Intellectual property: if you fail to block competition with one kind, apparently you can try, try again with another kind -- and eventually you'll end up in the Court of Appeals for the Federal Circuit, who will mess everything up and kill off the competition. Printer company Lexmark has been at war with alternative suppliers of ink for well over a decade. As you may be aware, printer ink is sold at a ridiculously high markup, such that one estimate (from over a decade ago) noted that in order to fill an Olympic-sized swimming pool with printer ink, it would cost you $5.9 billion (yes, with a "b") at the checkout counter of your local office-supply retailer. The printer makers have notably taken a "give away cheap crappy printers at a low cost, and make it up in seriously overpricing the ink" strategy to their businesses. This kind of thing works great until someone tries to step in and sell competing ink.
The various printer companies have tried all sorts of tricks to fight back against this, with Lexmark being one of the most aggressive (though, others, including HP and Epson, have been fairly aggressive as well). Back in the early 2000s, Lexmark started out by arguing that replacement inkjet cartridges violated copyright law. Their claim rested on the idea that resellers were "circumventing" the technological protection measures that Lexmark placed on its ink cartridges, and thus were violating Section 1201 of the DMCA, which made it copyright infringement to "circumvent" technological protection measures. While a lower court agreed, the Sixth Circuit appeals court overturned the ruling, and smacked Lexamark around a bit for abusing the DMCA -- properly noting the ridiculous end result that would occur if it bought Lexmark's argument:
"If we were to adopt Lexmark's reading of the statute, manufacturers could potentially create monopolies for replacement parts simply by using similar, but more creative, lock-out codes. Automobile manufacturers, for example, could control the entire market of replacement parts for their vehicles by including lock-out chips. Congress did not intend to allow the DMCA to be used offensively in this manner, but rather only sought to reach those who circumvented protective measures "for the purpose" of pirating works protected by the copyright statute."
That case, somewhat surprisingly, did not end there. The reseller that it had sued originally, Static Control Components (SCC), then countersued Lexmark, arguing that Lexmark violated trademark law when it basically sent a letter to every SCC customer it could find, telling them that SCC had broken the law. That case then made its way through the courts, and just about two years ago, the Supreme Court ruled against Lexmark again, and basically rewrote the rules for who could sue over a "false advertising" trademark claim by effectively throwing out all previous tests.
In that case, Lexmark didn't technically use trademark law to try to stop SCC, but very well may have abused trademark law to scare off SCC's customers.
And, of course, there was still a third option. While Lexmark had also used patent claims against SCC, the jury in the case ruled against Lexmark as well, even saying that Lexmark had misused its patents. However, Lexmark was also suing other ink sellers for patent infringement as well, and suing in the courts and using the ITC loophole as well. Basically, Lexmark will use and abuse any and all tools at its disposal to stop competition in ink sellers.
And it finally won one. Last week, the Court of Appeals for the Federal Circuit (CAFC) -- the court that is somewhat infamous for so frequently getting things wrong -- finally gave Lexmark the victory it so desperately had sought for over a decade, saying that Impression Products violated Lexmark's patents in selling its laser printer toner cartridges (which, yes, are slightly different than inkjet ink cartridges).
In this case, the key issue was basically over patent "exhaustion" and the question of if you first allowed for a sale overseas, could that product then be refurbished and resold back in the US. If this sounds familiar, you may remember that the Supreme Court ruled a few years ago in the Kirtsaeng case that you can resell goods you bought outside the US back in the US and it doesn't violate copyright law. However, CAFC in this case basically says "Sure, but that's not true with patents."
Kirtsaeng is a copyright case holding that 17 U.S.C. § 109(a) entitles owners of copyrighted articles to take certain acts “without the authority” of the copyright holder. There is no counterpart to that provision in the Patent Act, under which a foreign sale is properly treated as neither conclusively nor even presumptively exhausting the U.S. patentee’s rights in the United States.
Of course, there are other cases, mainly the well-known Quanta v. LG case that said that "exhaustion" applies to patents as well, and once you've sold a product, you can no longer use 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's a limited license, rather than a direct sale.
And the crux of its reasoning: "if we rule otherwise, that would really upset pharmaceutical companies who want to charge cheaper rates overseas and don't want to see those cheap drugs resold back in the US." Basically, there are neat business models that would be upset by geographical arbitrage:
At the same time, the conduct challenged here can have benefits. Lexmark’s Return Program provides customers an immediate up-front benefit: a choice between two options, one offering them a lower price in exchange for the single-use/no-resale limitation. And a company in Lexmark’s position could have a plausible legitimate interest in not having strangers modify its products and introduce them into the market with the quality of modifications (including ink refills) not subject to Lexmark’s control: lower quality of remanufactured cartridges could harm Lexmark’s reputation.... A medical supplier in Mallinckrodt’s position plausibly may have similar reason to believe that reuse, when not under its own control, carries a significant risk of poor or even medically harmful performance, to the detriment of its customers and its own reputation. Such interests are hardly unrelated to the interests protected by the patent law—the interests both of those who benefit from inventions and of those who make risky investments to arrive at and commercialize inventions.
Of course, that was the same argument that publishers made in the Kirtsaeng case, and the Supreme Court rejected it, so it seems like there's at least a decent chance that should SCOTUS take this up on appeal, it may be yet another opportunity to smack CAFC around for getting things totally backwards (now becoming something of an annual tradition at SCOTUS).
There is a dissent from Judge Dyk (with Judge Hughes) that suggests that the majority's decision here does not make sense in following Supreme Court precedent -- and recognizing that the majority has just set up CAFC for yet another smackdown. The dissent notes a long line of cases saying that patent exhaustion is a thing and finds it troubling that the ruling ignores all that, and suggests SCOTUS won't particularly like CAFC ignoring it all.
The majority’s justifications for refusing to follow Supreme Court authority establishing the exhaustion rule misconceive our role as a subordinate court.
First, the majority characterizes the statement of the exhaustion rule in the Supreme Court cases as mere dictum because in those cases there was either no restriction imposed or the restriction would otherwise violate the antitrust laws. But the cases impose no such qualification on the rule announced. The Supreme Court has repeatedly advised the courts of appeals that our task is to follow the rules proclaimed by the Court, and not to attempt to distinguish Supreme Court cases on their facts...
Not surprisingly, Impression Products has suggested it will appeal to the Supreme Court, so this case is far from over. However, once again, we see how companies will use intellectual property law however they can to try to block out competition.
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