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    30 Aug 2015

    Lexmark’s war against a man who recycles toner cartridges

    By extension Lexmark’s argument applied to any patent-protected product that was first sold abroad. In the world according to Lexmark, an eBay user in the U.S. who bought a video game originally sold in Canada could be sued for patent infringement. An American traveler returning from Europe with a new Swiss watch could have it seized in Customs as unlawful for use in this country.
    More ominously, patent holders could stop critically-important supplies from crossing the border. In times of shortage, technology users in the U.S.—hospitals, defense agencies, businesses, schools—might find themselves unable to secure replacement parts from overseas.
    Illogical as it may sound, Lexmark’s position was supported by a 2001 case called Jazz Photo Corp. v. ITC. Because of Jazz Photo, when Lexmark sued Impression Products and dozens of other cartridge recyclers in federal court, most of the defendants threw in the towel.
    But Smith hung tough, and now his battle with Lexmark is before the court of appeals for the Federal Circuit in Washington, D.C. In April 2015, the appeals court decided to reconsider Jazz Photo in light of the Supreme Court’s decision in Kirtsaeng v. John Wiley & Sons, Inc., which held that copyrighted products manufactured abroad could be freely traded in the U.S.
    Although Smith hopes that the Federal Circuit will overrule Jazz Photo, he’s girding for a long fight. Oral argument is set for October 2, 2015, and the case may eventually wind up in the Supreme Court.
    Eric’s father Walter Smith founded Impression Products in 1978, servicing typewriters and copiers in West Virginia’s capitol city. When Eric started making deliveries to customers around Charleston, it was supposed to be a summer job. “I noticed all the offices we weren’t making deliveries to,” he says. He skipped college and headed straight into sales.
    In the 1990s, Smith segued from selling IBM-compatible typewriter ribbons to selling remanufactured printer ink cartridges. He bought the used cartridges from recyclers who offered them by the bin. Smith didn’t know where in the world the cartridges had first been sold – to him that didn’t matter. He wanted “virgin” cartridges that had never been refilled, and he invested many thousands of dollars into buying high-quality equipment.
    “We deal with a lot of hospitals, law firms and banks,” says Smith. “If we can’t be as good as the new ones we won’t make it.”
    Meanwhile, IBM sold its printer operations and the new entity became Lexmark, based in Lexington, Kentucky. Lexmark is now a publicly-traded company (NYSE: LXK) with more than 12,000 employees and $3.7 billion in annual revenue. Impression Products began recycling and reselling Lexmark cartridges along with cartridges originally made by HP, Canon and others.
    The printer business – especially consumables – evolved into a huge profit center for the manufacturers. HP was the premier example: By 2004, ink and toner supplies accounted for half ofHP’s profits. The recycled cartridge business was growing too, as remanufacturers offered customers big savings with cartridges that had been cleaned and refilled.
    Impression Products remained small; Smith employed about 25 people, some only part-time. The workload was “nonstop,” he says, and profit margins shrank as competition increased, especially from companies based in China. Smith went the extra mile, repairing his customers’ printers and copiers for free if they kept buying the consumables from Impression Products.
    But Lexmark, HP and other manufacturers didn’t want companies like Impression Products sharing in the spoils. As their lawyers looked for ways to attack the recyclers, patent law became a weapon of choice.
    With jargon like “Jepson claim” and “file wrapper estoppel,” U.S. patent law can seem impenetrable, but it originates from a single phrase in the U.S. Constitution. The Copyright & Patent Clause grants Congress the power to “promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries…”
    In 1790, Congress passed the first of many laws protecting copyrights and patents. But over time, as authors and inventors sought to expand their rights, they clashed with owners of the items that embodied their intellectual property.
