Lexmark Suffers a Couple of Legal Defeats, but Wins a Biggie

At the end of March, attorneys for Lexmark International received court rulings that will profoundly impact two of the firm’s most notable lawsuits. On March 25, the U.S. Supreme Court ruled unanimously that Static Control Components, one of the remanufacturing industry’s leading suppliers, can move forward with its false-advertising claims against Lexmark. The ruling sets the stage for yet another courtroom fight in this epic legal battle that has been ongoing for over a decade.

Two days after the Supreme Court announced its decision, orders were issued regarding a defendant’s motions to dismiss Lexmark’s case pending in the U.S. District Court for the Southern District of Ohio, which was filed against several third-party supplies vendors a few years ago and has grown to include a number of companies. Judge Michael R. Barrett sided with the defendant Impression Products and dismissed Lexmark’s claims against the firm related to remanufacturing so-called Prebate cartridges. However, Judge Barrett denied Impression Products’ motion to dismiss the case related to territorial patent exhaustion, which is a far bigger issue than the Prebate matter for the remanufacturing industry.

Lexmark v. SCC

This long-running legal battle began in 2002, when Lexmark sued Static Control for marketing compatible chips for Lexmark toner cartridges, which the OEM claimed infringed its copyrights and violated the Digital Millennium Copyright Act (DMCA). Alleging Lexmark had violated the Lanham Act, a federal statute prohibiting false advertising and unfair competitive practices, Static Control countersued. The firm alleged the violation came when Lexmark falsely instructed customers that they were legally bound to return Lexmark Prebate cartridges to the OEM and warned remanufacturers that if they used Static’s chips to remanufacture Prebate cartridges they would infringe Lexmark’s intellectual property.

Under the terms of the Prebate agreement, which is now known as Lexmark’s Return Program, customers receive a discounted price at the time they purchase a cartridge if they agree to return the empty to the OEM. Lexmark held that because its Prebate/Return Program cartridges are sold under the condition that they will be returned, it retained certain patent rights and Prebate cartridges could not be remanufactured without violating Lexmark’s IP. Lexmark then further asserted that by marketing chips used to remanufacture Prebate cartridges, Static Control had infringed the OEM’s patents.

After Lexmark scored some initial victories, including a dismissal of Static’s false-advertising claims, in 2009 a district court judge reversed a prior ruling, which found that the OEM did retain certain patents rights on Prebate cartridges after the initial sale. After reviewing a Supreme Court ruling in a separate case, Judge Gregory F. Van Tatenhove of the U.S. District Court for the Eastern District of Kentucky found in his 2009 decision that Lexmark had indeed lost its patent rights after the first sale of its cartridges in the United States regardless of the conditions it set prior to the sale. Both sides appealed after the decision was rendered. The U.S. Court of Appeals for the Sixth Circuit then affirmed the district court’s rulings and reversed the dismissal of Static Control’s false-advertising claims under the Lanham Act, clearing the way for the company to bring suit against Lexmark.

After the appellate court’s decision was handed down, Lexmark petitioned the Supreme Court to review it and requested the high court determine the appropriate framework for determining whether a party has standing to bring a false advertising claim under the Lanham Act. At the time of Lexmark’s request, federal courts used different systems to determine who could bring such claims. Following one line of logic, Lexmark argued that a component maker like Static should not have standing under the act to bring false-advertising claims against a maker of finished printers and cartridges. Conversely, using a legal test established by the high court, Static Control argued that, “Any commercial party like Static Control whose products are targeted by false advertising stands at the center of the zone of interests protected by the Lanham Act.” The Supreme Court elected to hear the dispute last year and oral arguments were presented in December 2013.

In an opinion penned by Justice Antonin Scalia, the court recently found that “Static Control has adequately pleaded the elements of a Lanham Act cause of action for false advertising.” The court determined that the company “comes within the class of plaintiffs authorized to sue under §1125(a) [the Lanham Act].” Justice Scalia wrote, “Static Control’s alleged injuries—lost sales and damage to its business reputation—are injuries to precisely the sorts of commercial interests the Act protects. Static Control is suing not as a deceived consumer, but as a ‘perso[n] engaged in’ ‘commerce within the control of Congress’ whose position in the marketplace has been damaged by Lexmark’s false advertising … There is no doubt that it is within the zone of interests protected by the statute.” The court also held in its March decision that Static Control had sufficiently alleged that its injuries were caused by Lexmark’s misrepresentations.

