Exclusive rights of patent owners versus rights of chattel owners: the implied licence approach

ABSTRACT

Everybody who owns a smartphone is the chattel owner of an artefact embodying patented inventions. The extent to which one may use the smartphone depends on the scope of patent rights and the implied licences granted by the patent owners. Little attention has been given to this in New Zealand. This article seeks to address this gap by exploring patentees’ exclusive rights and implied licences and how these play out domestically and internationally. It examines the convoluted case law that traverses the interface between patent exclusive rights and chattel owner rights. The article focuses on New Zealand, but borrows case law from the United Kingdom, Australia and Canada to fill gaps. It surmises that the current law in New Zealand is complicated and fact-dependent, and relatively pro-patentee as opposed to pro-chattel owner. The article concludes by analysing whether an exhaustion model would be simpler and more balanced than the implied licence approach.

KEYWORDS:

• Patent law
• patent rights
• implied licence
• New Zealand
• exhaustion

Acknowledgements

My thanks to Susan Corbett for her comments on an earlier version of this article. Any errors remain my own.

Notes on contributor

Jessica C. Lai is a senior lecturer in commercial law at Victoria University of Wellington.

ORCID

Jessica C. Lai http://orcid.org/0000-0003-4377-1991

Notes

1 See Alain Pottage and Brad Sherman, Figures of Invention: A History of Modern Patent Law (Oxford University Press 2010); Alain Pottage and Brad Sherman, ‘On the Prehistory of Intellectual Property’ in Helena R Howe and Jonathan Griffiths (eds), Concepts of Property in Intellectual Property Law (Cambridge University Press 2013) 11; Mario Biagioli, ‘Patent Specification and Political Representation: How Patents Became Rights’ in Mario Biagioli, Peter Jaszi and Martha Woodmansee (eds), Making and Unmaking Intellectual Property: Creative Production in Legal and Cultural Perspective (University of Chicago Press 2011) 25, 30.

2 One could, of course, undertake a similar analysis with different forms of intellectual property, such as design rights, copyright and trademarks. Such an analysis lies outside the scope of this paper.

3 For an overview of parallel importing and intellectual property, see Irene Calboli and Edward Lee (eds), Research Handbook on IP and Exhaustion (Edward Elgar 2017); Susy Frankel and Daniel Gervais, Advanced Introduction to International Intellectual Property (Edward Elgar 2016) 114–16; Susy Frankel, Intellectual Property in New Zealand (2nd edn, LexisNexis 2011) 89–93; Susy Frankel and Jessica C Lai, Patent Law and Policy (LexisNexis 2016) 72–77.

4 While the parallel importing regarding copyrighted works and even trademarked goods has been the topic of significant debate in New Zealand, the same cannot be said with respect to patented inventions. See eg Ministry of Business, Innovation and Employment, ‘Parallel importing in New Zealand’ (22 September 2016) <www.mbie.govt.nz/info-services/business/intellectual-property/parallel-importing-in-new-zealand>, which makes no references to patents; Matthew J Coull, ‘New Zealand’s Approach to Parallel Imported Goods and the Copyright Amendment Act 1998’ (1999) 29(2) Victoria University of Wellington Law Review 253; Deloitte, ‘Costs and Benefits of Preventing Parallel Imports into New Zealand’ (Report commissioned by the New Zealand Ministry of Economic Development, 27 February 2012).

5 Note that the Trade Marks Act 2002, s 97A refers to the ‘exhaustion’ of rights, though it functions by stating that there is no infringement in certain circumstances rather than that the rights have exhausted. The Copyright Act 1994, s 12(5A) does not refer to exhaustion, but states that licit copies are not ‘infringing copies’ and so can be imported.

6 New Zealand also has a mechanism for explicit compulsory licensing: Patents Act 2013 (NZ), ss 169–78. See Frankel and Lai (n 3) 267–69.

7 Patents Act 2013 (NZ), s 17(1). See also Patents Act 1990 (Cth), s 13(2). On the proprietary nature of intellectual property, see Howe and Griffiths (n 1). On the transition from privileges to rights, see Biagioli (n 1).

