Lexmark v. Static Control: Multifaceted Appellate Hearing All About Prebate
- By Tricia Judge
- May 01, 2012
Static Control again went head-to-head with Lexmark International over Prebate in oral arguments in Cincinnati on March 6. This protracted case, which was filed in 2002, has left the two companies seesawing through injunctive actions, pretrial motions, a jury trial and now post-trial appeals. In the opening rounds of the case, Lexmark garnered more victories, but since Static Control’s stunning victory at the appellate level in June 2007, the litigation has favored Static.
Read the full article in the May issue of Recharger.
On March 6, Static Control’s and Lexmark’s lawyers were back in front of the same appellate court that overturned a Lexington judge’s ruling that heavily favored Lexmark. This time, however, there was a different set of judges. Senior Judge Damon Keith and Judges Danny Boggs and Karen Nelson Moore heard the arguments. Each side was limited in time to 15 minutes to make its case, and several issues were raised before the court by both parties. At the end of the day, only two issues were actually argued, and they were both issues raised by SCC in its appeal, leaving Lexmark’s claims unconsidered.
Static Control had appealed the lower court’s decision that its antitrust and unfair competition claims could not be sustained because Static Control does not directly compete with Lexmark. According to Lexmark and the lower court, the competitors that have “standing” to sue Lexmark were the cartridge remanufacturers and resellers themselves.
However, as SCC attorney Seth Greenstein pointed out, “Lexmark targeted SCC as a way of eliminating aftermarket cartridge remanufacturers.” This is especially true because SCC provided the key chip solution along with the components necessary to remanufacture Lexmark cartridges. “Lexmark (brought the case) to stifle competition. Lexmark cartridges are unique to Lexmark printers. Without the Static Control parts, there is no way a remanufacturer can remanufacture Lexmark cartridges. SCC is the fulcrum of competition in the aftermarket. Lexmark sought ultimately to damage the entire cartridge market.”
Lexmark countered with its position that the relevant market was just the cartridge market and did not include a vendor to the aftermarket. “We concede that Static feels passionate about Prebate,” its attorney Steven Loy said. “But it’s still not standing and SCC is still not a competitor in the cartridge market.”
In 2004, the Court of Appeals threw out Lexmark’s DMCA arguments
During the first appeal before this court, Static scored a clear victory. The 6th Circuit U.S. Court of Appeals overturned the decision of the lower court judge and vacated the preliminary injunction against the sale of its Smartek chips.
The 32-page decision, including a scathing rebuke of Lexmark’s monopolistic misuse of the Digital Millennium Copyright Act (DMCA) in a concurring opinion, was an utter repudiation of the lower court’s findings.
The decision refuted each conclusion made by Judge Forrester and found to the contrary that Lexmark’s toner loading and printer engine programs are most likely not subject to copyright protection, or if copyright-protected, then Static Control’s circumvention or reverse engineering is permissible and does not violate the DMCA.
“This is a finding that Lexmark had no right to invoke the DMCA. It is not just a victory for Static Control,” said Static Control CEO Ed Swartz, “it is a victory for the entire remanufacturing industry, American businesses and the American consumer.”
It was the American consumer that was featured in Judge Merritt’s concurrence. “We should make clear that in the future companies like Lexmark cannot use the DMCA in conjunction with copyright law to create monopolies of manufactured goods for themselves just by tweaking the facts of this case.”
“The great thing about that decision is that no one is going to be able to use the DMCA-chip argument to close out an aftermarket,” said Skip London, vice president and general counsel for Static Control.
With the causes of action for violations of copyright law and the DMCA removed from the case, the only remaining counts were those for the breach of — or tortuous interference with — Prebate contract provisions, which were all questions of state law. And the court seemed to tip its hand on that issue as well in the conclusion when it stated, “Because the chip contains only a copy of the thus-far unprotected Toner Loading Program and does not contain a copy of the Printer Engine Program, infringement is not an issue. And Lexmark has offered no independent, let alone persuasive, reason why SCC’s Smartek chip violates any tort or other state law.”
“We will beat them as soundly over Prebate as we did over the DMCA,” Swartz said. “And we will prove that Lexmark’s behavior is anticompetitive.”
In June 2007, the jury found that Lexmark had behaved in an anti-competitive fashion
It would take a few years, but Swartz’s prediction would prove to be accurate. After an arduous trial, the jury was challenged with making findings on a dozen questions of fact. All of these questions related to the validity of Lexmark’s patents, whether Lexmark has misused its patents, and whether that use was anti-competitive.
Both parties went to trial with a mixed bag of pretrial decisions from the judge. He had invalidated a couple of the patents that Lexmark laid as the foundation for the Prebate restrictions. However, he deemed others valid and infringed upon by the remanufacturers (who settled and were no longer in the case). He also deemed the Prebate terms to be a valid contract.
Chief among the issues that went to the jury was this: Did Static Control induce remanufacturers as a class to infringe Lexmark’s patents by remanufacturing Lexmark cartridges?
