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of the all about control dept

Intellectual Property: If you don’t succeed in blocking competition with one kind, it seems you can try, try again with another kind – and eventually you end up in Federal Court of Appeals, which messes everything up and kills the competition . Printing company Lexmark has been at war with alternative ink suppliers for well over a decade. As you may know, printer ink is sold at a ridiculously high premium, so one estimate (from over a decade ago) determined that it would cost you $5.9 to fill an Olympic-size swimming pool with printer ink billion (yes, with a “b’) at the checkout at your local office supply store. In particular, printer manufacturers have adopted a “give away cheap, crappy printers at low cost and make up for it by seriously overpriced the ink” strategy for their companies. This kind of thing works great until someone tries to step in and sell competing ink.

Various printer manufacturers have tried all sorts of tricks to counter this, with Lexmark being one of the most aggressive (although others including HP and Epson were also quite aggressive). In the early 2000s, Lexmark initially argued that replacement ink cartridges were against the regulations copyright law. Their claim was based on the idea that resellers were “circumventing” and thereby violating the technological protections Lexmark placed on its ink cartridges Section 1201 of the DMCA, which resulted in copyright infringement to “circumvent” technical protection measures. While a lower court agreed, the Sixth Circuit Court of Appeals overturned the verdict and slapped Lexamark around a bit for abusing the DMCA – correctly noting the ridiculous end result that would ensue if it bought Lexmark’s argument:

“If we adopted Lexmark’s reading of the law, manufacturers could potentially create monopolies on parts simply by using similar but more creative lock codes. For example, automakers could control the entire aftermarket for their vehicles by installing lock-out chips. Congress had no intention of using the DMCA offensively in this way, only seeking to reach out to those who circumvented protections “for the purpose” of pirating works protected by copyright law.”

This case, surprisingly, didn’t end there. The original sued reseller, Static Control Components (SCC), then countered Lexmark, arguing that Lexmark violated trademark law by essentially sending every SCC customer it could find a letter telling them that SCC broke the law. This case then went through the courts and about two years ago to the Supreme Court again decided against Lexmarkand basically I rewrote the rules for who could sue a trademark claim for “false advertising”, effectively throwing out all previous tests.

In this case, Lexmark did not technically use trademark law to stop SCC, but did abuse trademark law to deter SCC’s customers.

And of course there was a third option. While Lexmark would have also filed patent claims against SCC, the jury in the case also ruled against Lexmark and even said that Lexmark misused its patents. However, Lexmark also complained Miscellaneous Ink sellers also sue for patent infringement and sue in court and also take advantage of the ITC loopholes. Basically, Lexmark will use and abuse any tools at its disposal to stifle competition among ink vendors.

And it finally won one. Last week, the Court of Appeals for the Federal Circuit (CAFC) — the court notorious for getting things wrong so frequently — finally did gave Lexmark the victory it had so desperately sought for over a decadesaying that Impression Products infringes Lexmark patents when selling its toner cartridges for laser printers (which differ slightly from ink cartridges for inkjet printers).

The main issue in this case was the “exhaustion” of the patent and whether you would allow a sale overseas first, then whether this product could be refurbished and resold in the US. If this sounds familiar, you might recall that a few years ago in the Kirtsaeng case, the Supreme Court ruled that you can resell goods you purchased outside the US in the US and it would not infringe copyright law. However, in this case, CAFC is basically saying, “Sure, but that’s not true about patents.”

Kirtsaeng is a copyright case stating that 17 USC § 109(a) authorizes owners of copyrighted items to perform certain acts ?without the authority? of the copyright owner. There is no counterpart to this provision in patent law, which properly treats a foreign sale as not definitively or presumptively exhausting the US patentee’s rights in the United States.

Of course, there are other cases, mainly the well-known Quanta v. LG case, which states that “exhaustion” applies to patents too, and once you’ve sold a product you can no longer use the patent law to block future sales . But here the court spends a lot of time trying to distinguish the differences between the Quanta case and this case – basically saying that there is no exhaustion when there is a limited license, but a direct sale.

And the crux of his argument: “If we decide otherwise, it would really piss off the pharmaceutical companies who charge cheaper prices abroad and don’t want these cheap drugs to be resold in the USA.” Basically, there are nice business models that are based on geographic arbitrage would be disturbed:

At the same time, the behavior objected to here can have advantages. Lexmark’s returns program offers customers an immediate upfront benefit: a choice of two options, one of which gives them a lower price in exchange for the single use/no resale restriction. And a company in Lexmark’s position might have a plausible legitimate interest in preventing strangers from modifying its products and bringing them to market with the quality of modifications (including ink refills) that are beyond Lexmark’s control: lower quality remanufactured cartridges could hurt Lexmark’s reputation… A medical provider in Mallinckrodt’s position may have plausibly similar reasons to believe that reuse, unless under its own control, poses a significant risk of poor or even medically harmful performance to the detriment of its customers and its own reputation. Such interests are hardly independent of the interests protected by patent law – the interests of both those who benefit from inventions and those who make risky investments to obtain and commercialize inventions.

Of course, that was the same argument the publishers made in the Kirtsaeng case, and the Supreme Court rejected it, so there seems to be at least a good chance that should SCOTUS take this up on appeal, it could be another opportunity to bang CAFC around to take things totally backwards (now an annual tradition at SCOTUS).

There is a contradiction from Justice Dyk (with Justice Hughes) suggesting that following Supreme Court precedent the majority decision here makes no sense – and acknowledging that the majority has just used CAFC for another blow . Noting a long line of cases stating that patent exhaustion is a thing, the dissident finds it troubling that the ruling ignores all of this, and hints that SCOTUS won’t particularly like it when CAFC ignores it all.

The majority’s rationale for refusing to follow the authority of the Supreme Court, which sets the exhaustion rule, misunderstands our role as a lower court.

First, the majority characterize the finding of the exhaustion rule in Supreme Court cases as mere dictum, because in those cases either no limitation was imposed or the limitation would otherwise violate antitrust law. But the cases impose no such limitation on the promulgated rule. The Supreme Court has repeatedly advised the Courts of Appeal that it is our job to follow the rules promulgated by the Court and not attempt to distinguish Supreme Court cases based on their facts…

Unsurprisingly, Impression Products has suggested taking it to the Supreme Court, so this case is far from closed. However, we see once again how companies will use intellectual property rights in every way they can to try to block competition.

Filed under: cafc, copyright, copyright exhaustion, dmca, exhaustion, false advertising, ink, patent exhaustion, patents, printer ink, printer, supreme court, trademarks

Company: Lexmark

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