8 A patentee can technically also ‘commit waste’ vis-à-vis the patent. However, as discussed below, one could historically have a patent removed from the register for lack of use. This is no longer the case.

9 The Patents Regulations 1954 (for the Patents Act 1953), Schedule 3, Form A (‘Form of Patent’).

10 Patents Act 2013 (NZ), s 18(1) (emphasis added).

11 Patents Act 2013 (NZ), s 18(2) (emphasis added).

12 Patents Act 2013 (NZ), s 14.

13 Patents Act 2013 (NZ), s 14 is very similar to s 18 of the Australian Patents Act 1990, which defines an ‘invention’ (in Schedule 1) as ‘any manner of new manufacture the subject of letters patent and grant of privilege within section 6 of the Statute of Monopolies, and includes an alleged invention’.

14 On the ‘intangible’ nature of the patentable invention, see Jessica C Lai, ‘The Nebulous “Invention”: From “Idea and Embodiment” to “Idea/Embodiment and Observable Physical Effects”’ in Jessica C Lai and Antoinette Maget Dominicé (eds), Intellectual Property and Access to Im/material Goods (Edward Elgar 2016) 121.

15 Mark J Davison, Ann L Monotti and Leanne Wiseman, Australian Intellectual Property Law (2nd edn, Cambridge University Press 2012) 558, discussing the Patents Act 1990 (Cth).

16 This is similarly the case in the United States (US). Regarding a patent owner’s exclusive rights, 35 USC § 154(a)(1) does not specifically differentiate between the invention and a product encompassing the invention. However, it is clear from the ‘the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States’ pertain to products, as the section continues that, ‘if the invention is a process, of the right to exclude others from using, offering for sale or selling throughout the United States, or importing into the United States, products made by that process’.

17 Patents Act 2013 (NZ), s 18(2).

18 Pfizer Corporation v Ministry of Health [1965] AC 512 (UK House of Lords), 573 (Lord Wilberforce), cited in Smith Kline & French Laboratories Ltd v Attorney-General [1991] 2 NZLR 560 (NZ Court of Appeal), 565 (Hardie Boys J).

19 Except for experimental purposes; Patents Act 2013 (NZ), s 143.

20 On the differences between the two approaches, see Christopher Heath, ‘Exhaustion and Patent Rights’ in Ruth L Okediji and Margo A Bagley (eds), Patent Law in Global Perspective (Oxford University Press 2014) 419, 421–24; Christopher Heath, ‘Patent Exhaustion Rules and Self-Replicating Technologies’ in Calboli and Lee (n 3) 289, 290–92.

21 The US also has a history with the implied licence approach: see Mark D Janis, ‘A Tale of the Apocryphal Axe: Repair, Reconstruction, and the Implied License in Intellectual Property Law’ (1999) 58 Maryland Law Review 423.

22 Frankel and Gervais (n 3) 88–89, have noted that the term ‘first-sale doctrine’ should not be used synonymously with exhaustion, because it conflates the domestic and international aspects of distribution and makes it difficult to discuss how actions affect different rights from different jurisdictions and, thus, the distinction between domestic and international exhaustion. Christopher Heath classified the ‘first-sale doctrine’ as conceptually distinct from the licence approach and from the exhaustion approach: Heath, ‘Exhaustion and Patent Rights’ (n 20) 433–34. However, his categorisation was largely based on the fact that patentees could contract out of exhaustion, which he saw as making the US approach something between an exhaustion and a licence approach. As discussed further in this text, this is no longer the case: see Impression Products v Lexmark, 137 S Ct 1523 (2017).

23 Treaty on European Union and the Treaty on the Functioning of the European Union: Consolidated version, OJ C 326, 26/10/2012 P 0001–0390, Arts 34 and 36. See also Christopher M Stothers, ‘The European Internal Market: Exhaustion Plus’ in Calboli and Lee (n 3) 169.

