Friday, May 25, 2007

Static Control v. Lexmark: not just for anticircumvention anymore

Static Control Components, Inc. v. Lexmark International, Inc., 2007 WL 1310134 (E.D. Ky.)

Lexmark sells certain printer toner cartridges pursuant to its “prebate” program; the cartridges are discounted from regular price but are only refillable by Lexmark. A shrinkwrap contract containing the refill restriction accompanies every prebate cartridge. About 90% of the cartridges Lexmark sells are prebated; despite claims on the contract that “[a] regular price cartridge without these terms is available,” Lexmark does not make “regularly” priced cartridges for at least five of its models. Lexmark designed a computer chip in the cartridges to enforce this contractual restriction. Static Control reverse engineered the relevant information and refills/remanufactures prebated cartridges, much to Lexmark’s chagrin. This spurred DMCA litigation, resolved in Static Control’s favor, but other aspects of the case continue.

Static Control’s remanufactured cartridges sell for $31, $10 less than Lexmark’s. Static Control alleges that the prebate program increased the price of remanufactured cartridges, due to the 90% loyalty Lexmark has among toner customers, up from 60% prior to the prebate program. The district court denied Lexmark’s motion for summary judgment on Static Control’s antitrust claims, but I will discuss only its analysis of the false advertising claims. (These claims are brought by a group of remanufacturers including Static Control.)

Because of the prebate program, Lexmark has accumulated a large number of empty cartridges. It doesn’t remanufacture all of these, and for cost reasons, when it does remanufacture cartridges, it doesn’t remanufacture all the parts. Hundreds of thousands of cartridges are incinerated, with their ash going to a landfill. Apparently, Lexmark sometimes calls incineration “thermally recycling.”

Lexmark’s prebate cartridges have a label about Lexmark’s “Environmental Program:” “We manage resources today to ensure a beautiful tomorrow. Small steps can have big rewards. Thank you for your ongoing support, together we have recycled millions of toner cartridges, one cartridge at a time. See details inside about how you can continue to participate in this important environmental initiative.” Lexmark’s website claims, “Return Prebate cartridges are a great choice for the environment.” It further states: “Lexmark Return Prebate Program Cartridges are sold at a discount in exchange for the customer's agreement to use the cartridge only once and return it only to Lexmark for remanufacturing or recycling,” and that “Lexmark recycles Return Program Cartridges, keeping them out of the waste stream.”

Lexmark conducted market research among people responsible for purchasing printers and physically replacing used cartridges with new or remanufactured cartridges. Responses to the “environmentally friendly message” included:

The green environmental label gives you a better conscience.

You want it to be green. You don't want this stuff out in the street. You want it to be recycled; you want it to be treated properly.

Focus groups asked to create their own names for the prebate program suggested names such as “Save the Toner Tree,” “Responsible Use of Resources,” “Environmental Express (so that people get the impression that it speeds up the process),” “Envirosave,” and "Save $ and the Environment.”

One remanufacturer, Wazana, sought summary judgment that the following claims were literally false: (1) all prebate cartridges will be remanufactured or recycled; (2) the cartridges will be disposed of in a manner different from regular household waste; and (3) regularly priced cartridges, or non-prebate cartridges, are available for purchase.

The court found that the statements that “Lexmark recycles Return Program Cartridges, keeping them out of the waste stream” and that regularly priced non-prebate cartridges were available were both unambiguous.

However, there were significant disputed facts about recycling v. the waste stream. Apparently, Lexmark’s “thermal recycling,” which sounds at best like Newspeak to me, could count as recycling under certain definitions. (Is there any evidence that any customers subscribe to those definitions? Lexmark’s own research suggests otherwise.) There is also a dispute over whether Lexmark’s partial recycling of used cartridges counts as recycling.

Likewise, Lexmark submitted some evidence that it made regularly priced cartridges available to customers who did not want to purchase the prebate cartridge kits, so summary judgment on claim (3) was also denied.

Lexmark cross-moved for summary judgment on Wazana’s claim that Lexmark falsely advertised when it told customers that its single-use restrictions on prebate cartridges were valid. Though the court thought it possible that single-use restrictions were invalid, the difficult question was whether this statement, if false, could have damaged Wazana. Lexmark questioned whether the validity of the restrictions was material to any purchasers. (Indeed, one would think that valid restrictions would discourage rather than encourage purchase, precisely because of the possibility of cheaper refills from other remanufacturers.)

Wazana submitted expert evidence that prebating increased Lexmark’s sales and decreased Wazana’s. The lost sales are not the first purchase, but the refill, so it’s easy to see how Lexmark could take business from Wazana. On materiality, the court found it reasonable to infer that the single-use restriction was valuable to the customer, because without it, the cartridge price could be significantly higher. It’s material, but not in the ordinary way: It’s material as part of an overall package. Thus, Lexmark wasn’t entitled to summary judgment. I’m not convinced this is right, though it’s a difficult issue. The question is what the proper counterfactual comparison is: the prebated cartridges without the allegedly false claim, or the cartridges as they’d be sold if the restrictions weren’t in fact valid? Usually, it’s obvious that the former is the proper comparison for Lanham Act purposes, but here the claim is about the terms of sale (rather than some other product quality), which would themselves change if the claim weren’t made.

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