A federal appeals court this week struck a blow against Lexmark International's attempt to protect its share of the lucrative market for refill printer cartridges.
The court vacated a preliminary injunction that barred Static Control Components (SCC) from selling computer chips enabling third-party manufacturers to clone Lexmark's cartridges.
District Judge Jeffrey Sutton of the U.S. Court of Appeals for the Sixth Circuit, in Cincinnati, delivered the court's opinion that Lexmark had not established a likelihood of success on any of its claims against SCC and should not have been granted a preliminary injunction. His ruling details a series of legal errors in the district court's decision.
Lexmark, headquartered in Lexington, Kentucky, sued Sanford, North Carolina-based SCC in late 2002 in U.S. District Court for the Eastern District of Kentucky, alleging copyright infringement and Digital Millennium Copyright Act (DMCA) violations.
The district court favored Lexmark's arguments and granted the injunction in March 2003, but a later interpretive ruling by the U.S. Copyright Office cast doubt on the DMCA grounds Lexmark used to establish its case.
SCC retired the disputed Smartek chips in accordance with the preliminary injunction, but in March 2004 it began selling a new line of chips to enable cloned cartridges to function in Lexmark printers.
In the printer market, the big money comes not from selling the devices but from selling supplemental products like refill cartridges. Printer makers strongly encourage their customers to buy cartridges directly, but Lexmark took its campaign a step further by locking out products from third-party manufacturers.
Setting a Precedent
The Lexmark/SCC case is closely watched for the precedent it will set, as the two vendors test whether copyright law protects software used to inhibit interoperability between one vendor's products and those from its rivals.
Sutton argues that it does not. "Lexmark's market for its toner cartridges . . . may well be diminished by the Smartek chips, but that is not the sort of market or value that copyright law protects," he writes in the ruling.
Lexmark did not promptly respond to a request for comment. SCC issued a written statement praising the decision. "The Sixth Circuit's ruling solidifies and supports our position that the DMCA was not intended to create aftermarket electronic monopolies," says Chief Executive Officer Ed Swartz.
Sutton's decision focuses on technical aspects of the protection methods Lexmark used, but a second court judge, Gilbert Merritt, writes a concurring opinion advocating a firmer stance against Lexmark.
"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," Merritt writes.
A third court judge wrote a mixed opinion concurring on most points but dissenting on a few technical matters. The court as a whole noted that its opinion concerns only the preliminary injunction, and leaves a decision on a permanent injunction in the hands of the district court, to which the case will now return.
Merrill Lynch analyst Steven Milunovich says in a research note that he is "somewhat surprised" at the appeals court ruling but does not expect it to significantly affect Lexmark's business.
"[We] expect Lexmark to continue to press its legal case. We would also not be surprised to see the company adjust the digital handshake technology to make it harder for Static Control to circumvent in future cartridges," he writes.