24 There are some exceptions, such as if the artefact was manufactured under a compulsory licence (see Case 19/84 Pharmon BV v Hoechst AG [1985] ECR 2281 [25]), it was not the patentee that placed the artefact on the market (or the patentee did not consent to this), or the patentee was legally obliged to place the good on the market (Cases C–267/95 and C–268/95 Merck v Primecrown; Beecham v Europharm [1996] ECR I–6285 [50]). The situation where pharmaceuticals are subsidised in a Member State, or there is an ‘ethical’ obligation to market in a Member State where the pharmaceutical is patent free, is more complicated: see again Merck v Primecrown; Beecham v Europharm [46], [53].

25 Case 187/80 Merck v Stephar and Exler [1981] ECR 2063; Merck v Primecrown; Beecham v Europharm (n 24).

26 On the relationship between competition law and parallel importing in the EU, see Josef Drexl, ‘Patent Exhaustion and Free Transit at the Interface of Public Health and Innovation Policies: Lesson to be Learned from EU Competition Law Practice’ in Calboli and Lee (n 3) 249.

27 See also Roussel Uclaf SA v Hockley Int’l Ltd [1996] RPC 441.

28 Case 15/74 Centrafarm BV and Adriaan de Peijper v Sterling Drug Inc [1974] ECR 1147. The post-Brexit situation is unclear.

29 In HTC Corp v Nokia Corp [2013] EWHC 3247 (Pat) [165], Arnold J stated that he was bound by Betts v Willmott (1871) LR 6 Ch App 239, which allows a patentee to place restrictive conditions on artefacts embodying patented inventions.

30 (n 22).

31 Stemming from Boesch v Graff, 133 US 697 (1890). See also Jazz Photo Corp v US International Trade Commission, 264 F 3d 1094 (Fed Cir 2001).

32 Betts v Willmott (n 29). Notably, the Ministry of Economic Development (MED) indicated that this case continued to be good law under the Patents Act 1953 (NZ), as did the UK Intellectual Property Office with respect to the Patents Act 1977 (UK). See New Zealand and United Kingdom submissions regarding the ‘Questionnaire on Exceptions and Limitations to Patent Rights’ [60], submitted to the WIPO Standing Committee on the Law of Patents (2011) <www.wipo.int/scp/en/exceptions/> accessed 12 April 2017. See also Roussel Uclaf v Hockley (n 27).

33 Betts v Willmott (n 29) 245 (Lord Hatherly LC). See also Schütz (UK) Ltd v Werit (UK) [2013] UKSC 16 [66] (Lord Neuberger for the Court).

34 National Phonograph Co of Australia v Menck [1911] 28 RPC 229 (Privy Council), 246 (Lord Shaw).

35 This is exemplified by the string of cases relating to the implied licence to repair or ‘prolong the life’ of an embodiment of a patented invention, but not to make it. See Solar Thomson Engineering Co Ltd v Barton [1977] RPC 537; United Wire Ltd v Screen Repair Services (2001) RPC 439; Schütz (UK) Ltd v Werit (UK) (n 33).

36 (1891) 10 NZLR 85 (NZ Supreme Court). The case is discussed further below in section 3.3.1.

37 ibid 91, citing Thomas v Hunt (1864) 17 CB NS 183.

38 ibid 91.

39 Thomas A Edison v Stockdale [1919] NZLR 276 (NZ Supreme Court).

40 (n 34).

41 ibid 244.

42 ibid 246. This continues to be true: see Roussel Uclaf v Hockley (n 27) 443; MED (n 32) [60].

43 National Phonograph Co of Australia v Menck (n 34) 248. See also Incandescent Gas Light Co v Cantelo (1895) 12 RPC 262 (Queen’s Bench Division), 264–65 (Wills J); Incandescent Gas Light Co v Brogden (1899) 16 RPC 179 (Queen’s Bench Division), 183 (Kennedy J). Note that the US Supreme Court followed Incandescent Gas Light Co v Cantelo in Henry v AB Dick Co (1912) 224 US 1, 40. However, this was contradicted in Bauer v O’Donnell (1913) 229 US 1, 17, and overruled in Motion Picture Patents Co v Universal Film Mfg Co (1917) 243 US 502, 517.

44 National Phonograph Co of Australia v Menck (n 34) 246 (emphasis added), citing Incandescent Gas Light Co v Cantelo (n 43) 264 and Betts v Willmott (n 29). See also Dunlop Rubber Co Ltd v Longlife Battery Depot [1958] 19 RPC 473, 476 (Lloyd-Jacob J).

