Wilson case was stated by Judge Learned Hand . . . “The [patent] monopolist cannot prevent those to whom he sells from . . . reconditioning articles worn by use, unless they in fact make a new article.”  Instead of applying this plain and practical test, the courts below focused attention on operative facts not properly determinative of the question of permissible repair versus forbidden reconstruction.

That is why we emphasise Lexmark was not suggested to be a case of forbidden reconstruction and, indeed, to the extent there were any indication of facts, it says that the ink was replaceable in the cartridges in Lexmark.

KIEFEL CJ:   You say you have findings of remaking in your favour?

MR BANNON:   Exactly.  If one goes to tab 64 of this bundle, this is obviously a much lower court.  It is post‑Lexmark and it was a strike‑out application or the equivalent.  But at page 67, it was a move to dismiss the plaintiff’s – the defendant argues that the changes to an X‑ray tube - or the ability to bring an infringement claim in respect of changes to an X‑ray tube was barred by Lexmark.  But at page 68 the learned judge in that paragraph identifies the extent of the product – the doctrine of patent exhaustion under initial law:

“the initial authorized sale . . . terminates all patent rights to that item.”

That is the exhaustion theory for the particular item.  But if you reconstruct that item, if one goes all through that paragraph down to about four lines from the bottom:

But the right to repair the purchased product does not include the right to ‘construct an essentially new article on the template ‑ ‑ ‑

KIEFEL CJ:   But it is put against you, is it not, that the question of remaking must be assessed according to the integers of the claim?

MR BANNON:   Taking it one step at a time, we say exhaustion theory does not bring about a different outcome, firstly, because it is ‑ ‑ ‑

KIEFEL CJ:   Well, there is a question as to that, obviously.

MR BANNON:   Well, not under US law, we say, and it is not the task of this Court to consider US law, we would respectfully submit, as – well, we say under US law exhaustion theory is as set out there.  What I should have referred back in Aro – your Honour, if could just go back to this, I think I forgot to mention in the dissenting reasons the reference was made to this principle as one which held good for - page 35 ‑ ‑ ‑

KIEFEL CJ:   Justice Harlan.

MR BANNON:  

For more than a hundred years –

yes.  It is dissenting but the principle observed – but it was applied differently as to whether it was a reconstruction.  The reference to “more than a hundred years” is a reference back to the Wilson Case of 1850.  So when one comes back to consider what the High Court did in Menck when it was referring to exhaustion theory cases, it was referring to exhaustion theory cases which accommodated this 100‑year‑old principle as at 1960, so this was 1850.  So whatever the various Justices of this Court were applying in Menck, it was in the context of – sorry, your Honour.

KEANE J:   I was just going to say if Justice Harlan was applying the exhaustion theory, he was a fainthearted exhaustionist because his Honour says:

The underlying rationale of the rule is of course that the owner’s license to use the device carries with it an implied license to keep it fit for the use . . . but not to duplicate –

So there does seem to be a lack of adherence in a coherent way to the exhaustion theory.

MR BANNON:   Well, I think that Lexmark refers to a principle of election.

KEANE J:   You elect to sell.

MR BANNON:   Correct.

KEANE J:   And by doing so, you exploit.

MR BANNON:   But the court from which the appeal was heard treated it as an implied licence theory – this is a US Supreme Court case – treated it going back many years, and if one looks at the cases which were cited in Menck by the High Court, they talk about on acquisition a party acquires the right to use, which is our licence theory. 

If Lexmark is moved to reconfigure the exhaustion theory, so be it, but it is not a concern of this Court.  But the point of that is to say that when our High Court considered those exhaustion theory cases, they were not considering reconstruction because Menck was not a reconstruction case.  It was a condition of sale case.  It was the case where, if you were a retailer and ceased to be a retailer, you were not allowed to sell the goods, and that is why the Privy Council said that condition held good because the relevant vendor had notice.  So that is why Menck is not informative, because it is not dealing with this topic.

KIEFEL CJ:   So it is an open question to be decided, if the Court was to go down that path.

MR BANNON:   Well, the difficulty, if I can then come back to the Time‑Life Case, the difficulty with the Court considering exhaustion theory is available is this Court, we submit, authoritatively in Time‑Life considered the question of the basis of the patent right.  It did that because the argument put in Time‑Life was that an importer of a book which had been acquired overseas from the copyright owner had an implied licence to sell that book in Australia, and the argument presented to the Court was because of the implied licence under a patent. 

All of the Justices said no, that was not right, for the reason that the difference between a patent licence and a copyright licence was this.  You do not need a copyright licence to read a book you acquire, to enjoy it, to use it; nor do you need mostly a copyright licence to resell it.  In contradistinction, under a patent licence after sale, post‑sale, the right survives and you do need a licence. 

