Static Control Components, Inc. v. Lexmark Int'l, Inc.

• Decision Date: 26 October 2012
• Docket Number: 09–6449.,09–6288,Nos. 09–6287,s. 09–6287
• Parties: STATIC CONTROL COMPONENTS, INC., Plaintiff–Appellant/Cross–Appellee, v. LEXMARK INTERNATIONAL, INC., Defendant–Appellee/Cross–Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

697 F.3d 387

104 U.S.P.Q.2d 1352

STATIC CONTROL COMPONENTS, INC., Plaintiff–Appellant/Cross–Appellee,

v.LEXMARK INTERNATIONAL, INC., Defendant–Appellee/Cross–Appellant.

Nos. 09–6287, 09–6288, 09–6449.

United States Court of Appeals,Sixth Circuit.

Argued: March 6, 2012.

Decided and Filed: Aug. 29, 2012.

Rehearing and Rehearing En Banc Denied Oct. 26, 2012.

ARGUED:Seth D. Greenstein, Constantine & Cannon LLP, Washington, D.C., for Appellant/Cross–Appellee. Steven B. Loy, Stoll Keenon Ogden PLLC, Lexington, Kentucky, for Appellee/Cross–Appellant. ON BRIEF:Seth D. Greenstein, Constantine & Cannon LLP, Washington, D.C., Joseph C. Smith, Jr., Bartlit Beck Herman Palenchar & Scott, LLP, Denver, Colorado, William L. London III, Static Control Components, Inc., Stanford, North Carolina, M. Miller Baker, Stefan M. Meisner, McDermott Will & Emery LLP, Washington, D.C., W. Craig Robertson III, Mickey T. Webster, Wyatt, Tarrant & Combs, LLP, Lexington, Kentucky, for Appellant/Cross–Appellee. Steven B. Loy, Anthony J. Phelps, Christopher L. Thacker, Stoll Keenon Ogden PLLC, Lexington, Kentucky, William J. Hunter, Jr., Stoll Keenon Ogden PLLC, Louisville, Kentucky, Timothy C. Meece, Binal J. Patel, Matthew P. Becker, Jason S. Shull, Michael L. Krashin, Banner & Witcoff, Ltd., Chicago, Illinois, Joseph M. Potenza, Christopher B. Roth, Banner & Witcoff, Ltd., Washington, D.C., for Appellee/Cross–Appellant.

Before: KEITH, BOGGS, and MOORE, Circuit Judges.

OPINION

KAREN NELSON MOORE, Circuit Judge.

Lexmark International, Inc. (“Lexmark”) is a major producer of laser printersand toner cartridges for its laser printers. Other companies, called remanufacturers, acquire used Lexmark toner cartridges, refill them, and sell them to owners of Lexmark printers at a lower cost. Lexmark developed microchips for both the toner cartridges and the printers so that Lexmark printers will reject any toner cartridges not containing a matching microchip, and over time Lexmark has patented certain aspects of the cartridges. Static Control Components, Inc. (“Static Control”) has identified how to replicate the cartridge microchips and sells the microchips to the remanufacturers along with other parts to facilitate the repair and resale of Lexmark toner cartridges.

Lexmark sued Static Control in 2002 (the “02 Action”) for copyright violations related to its source code in making the duplicate microchips and was given a preliminary injunction by the district court. Static Control counterclaimed under federal and state antitrust and false-advertising laws. While that suit was pending, Static Control redesigned its microchips and sued Lexmark for declaratory judgment in 2004 (the “04 Action”) to establish that the redesigned microchips did not infringe any copyright.¹ Lexmark counterclaimed again for copyright violations and this time added patent counterclaims against Static Control and eventually three of the remanufacturers. The two suits were consolidated into the 04 Action.

On appeal of the preliminary injunction, the Sixth Circuit vacated and rejected Lexmark's copyright theories. Lexmark Int'l, Inc. v. Static Control Components, Inc., 387 F.3d 522 (6th Cir.2004) (“Lexmark I ”). On remand, Lexmark successfully moved to dismiss all of Static Control's counterclaims. The case proceeded to trial, and the only issues ultimately submitted to the jury were Lexmark's claim of patent inducement against Static Control and Static Control's defense of patent misuse. The district judge instructed the jury that its findings on patent misuse would be advisory; the jury held that Static Control did not induce patent infringement and advised that Lexmark misused its patents. Lexmark renewed its earlier request for a judgment as a matter of law and also filed a motion for a retrial, which the district court denied. Both parties timely appealed.

For the following reasons, we AFFIRM the district court's dismissal of Static Control's federal antitrust claims, but REVERSE the dismissal of Static Control's claims under the Lanham Act and certain claims under state law. We AFFIRM the remainder of the judgment on appeal.