45 Roussel Uclaf v Hockley (n 27) 443.

46 National Phonograph Co of Australia v Menck (n 34) 248.

47 Eli Lilly & Co v Novopharm Ltd [1998] 2 SCR 129 [100], citing the Privy Council decision National Phonograph Co of Australia v Menck (n 34). See also Signalisation de Montréal Inc v Services de Béton Universels Ltée [1993] 1 FC 341 [20] (FCA); Distrimedic Inc v Dispill Inc [2013] FC 1043 [226].

48 National Phonograph Co of Australia v Menck (n 34) 245.

49 See n 44.

50 Thomas A Edison v Stockdale (n 39) 280.

51 ibid 280.

52 See n 32; Roussel Uclaf v Hockley (n 27) 443; Signalisation de Montréal Inc v Services de Béton Universels Ltée (n 47); Davison, Monotti and Wiseman (n 15) 559, 565–67.

53 See Sirdar Rubber Co Ltd v Wallington, Eston & Co (1907) 24 RPC 539, 543 (Lord Halsbrug LC); Solar Thomson Engineering (n 35), which specifically used the term ‘implied licence to repair’. Note: Provisions on infringing by supplying the means to put the invention into effect affect the analysis of the repair/make dichotomy: Patent Act 1977 (UK), s 60(2); Patents Act 2013 (NZ), s 141; Patents Act 1990 (Cth), s 117. The situation in Canada differs, as it has no such provision: see MacLennan v Produits Gilbert Inc [2008] FCA 35 [32]–[34]. The right to repair has also been an issue for copyright: see British Leyland Motor Corp v Armstrong Patents Co Ltd [1986] 12 RPC 279 (UKHL); Kaisha v Green Cartridge Co (HK) Ltd [1997] UKPC 19. It is also an issue under the exhaustion approach: see Janis (n 21).

54 United Wire (n 35); Schütz v Werit (n 33). For discussion of these two cases in the context of exhaustion, see Heath, ‘Exhaustion and Patent’ (n 20) 436–40. These two cases were applied in Nestec v Dualit [2013] EWHC 923 (Pat) to contributory infringement per Patents Act 1977 (UK), s 60(1), a provision substantively emulated in the Patents Act 2013 (NZ), s 141.

55 United Wire (n 35).

56 ibid 458.

57 ibid, citing Sirdar Rubber (n 53) 543.

58 Note that the approach in Canada is slightly different. In MacLennan v Produits Gilbert Inc [2008] FCA 35 [14]–[15], the Court stated: ‘It is well established that the purchaser of a patented article may repair the components without infringing the patent. This right is based on the fact that the patent holder is presumed to permit this type of activity … According to this theory, a component of a patented article may be replaced without infringing the patent as long as the replacement has become necessary as a result of ordinary use’.

59 United Wire (n 35) 459 (emphasis added).

60 ibid 459 (Lord Hoffmann).

61 (n 33).

62 ibid [26].

63 ibid [78].

64 ibid [78].

65 ibid [37]–[40]. See also Patents Act 1977 (UK), s 130(7).

66 Case No X ZR 97/11 (17 July 2012, BGH).

67 See the IPONZ Patent Examination Manual, which makes multiple references to EPO case law: <www.iponz.govt.nz>.

68 The situation in the UK is regulated under EU law and the Biotech Directive; EC Directive 98/44/EC of the European Parliament and of the Council of 6 July 1998 on the Legal Protection of Biotechnological Inventions (Biotech Directive) [1998] OJ L 213/13, Art 9; ECJ C–428/08 Monsanto Technology LLC v Cefetra BV (Grand Chamber, 2010). Under the US exhaustion model, the right ‘to make’ does not exhaust. The Supreme Court, in Bowman v Monsanto, 33 S Ct 1761 (2013), held that to plant = to reproduce = to make. In that particular case, the vendees had an explicit licence to plant. The Supreme Court indicated that in a situation where one buys patented seeds without an explicit licence to plant, one presumably has an implied licence to do so (at fn 3); after all, the patentee or manufacturer of seeds embodying a patented invention must know that the vendees wish to plant those seeds. For a discussion on this decision, see Jessica C Lai, ‘The Exhaustion Doctrine and Genetic Use Restriction Technologies: A Look at Bowman v Monsanto’ (2014) 17 Journal of World Intellectual Property 129.