So it was essential to their reasoning process in rejecting that argument and all five Justices applied that same logic.  So it is an authoritative statement by the Court.  That is informed, we submit, by the statement of the explanatory memorandum which is fully set out in Justice Greenwood’s decision at 166.  I think our learned friends quote the last part of this, but if one reads it in whole the part says:

It is intended that the question whether such a resale or importation constitutes an infringement in a particular case will continue to be determined as it is now, having regard to any actual or implied licences in the first sale and their effect in Australia, and to what is often known as the doctrine of “exhaustion of rights” so far as it applies –

So that is using an exhaustion right as a descriptor of what is the base or principle of patent law, which is implied licence, which is ‑ ‑ ‑

KIEFEL CJ:   The explanatory memorandum seems to raise a question about inconsistent approaches.

MR BANNON:   We respectfully submit the use of exhaustion rights considered in that context is indicating that it is just a practical descriptor of our theory, which is implied licence, which is also the UK theory.  Then in section 144 which is a part of our annexure to our outline which is 279, the three relevant subsections of that are (1), (4) and (5) and (1) effectively is a provision which relates to, third line, forcing.  In other words, a condition of a – and the point we emphasise here is sale of a patent invention is void if it would require the acquirer to buy additional goods from the patentee or from a third party.  So that is void.  Now, subsection (4) says:

It is a defence to proceedings for infringement of patent that the patented invention is, or was when the proceedings were started, the subject of a contract containing a provision, inserted by the patentee -

Then (5):

If the patentee offers the other parties to a contract . . . a new contract that does not contain the void condition –

then (4) does not apply.  Now, (4) does not make any sense if exhaustion theory is right because an exhaustion theory, once you sell under a contract, there are no patent rights left.  Section 144 presumes that on sale, if someone fails to comply with a void condition, they could be sued for patent infringement and (5) presumes that if you get rid of that condition, patent infringement is available. 

That does not sit and cannot sit with exhaustion theory.  Indeed, (5) implicitly accepts the Privy Council in Menck that you can attach conditions which run with the goods, subject to notice of course.  So we say there is no question available for the Court to consider as to whether exhaustion theory applies, against that background. 

The findings of this Court, including if I can just go to the question on making, if one looks at Justice Jagot’s reasons, include findings as far as any exhaustion theory is concerned the same result would obtain.  That appears at 164 of Justice Jagot’s reasons and which are agreed in by Justice Greenwood.  That is application book 216.  At 215 ‑ ‑ ‑

GORDON J:   Did you say 215?

MR BANNON:   Application book 215, your Honour, yes.  There is a quotation from Lord Hoffmann, paragraph 70:

Where however it is alleged that the defendant has infringed by making the patented product, the concepts of an implied licence or exhaustion of rights can have no part to play.

This is dealing with the European theory of exhaustion of rights:

The sale of a patented article cannot confer an implied licence –

So, what you have is a situation – you have Australian law about implied licence which does not suggest is it a licence to remake a product.  You have English law which follows exactly that theory.  You have US law which says you cannot reconstruct and you have, under exhaustion theory, you have European exhaustion you cannot reconstruct.

So, taking up a case to promote uncertainty as to whether or not the implied licence theory which has been the basal principle of our patent law since Menck and confirmed, we say, in Time‑Life and confirmed by the enactment of the…..for the reasons I did indicate – is not something which we suggest the Court ought accede to.  Further, under any, we say, proper analysis of exhaustion theory, the question of making still arises – which brings it back to simply a question of fact. 

My friend says it is a characterisation of fact.  It is an ultimate question of fact.  There may be basal facts but the only three members who have considered the question – of this Court so far who have considered the question of whether there was a making were the three members of the Full Court.  Justice Burley said, specifically, it was not an issue for him to consider.  He said the issue was one of whether the licence is terminated and he gave a basis for looking at termination of licence.  That appears at Justice Burley at 163, application book 56.

KIEFEL CJ:   I see the light, Mr Bannon.

MR BANNON:   Yes.  Just two paragraphs of Justice Jagot’s decision:  firstly, 172, which is at application book 219, her Honour says – her construction which is agreed with by Justice Greenwood – “memory” does include part of one of the integers of the patterns.  So that is another issue which our learned friends would seek to have agitated before the Court. 

Then, 174, her Honour looks at Schütz which is the Supreme Court’s consideration of the matter.  They took that matter up but in circumstances where the patent was for a product which had a reusable bottle.  That was the reason they took it up.  It was actually defined as a reusable bottle.  But, as her Honour says there, applying the Schütz factor, you come to the same result and 179 – I think which your Honours have been taken to – makes it clear that her Honour is looking at the integers of the pattern.

KIEFEL CJ:   Thank you, Mr Bannon.  Mr Shavin, you are going to deal in reply with section 144?

MR SHAVIN:   Yes, if the Court please.  I was also going to deal briefly with Time‑Life and Varex.  In our respectful submission, section 144 is not dispositive.  It deals with a condition.  The way in which the courts below approached this matter was not to deal with a condition of contract but to deal with the question of the approach to infringement.  They are different issues. 