The jury first considered Lexmark’s claim that SCC infringed on its patents and moreover induced others to infringe on them as well. They determined that Lexmark did not prove that SCC’s customers (other than settled parties) directly infringed one or more of Lexmark’s patents, and therefore SCC could not be guilty of having induced those customers to infringe. Also, Lexmark did not prove that SCC induced settled parties to infringe. Since there was no inducement to infringe, the jury did not have to consider whether Lexmark’s patent rights were exhausted at the time of sale.
The jury was then asked to advise the judge on the remaining matter, which chiefly addressed Static Control’s defenses to the findings of infringement. SCC had raised several defenses, including a laches defense, which precludes a litigant from prevailing in a lawsuit if the litigant waits too long to bring the lawsuit. The jury did not find that Lexmark had delayed too long in bringing the infringement matter.
However, they felt differently about SCC’s defense of equitable estoppel. This defense precludes a party from prevailing when its own actions or conduct cause the other party to act in a way that harms itself. The jury found that Lexmark had made a misleading communication to SCC, which SCC relied upon to its detriment. The jury found that SCC had proved all the elements of estoppel.
Finally, the jury addressed SCC’s defense that Lexmark had misused its patent and was therefore not entitled to recover damages for the infringement. In support of its patent misuse defense, Lexmark had no basis to bring a lawsuit over IBM green cartridges (which it manufactures for IBM) and did so solely to interfere with competitors, using misleading Prebate-style language on those cartridges.
As part of its determination on the patent misuse issues, the jury determined the relevant product market to be the aftermarket for Lexmark cartridges, that Lexmark has the “substantial ability to exploit customers” in that market and has unreasonably restrained competition (by misusing its patents to protect IBM Green cartridges). The jury did not find one element: that the marketplace was global.
The jury sent a strong message that it had felt that Lexmark’s behavior was not appropriate and therefore may be monopolistic. The judge, in rendering his final decision, sidestepped the issue, saying the anti-trust defense was irrelevant because the jury found no infringement.
The Prebate program is invalidated by a federal judge
The validity of Prebate was the next to fall. In 2009, Judge Van Tatenhove reversed his earlier decision that Prebate restrictions were valid, based on the recent U.S. Supreme Court decision in Quanta Computer Inc. v. LG Electronics. SCC had brought this highly favorable decision to the Judge’s attention within days of the rendering of a unanimous decision by the Supreme Court.
The opinion stated, “After reading the parties’ briefs and hearing oral arguments, this Court agrees that Quanta compels reconsideration and reversal of the aforementioned Order. Quanta has changed the landscape of the doctrine of patent exhaustion generally, and specifically the application of the doctrine to the facts of this case.”
“Static Control Components was committed to proving that Lexmark used its patents unfairly and to the detriment of remanufacturers and consumers alike,” said London. “We are very pleased with the Judge’s decision.”
Static Control filed a motion for reconsideration of the judge’s earlier findings that Prebate was valid after the Quanta decision. Lexmark opposed the motion on several grounds but chiefly tried to distinguish the status of its sales as “conditional,” while those involved in the Quanta case were “unconditional.”
The court refused to accept Lexmark’s efforts to distance itself from the Quanta scenario. “Like LG Electronics, Lexmark attempts to reserve patent rights in its products through post-sale restrictions on use imposed on its customers. This is what Quanta says Lexmark cannot do.”
The International Imaging Technology Council (Int’l ITC) filed a brief in support of Static Control in the case and provided testimony in the early stages of the trial. The Int’l ITC also filed a brief in the Quanta case, with the support of Static Control.
The Int’l ITC has also been involved in passing anti-Prebate, pro-remanufacturing legislation as well as working to get the legislation properly implemented.
The other issue in the March 6 hearing: Money
SCC also was seeking to get the injunction bond, originally set at $250,000, reviewed and raised. Lexmark posted the bond when it won an injunction against SCC in the very early stages of the trial. SCC was not allowed to sell its chips for the period that the injunction was in place, or roughly four years. The bond is supposed to compensate SCC for its improperly lost sales of chips once the bond was lifted. However, $250,000 is a drop in the bucket of SCC’s lost chip sales for that period.
SCC provided evidence that it was damaged in the amount of $17 million. According to SCC attorney Seth Greenstein, Static sold more than the $250,000 (or the full bond amount) in chips in just one month, so the bond amount was totally inadequate to cover SCC’s lost profits.
Lexmark countered by arguing that the time to argue to increase the bond had long ago passed, when the Appellate Court first lifted it in 2004. Judge Moore wondered when the appropriate time to revisit the bond question actually occurred, since that earlier decision had been quiet on the issue entirely.
With a little luck, coupled with good legal preparation and representation, SCC might be in store for another tremendous victory. After investing $30 million in this 10-year litigation, it would be a well-deserved one.
Contact Tricia Judge at email@example.com or visit www.i-itc.org.
This article originally appeared in the May 2012 issue of Recharger.