69 Monsanto Canada Inc v Schmeiser [2004] 1 SCR 902. The EU and the US have had similar cases, analysed through an exhaustion lens: see n 68.

70 Monsanto v Schmeiser (n 69) [26] (McLachlin CJ and Fish J), [142] (Arbour J). This was consistent with the SCC’s previous ‘Oncomouse’ decision, Harvard College v Canada (Commissioner of Patents) [2004] 4 SCR 45 [159] (Bastarache J), where the majority held that ‘a complex life form such as a mouse or a chimpanzee cannot easily be characterized as “something made by the hands of man”’. In Monsanto v Schmeiser, Mr Schmeiser tried to apply the Oncomouse decision to argue against infringement via use as ‘plants reproduce through the laws of nature rather than through human intervention’ (see [88]). However, the majority stated that ‘[t]he appellants’ argument also ignores the role human beings play in agricultural propagation. Farming is a commercial enterprise in which farmers sow and cultivate the plants which prove most efficient and profitable’ ([90]).

71 Monsanto v Schmeiser (n 69) [96] (McLachlin CJ and Fish J) (emphasis added).

72 In Canada, patents confer ‘an exclusive privilege or property’: Patent Act (RSC, 1985, c P–4), s 27(4). The reference to an ‘exclusive privilege’ and ‘property’ is interesting, as the two are considered to be different.

73 Jeremy de Beer and Robert Tomkowicz, ‘Exhaustion of Intellectual Property Rights in Canada’ (2009) 25 Canadian Intellectual Property Review 3, 15.

74 ibid 16. De Beer and Tomkowicz argued that Mr Schmeiser was not subject to the restrictive conditions because contractual limitations ‘do not run with the goods’ (per Eli Lilly (n 47)), which de Beer and Tomkowicz equated with an exhaustion approach. To support the supposition that Eli Lilly adopted patent exhaustion, de Beer and Tomkowicz (19) quoted a dissenting opinion from the lower court decision, that ‘by selling the patented article that he made, the patentee impliedly renounces, with respect to that article, to [sic] his exclusive right under the patent of using and selling the invention’: Eli Lilly (n 47) [99]. The use of the word ‘renounces’ does make this sound like the exhaustion approach. However, in the following paragraph, the Supreme Court elaborated upon this and made it very clear that it was referring to a licence approach, including a citation to National Phonograph Co v Menck (n 34).

75 Monsanto v Schmeiser (n 69) [86]–[87].

76 Betts v Willmott (n 29) 245 (emphasis added).

77 Roussel Uclaf v Hockley (n 27).

78 (n 36).

79 Patents Act 1870 (NZ), s 8 stated: ‘Every invention protected by letters patent issued under this Act shall be brought into actual and public use within the Colony within the space of two years from the date of such letters patent or in default thereof such letters patent shall at the expiration of' such period of two years cease and be of no effect.’

80 Briscoe & Co v Washburn & Moen (n 36) 89–90 (Williams J) (NZ Supreme Court). Williams J differentiated the requirement of ‘actual and public use’ from showing the public how to use the invention, which his Honour noted was covered by the requirement that the specification ‘be so clear that it will of itself enable an ordinary skilled workman to construct the machine, or, if it be for a process, to carry out the process.’ (89, referring to Patents Act 1870 (NZ), s 7). Historically, public use and the teaching function of a patent were also distinct: see Jessica C Lai, ‘The Changing Function of Patents’ (2017) 37 Legal Studies 807, 809–11.

81 Briscoe & Co v Washburn & Moen (n 36) 102 (Denniston J), 105 (Conolly J).

82 ibid 102 (Denniston J), 105 (Conolly J).

83 ibid 105 (Conolly J).