While the high court decided in Static Control’s favor that the company has the right to sue, the firm will need to take the matter to another court. Justice Scalia concluded by explaining, “Although we conclude that Static Control has alleged an adequate basis to proceed under §1125(a), it cannot obtain relief without evidence of injury proximately caused by Lexmark’s alleged misrepresentations. We hold only that Static Control is entitled to a chance to prove its case.” I expect that Static Control will move forward with its false-advertisement suit sometime this year.

The Prebate Problem

The Prebate issue alluded to in the Supreme Court case is at the center of one of the decisions handed down by the Ohio court. As noted earlier, it appeared that any issues related to Prebate and patent law had been settled back in 2009. At that time, Judge Van Tatenhove said, “Lexmark’s patent rights in its toner cartridges were exhausted by the authorized, unconditional sales of the cartridges to end users,” and that “the Prebate Program is invalid under patent law.” Regardless, the OEM claimed in its more recent lawsuit before the federal court in Ohio that the Charlestown, WV based remanufacturer, Impression Product, infringed Lexmark’s patents by remanufacturing Return Program cartridges.

Last July, Impression Products filed a motion with the Ohio court to dismiss the Lexmark case claiming that a key issue in the OEM’s case had been made moot by a recent Supreme Court ruling. Regardless of the Prebate/Return Program issue, the Lexmark case in the Ohio court really hinges on whether or not the first sale of a product extinguishes a patent-holder’s right if the first sale occurs outside the United States. In the past, U.S. patent law held that the first sale of a product had to occur in the U.S. for patent rights to be exhausted. If a cartridge was first sold in another country, a patent holder’s rights would be violated if the empty was then remanufactured and sold in the U.S. Impression Products argued that in light of the high court’s so-called Kirtsaeng decision, which is detailed below, patent rights were exhausted at the time of the first sale regardless of where it took place.

In its opposition to the remanufacturer’s motion to dismiss, Lexmark went beyond matters pertaining to a product’s first sale and territorial patent exhaustion and asserted “international patent exhaustion is irrelevant to remanufactured Lexmark Return Program cartridges.” The OEM once again suggested it retains certain patent rights on Return Program cartridges regardless of where the cartridges were first sold. The firm cited a portion of an August 2012 decision from the U.S. Court of Appeals for the Sixth Circuit’s calling the patent exhaustion and Return Program cartridges an “extremely complex and unsettled question” that had not been resolved. Lexmark said Impression Products put the issue of the validity of the Prebate program under patent law “front and center” before the Ohio court.

Unfortunately for Lexmark, Judge Michael R. Barrett of the U.S. District Court for the Southern District of Ohio found that the matter surrounding patent law and Prebate/Return Program had been resolved.  He wrote, “The issue presented is whether the Return Program is invalid as a matter of law. Having considered the relevant caselaw and the briefings of the parties, the Court finds that Lexmark’s patent infringement claims are barred as a matter of law by the doctrine of patent exhaustion and must be dismissed.”

1 Out Of 3 Ain’t Bad

While Lexmark’s attorneys may have been disappointed by the Supreme Court’s decision and Judge Barrett’s Prebate opinion, I have no doubt that they were delighted by the other decision reached by the judge in the Ohio court in March. In addition to filing a motion to dismiss because Lexmark’s allegations of patent infringement were not valid on Prebate cartridges, Impression Products attempted to get Judge Barrett to dismiss the OEM’s larger case by overruling the controversial Jazz Photo decision because of the Supreme Court’s recent ruling in Kirtsaeng v. John Wiley & Sons. The judge declined to dismiss the case, however, indicating that Jazz Photo remains the law of the land.

The condensed version of the Jazz Photo decision is as follows: At the end of the 1990s, Fuji Photo Film held certain patents on single-use cameras. The firm filed complaints against Jazz Photo alleging patent infringement with the U.S. International Trade and in the U.S. District Court for the District of New Jersey. Fuji Photo Film claimed that Jazz Photo had collected disposable cameras around the world and infringed it patents by remanufacturing the spent cameras and selling them in the United States. In 2003, the federal court found that the patents on cameras purchased outside of the U.S. were not exhausted and ruled in favor of Fuji Photo Film. Jazz Photo appealed and in 2005 and a federal appellate court upheld the findings of the NJ court. The so-called Jazz Photo decision became the law of the land and has been the bane of many a remanufacturer ever since.