In our respectful submission, it depends upon the way in which this Court approaches the question of the exhaustion doctrine.  This Court in 1908 said there can be no conditions.  But if this Court adopted an approach equivalent to that in Lexmark – in Lexmark they did contemplate a sale by the patentee on a condition to the first purchaser and it would be – in contract – not in patents.

Thus, in contract, section 144 might apply but, as a matter of infringement, it has no application.  It is a separate question.  There is no contract here.  There is no suggestion of contract here.  Of course, in Impression, there was a contract – there were conditions and the court said the patentee must resort to the contract terms, not to the question of patent rights.  That is a distinct and separate issue.  Section 144 can apply only to terms of a contract.  It cannot be used to apply to the question of characterisation of infringement or making.

In Time‑Life it is not dispositive.  It is not a positive statement by this Court.  It is dicta.  It was a copyright case.  Justice Stephen, at page 549, found the authorities on implied licences in patent cases as irrelevant to the case before the Court.  Justice Gibbs found at 541 that the concept of a vendor consenting to the use of a product by a purchaser to be a misuse of words but simply the followed the questions on the implication of a licence.

But it was done in a copyright context – not in a patent context.  It does not relate to the way in which one approaches the question of infringement and the primacy, or otherwise, of the terms of the claim as this Court said in Myriad of the substance of the invention claimed, not the formulaic words that are used in the claim.  Ultimately, it is a question of determining the materiality by looking at the invention as a whole, rather than by looking at the purpose of the patentee.

Our friends then referred to the decision in the District Court in Varex and at page 68 of the bundle that our friends supplied, there is, in the paragraph that deals with “the doctrine of patent exhaustion, “the initial authorized sale”  can I take the Court towards the end of the paragraph:

After the sale, the purchaser ‘has the rights of any owner of personal property, including the right to use it, repair it, modify it -

We would draw the Court’s attention to the language used by this Court in Menck at 509, where the Court used exactly the same language:

Hence it is obvious, that if a person legally acquires, by licence or purchase, title to that which is the subject of letters patent, he may use it or improve upon it in whatever manner he pleases; in the same manner as if dealing with property of any other kind.”

KIEFEL CJ:   Are you saying that there was no remaking here?  There was a modification.

MR SHAVIN:   Yes.

KIEFEL CJ:   Are you challenging the findings then?

MR SHAVIN:   No.  We are challenging the conclusion that the ‑ ‑ ‑

KIEFEL CJ:   To be drawn from them.

MR SHAVIN:   To be drawn from the facts.  What Ninestar did to the cartridges was found by Justice Burley.  There is no challenge to those findings of the acts taken by Ninestar.  The question is whether they constitute an infringement, as Justice Jagot found, by reference, not to the materiality of the claim and, indeed, in the case of the reprogramming of the chip by something that was not in the claim at all, but by reference to the purpose of the patentee in projecting the product into the market, that is, as a single‑use product.

We challenge that characterisation.  With Justice Yates we challenge the characterisation that you do not actually have to look at the claim at all.  You look at the product and even if only a small part of that product is the subject of the inventive concept, namely, the spacing of the contacts which is found in integers 5 to 11, what one looks at is the purpose.  It was to be single use.  That is sufficient to determining infringement and that, in our respectful submission, is in error and, in our respectful submission, is a matter which would justify consideration by this Court.  May it please the Court.

KIEFEL CJ:   There will be a grant of special leave in this matter.  I assume it would take no more than one day, gentlemen?

MR SHAVIN:   It might be a very full day, if the Court please.

KIEFEL CJ:   Do you think you might go into a second day?

MR SHAVIN:   Into the morning.

KIEFEL CJ:   All right.

MR SHAVIN:   Your Honour, may I mention one other matter?  The Court will have been provided with copies of the final orders that were made subsequent to the initial order.  Whatever happens in the appeal may impact on the orders made.  Is it correct to assume that those final orders would be included within the grant?

KIEFEL CJ:   I am sorry, I do not follow you, Mr Shavin.

MR SHAVIN:   On the day in which the appeal was disposed, there were some orders made in terms of the disposition of the appeal.  That set time running for the making of the application for special leave.  Then the Court was provided with orders that were the final orders made on 29 October which was the form of the injunctions, et cetera, made. 

KIEFEL CJ:   Yes.

MR SHAVIN:   I was simply inquiring whether it was ‑ ‑ ‑

KIEFEL CJ:   Yes, I see.  I am sorry, I did not quite follow you.  Yes, of course, you just need to reframe your application for special leave to take account of the later orders.

MR SHAVIN:   All right.  May we have leave to do that?

KIEFEL CJ:   Yes, of course.

MR SHAVIN:   If the Court please.

KIEFEL CJ:   Would you please ensure that your instructing solicitors obtain a copy of the timetable and directions from the Deputy Registrar before they leave?

MR SHAVIN:   Yes.  Thank you.  If the Court please.

KIEFEL CJ:   The Court will adjourn to reconstitute.

AT 10.20 AM THE MATTER WAS CONCLUDED