84 Chief Justice Prendergast dissented (ibid 99), essentially arguing that ‘actual and public use’ meant manufacturing the patented invention or using the patented method in New Zealand, and not just offering for sale in New Zealand.

85 (1884) 25 ChD 1.

86 Briscoe & Co v Washburn & Moen (n 36) 91.

87 (n 29).

88 Briscoe & Co v Washburn & Moen (n 36) 92.

89 ibid 100 (Prendergast CJ) (NZ Court of Appeal) (emphasis added).

90 [1979] 2 NZLR 560 (NZ Court of Appeal).

91 ibid 562 (Cooke P).

92 (n 18).

93 New Zealand Letters Patent No 166242.

94 In the EU, this is an exception to regional exhaustion: Pharmon BV v Hoechst AG (n 24) [25].

95 Congoleum v Poly-Flor (n 90) 563 (Cooke P), 566 (Hardie Boys J), citing Upjohn Company v T Kerfoot & Co Ltd [1988] FSR 1 per Whitford J.

96 Smith Kline v Attorney-General (n 18) 563 (Hardie Boys J), citing Pfizer Corporation v Ministry of Health [1965] AC 512, 559 (Lord Upjohn).

97 Frearson v Loe (1878) 9 Ch D 48, 66–67 (Jessel MR), which recognised a narrow experimental-use exception for bona fide experimentation.

98 Smith Kline v Attorney-General (n 18) 563 (Hardie Boys J); see also 572 (Bisson J). The focus on commercial purposes and furthering business interests in determining whether there is ‘use’ is similarly central in Canada: Monsanto v Schmeiser (n 69) [36]–[37] (McLachlin CJ and Fish J). In Monsanto v Schmeiser, the majority held that, by cultivating plants containing Monsanto’s patented gene and cell, Mr Schmeiser had ‘used’ the patented invention. Note, however, the minority opinion (dissenting on this point, 4:9), which noted that ‘use’ does not mean ‘commercial use’, as this would mean that ‘the inventor is not obliged to describe the utility of the invention, the inventor must merely describe the invention so as to produce it’:[145] (Arbour J). The minority opinion argued that ‘use’ must be ‘limited by the subject matter of the invention’: [148]. Moreover, ‘“use” and “invention” must be read conjunctively and the scope of ‘use’ must be bounded by the scope of the claims’: [151]. Thus, ‘[t]he test for determining ‘use’ is not whether the alleged user has deprived the patentee of the commercial benefits flowing from his invention, but whether the alleged user has deprived the patentee of his monopoly over the use of the invention as construed in the claims’.

99 Smith Kline v Attorney-General (n 18) 566 (Hardie Boys J).

100 ibid 563 (Cooke P), 566–67 (Hardie Boys J).

101 Note that a regulatory review exception was inserted into the Patents Act 1953, s 68B, on 19 December 2002, by the Patents Amendment Act 2002, s 3. See also Patents Act 2013, s 145.

102 HTC Corp v Nokia Corp (n 29).

103 ibid [164].

104 ibid [166]; see also [169].

105 Heath has analogously argued that there is no reason why the right to import should be treated any differently than the rights to use or sell under the exhaustion approach: ‘Exhaustion and Patent Rights’ (n 20) 481.

106 See Frankel (n 3) 104–07. Note that per Trade Marks Act 2002, s 97A(2)–(3), there is no infringement of imports made by companies from the same group, including subsidiaries.

107 See n 68.

108 See eg Impression Products v Lexmark (n 22).

109 Molly Shaffer van Houweling, ‘The New Servitudes’ (2007) 96 Georgetown Law Journal 885; Elizabeth I Winston, ‘Why Sell What You Can License? Contracting Around Statutory Protection of Intellectual Property’ (2006) 14 George Mason Law Review 93. European courts have been wary of this behaviour: Heath, ‘Exhaustion and Patent Rights’ (n 20) 459–62. The practice is also prevalent in the field of copyright: Christina Mulligan, ‘Personal Property Servitudes on the Internet of Things’ (2016) 50 Georgia Law Review 1121; Aaron Perzanowski and Jason Schultz, The End of Ownership: Personal Property in the Digital Economy (MIT Press 2016).