Impression Products requested the court to dismiss Lexmark’s infringement suit last summer, several months after the Supreme Court issued its Kirtsaeng v. John Wiley & Sons decision. The Kirtsaeng matter involved used books first sold outside the United States, which were then imported back into the country and resold. The high court found that the copyrights, which belonged to the publisher John Wiley & Sons, had been exhausted after the first authorized sale of the books and were not violated despite the fact that the first sale was made in another country. Impression Product argued that the Supreme Court’s decision in Kirtsaeng overturns “the legal basis for asserting infringement against remanufactured products,” because Kirtsaeng is applicable to patent rights as well as copyrights.

In their motion to dismiss, Impression Products’ lawyers said, “A clear reading of the language and the rationale applied by the Court [in the Kirtsaeng decision] makes it clear that there is no reason to distinguish between patent rights, copyright rights, or any other rights in the products sold.” If the judge agreed, it would have had a profound impact on the remanufacturing industry in general, and probably would have resulted in a dismissal of the entire Lexmark case pending in the Ohio court. The motion went on to conclude that, “If the court agrees that the Jazz Photo decision is no longer the law, the case against Impressions Products should be dismissed with prejudice. If Jazz Photo is no longer the law, no amendment to the complaint will save this case.” Apparently, the court did not agree.

Judge Barrett denied Impression Products’ motion to dismiss and ruled, “Given the complete lack of consideration of the context, history, and practical implications of international patent exhaustion in Kirtsaeng, the Court concludes that the Supreme Court did not intend to implicitly overrule Jazz Photo and that Jazz Photo remains controlling precedent on patent exhaustion abroad.” The judge said that one deciding factor is that Kirtsaeng relates only to copyright law and Jazz Photo involved patent law. While he made clear that he did not think Kirtsaeng had any bearing on Jazz Photo in the Lexmark case, Judge Barrett seemed to indicate the matter may not be wholly resolved saying, “The Court is cognizant that many of the reasons for rejecting a territoriality requirement for copyright law may apply equally to patent law.” I would expect that Impression Products’ attorney would use this comment from the judge should they decide to appeal.

Not Over Yet

The recent rulings in Lexmark’s two big cases is sure to lead to further legal actions in the near future and I predict we’ll hear more about each case before the current year is out. The OEM’s attorneys are no doubt feeling a little relief regarding the Ohio court’s ruling on Jazz Photo but I bet they are feeling at least a little apprehensive about the possibility of facing a false-advertising suit from Static Control for violating the Lanham Act.

Although it is currently unknown how much Static Control is looking for in terms of damages and other awards, in its 2013 annual report, Lexmark told investors at one point, “SCC has stated in its legal documents that it is seeking approximately $17.8 million to $19.5 million in damages for the Company’s [Lexmark’s] alleged anticompetitive conduct and approximately $1 billion for Lexmark’s alleged violation of the Lanham Act.  SCC is also seeking treble damages, attorney fees, costs and injunctive relief.” As the case has progressed, SCC has adjusted these numbers and various courts have dismissed certain damages. Regardless, if Static Control will no doubt be looking for a significant amount and if the firm prevails in its false-advertising suit, Lexmark may have to write a big check.

After a seemingly endless discovery phase, which included several requests for additional time that extended the case by a couple of years, it seems that Lexmark’s suit in the Ohio court will be heading to trial this year. If Lexmark can prevail in the matter, it will severely hamstring the remanufacturing industry’s ability to market cartridges base on an empty that a remanufacturer cannot prove was first sold in the U.S. It will be interesting, however, to see if any of the defendants mount another challenge to Jazz Photo or attempt to negate the territoriality requirements of patent law as the high court has now done with copyright law.  If Jazz Photo should be overturned, the floodgates will be open on importing empty cores and fundamentally change the way the remanufacturing industry sources its most valuable raw material—the empty.  It will also effectively end the Lexmark case in Ohio.

One might argue that Lexmark is overly aggressive in its pursuit of protecting its intellectual property; or one might say that the firm is simply doing what any OEM should do to protect its patent protections.  Regardless, the firm keeps its legal team busy and it seems all but certain that lawyers for Lexmark will continue to work hard for the remainder of 2014.

 

Charles Brewer
About the Author
Mr. Brewer is the founder and president of Actionable Intelligence, the digital imaging industry’s leading market research firm. He was an editor for Inc. magazine and ComputerWorld during the 1990s, and more recently, the managing editor of The Hard Copy Supplies Journal. Mr. Brewer’s analysis is currently featured at his firm’s website, www.Action-Intell.com.