    In the 1908 case Bobbs-Merrill v. Straus, the publisher placed a legend inside the novel The Castaway, purporting to set a minimum retail price of one dollar. When the Straus brothers, owners of R.H. Macy & Co., bought a large quantity of the books at wholesale and then resold them at a retail price of 89 cents, Bobbs-Merrill filed suit for copyright infringement. The U.S. Supreme Court decided in favor of the brothers Straus, holding that when Bobbs-Merrill sold a copy of The Castaway, its rights in that copy were exhausted – a rule that became known as the “first sale doctrine.”
    About the same time period, patent law developed the parallel doctrine of “patent exhaustion.” In the 1917 case Motion Picture Patents Co. v. Universal Film Manufacturing Co., the patent holders in a film projector tried to stop the owner of the projector from using third-party film reels. The Supreme Court held that the projector, once sold, had been “carried outside the monopoly of the patent law and rendered free of every restriction that the vendor may attempt to put upon it.”
    But in the following decades, argument raged about whether copyright law’s first sale doctrine, and patent law’s doctrine of patent exhaustion, applied to products manufactured or first sold overseas. In copyright, the debate finally came to a head in the 2013 case Kirtsaeng v. John Wiley & Sons, Inc.
    Wiley pursued a business strategy called “market segmentation,” charging higher prices for textbooks sold in the lucrative North American market and less for textbooks sold overseas. Supap Kirtsaeng, a student from Thailand, had his family buy textbooks and ship them to his apartment in the U.S. As Supap pursued a doctorate in mathematics he helped finance his education by running an eBay business, reselling the foreign-market textbooks to American students.
    Wiley sued Supap in federal court, claiming that his importation and resale of the textbooks constituted copyright infringement. Supap fought the publisher all the way to the Supreme Court, where he won a 6-3 decision.
    The Court held that an authorized first sale of the textbooks anywhere in the world exhausted Wiley’s copyrights. Writing for the majority, Justice Stephen Breyer explained that “the Constitution’s language nowhere suggests that its limited exclusive right should include a right to divide markets…”
    Kirtsaeng was a victory for consumers and the tech industry, which benefit from unfettered worldwide markets. But paraphrasing Yogi Berra, “it’s déjà vu all over again” as the same issue gets litigated in the patent arena. The Supreme Court has yet to decide whether patent exhaustion, like copyright law’s first sale doctrine, applies without territorial limitation. Meanwhile, there’s lower-court case law that cuts the other way.
    The key case is Jazz Photo, a 2001 Federal Circuit decision. The case involved importation of “single use” Fuji cameras that had been reloaded and repackaged. The appeals court held that refurbishing the cameras didn’t infringe Fuji’s patents because an owner has a right of repair. But with little legal analysis, and no regard for the broader implications, the court limited its decision to cameras first sold in the U.S. because “United States patent rights are not exhausted by products of foreign provenance.” For recyclers and others who care about free trade and ownership rights, it was a jaw-dropping, “WTF-were-they-thinking” moment.
    Fast-forward to 2010, when Lexmark launched a massive patent infringement case in federal court inOhio against cartridge recyclers from around the world. After Lexmark discovered that Impression Products had acquired empty toner cartridges first sold overseas, Lexmark’s lawyers sent a letter to Eric Smith, basically saying “shut down your recycling business or we’ll sue you too.”
    Smith told me that the letter left him flummoxed. “I thought it was a bluff,” he admits. “What did I do? I didn’t do anything wrong.”

    In 2013, Lexmark added Impression Products to the list of more than two dozen defendants in the Ohio lawsuit. Lexmark dispatched a process server to the Impression Products facility in Charleston and served him with a summons. “It ticked me off,” he recalls.
    Meanwhile the other defendants were caving in with settlements that permanently barred them from buying empty Lexmark cartridges that had first been sold abroad. “Nobody wanted to fight,” Smith complains.
    Then Smith got referred to Ed O’Connor, 70, a patent lawyer with a long history of defending cartridge remanufacturers. O’Connor agreed to represent Impression Products for a flat fee plus expenses—a drop in the bucket compared to the rates charged by Lexmark’s white-shoe lawyers.
    “Lexmark went after small businesses—I thought that was wrong,” O’Connor told me over lunch at a chain restaurant near his firm’s Irvine, California office. He also said that “the illogic of Jazz Photoupset me as a lawyer.”
    The Supreme Court had just issued the Kirtsaeng decision, so O’Connor figured he had a fighting chance. He asked the district court in Ohio to dismiss the case against Impression Products on the basis that the rule in Kirtsaeng—an authorized sale anywhere in the world exhausts the copyright – should likewise apply to patent rights.

    O’Connor also asked the court to decide the other major issue in the case, which arose from language printed on Lexmark’s packaging. The language purported to obligate the buyer to use the cartridge once and then return it to Lexmark. O’Connor argued that this “Return Program” was an invalid end-run around patent exhaustion.
    In March 2014, Judge Michael R. Barrett issued two opinions. In the first opinion he agreed with O’Connor that the “Return Program” was invalid. But in the second opinion, Judge Barrett held thatKirtsaeng didn’t overrule Jazz Photo because “nowhere in Kirtsaeng is there any express mention or consideration of patents, the patent exhaustion doctrine, or patent exhaustion’s territoriality requirement.”
    Both sides filed appeals, and the case went up to the Federal Circuit in Washington, D.C., which has jurisdiction over patent cases. Normally an appeal would be heard by a three-judge panel, but in April 2015, the court ordered en banc review, meaning that the case will be heard by all eleven of the court’s fulltime judges. The court also invited interested parties to file amicus briefs.
    Since then the appeals court has been flooded with filings. The tech industry responded in force because technology products are layered in patents—the smartphone, for example, reportedly implicates 250,000 patents. Google, Samsung, Intel, Dell, LG Electronics, Quanta, Hynix and hundreds of other tech companies don’t want a patent cloud hanging over their supply chain. Other briefs supporting Impression Products were filed by remanufacturers, retailers and public interest groups like Electronic Frontier Foundation.
    I wrote an amicus brief on behalf of ASCDI, a trade group of 327 technology companies, and Owner’s Rights Initiative, a coalition that includes major players such as eBay and the American Library Association. My brief noted that ASCDI members routinely import patent-protected products from overseas to support technology users in the U.S. The technology users who’ve benefitted from these products include—can you guess?—Lexmark, its counsel Sidley Austin LLP, and the district court in Ohio that ruled against such free trade.
    Despite this disconnect between Lexmark’s legal position when attacking the cartridge recyclers, and how Lexmark acquires technology products to support its own operations, the printing giant isn’t backing down. Lexmark claims that dividing markets enables pharmaceutical companies to offer discounted drugs in developing countries without undercutting the U.S. market – conveniently ignoring that drug importation is regulated by the FDA, not patent law. Lexmark also claims there’s no evidence “that, under the Jazz Photo regime, patents are enforced against unsuspecting American buyers”—arguing in essence that it’s okay to make millions of everyday transactions illegal because patent holders will exercise discretion in deciding who to sue.
    Given such flaws in Lexmark’s arguments, it’s baffling that the U.S. Justice Department appears to be on Lexmark’s side. Although the government agrees with Impression Products that the “Return Program” is invalid, its amicus brief argues that patent holders should be able to sell products abroad and reserve their U.S. rights because “patent law is quintessentially territorial in nature.” This means, for example, that a toner cartridge or hard drive could be lawful for use in Canada but not in the U.S.—a system that would render the worldwide technology market an utter mess.
    Charles Duan, an attorney with Public Knowledge, told me in a phone call that the government is repeating the same argument it made when supporting John Wiley & Sons in Kirtsaeng. “It failed there and it should fail here,” he says.
    Oral argument before the Federal Circuit is set for October 2, 2015, in Washington, D.C. The outcome may be uncertain, but there’s one thing you can bet on: Eric Smith will be there.
    “I’m just a little guy who felt I was being bullied in the schoolyard,” he says. “I decided to fight. Someone had to do it.”
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