I. BACKGROUND

A. Factual Background

Lexmark manufactures laser printers, which require toner cartridges to print. The market for printers and toner cartridges generally has many players, e.g., Xerox, Epson, Hewlett–Packard, and Canon, and Lexmark's share of the overall printer market is less than 15%. Second Appellee Br. at 4. Each company generally manufactures its printers to work with only its own style of cartridges, and each company's cartridges will work with only its brand of printers. Therefore, each company typically dominates the aftermarket for cartridges compatible with its brand of printers, although the primary market for printers is well populated.

Remanufacturers are companies that participate in the toner-cartridge aftermarkets by acquiring used toner cartridges of all kinds of printers, repairing and refilling them, and selling them to owners of that kind of printer at a lower price.² First Appellant Br. at 11. Lexmark also acquires and repairs its used toner cartridges for resale. In the 1990s, Lexmark started a “Prebate” program with certain large customers whereby Lexmark would sell new toner cartridges at an upfront discount of around 20% if the end user agreed to (1) a single-use license and (2) a restriction that the cartridge be returned to Lexmark for remanufacturing or recycling and not to a third-party remanufacturer. Second Appellee Br. at 6. These terms were printed on several notices on the outside of the toner-cartridge box, which instructed the user that opening the box would indicate acceptance of the terms. Regular cartridges not subject to the Prebate terms are still sold, but at a higher price than the Prebate cartridges. According to Static Control, the price of Lexmark toner cartridges increased following the implementation of the program because of reduced competition from remanufacturers. First Appellant Br. at 16.³

Lexmark toner cartridges each contain a microchip that communicates with the printer once installed. Toner cartridges that are otherwise compatible with Lexmark printers will not function without the microchip. Lexmark obtains these microchips from a supplier that has allegedly agreed to sell microchips only to Lexmark. All Lexmark toner cartridges are initially manufactured with the necessary microchip, but the microchip for the Prebate cartridges is specifically designed to enforce the Prebate terms by disabling the cartridge for future use after the cartridge runs out of toner. To use the Prebate cartridge again, the microchip needs to be replaced. To use a non-Prebate cartridge again, the microchip does not need to be replaced unless it was damaged.

Lexmark eventually obtained several patents relating to its toner cartridges. At issue on appeal are nine utility patents that the remanufacturers allegedly infringe (referred to as the “nine mechanical patents”) and two design patents relating to seven different toner cartridges. Static Control developed a microchip that could replace the microchip on the Prebate toner cartridges, permitting a third party to remanufacture and sell the toner cartridge again. Static Control also sent its customers a letter, referred to as an “Anti–Prebate kit,” consisting of information from Static Control's general counsel regarding why the Prebate program is not valid under principles of contract law. Second Appellee Br. at 33. Remanufacturers buy these microchips from Static Control, along with other parts. Static Control does not manufacture, remanufacture, or sell toner cartridges of any kind, but it is the market leader on making and selling the components necessary to remanufacture Lexmark cartridges. First Appellant Br. at 11. Lexmark, on the other hand, sells toner cartridges but does not sell any of the component parts necessary to repair or remanufacture its toner cartridges, whether Prebate cartridges or not.

B. Procedural Background

Lexmark sued Static Control in December 2002 for violations of federal copyright laws and the Digital Millennium Copyright Act (“DMCA”), relating to two computer programs on its printer chips. Lexmark sought to halt Static Control's sale of the allegedly infringing chips. Static Control responded, ultimately counterclaiming under federal and state antitrust and false-advertising laws. Static Control claimed that Lexmark's Prebate program unlawfully excluded competition in the aftermarket for Lexmark-compatible cartridges, reducing competition and increasing prices, and that Lexmark falsely told remanufacturers that Static Control was infringing on Lexmark's patents. Lexmark then counterclaimed in reply, adding remanufacturers as defendants and making additional claims under the DMCA and various state-law claims, but no patent claims.

On January 8, 2003, Lexmark received a temporary restraining order in the 02 Action, and on January 24, 2003, the district court required Lexmark to post an injunction bond of $75,000. On February 7, 2003, the district court increased the bond to $250,000 and extended relief for 21 days. On February 27, 2003, district court granted the preliminary injunction. Static Control appealed both the injunction and the bond amount, and in October 2004 the Sixth Circuit reversed the preliminary injunction, making no comment on the bond amount. Lexmark I, 387 F.3d at 551. Static Control sought rehearing on the issue of the bond amount, which we denied in a one-sentence order. Lexmark Int'l, Inc. v. Static Control Components, Inc., No. 03–5400 (6th Cir. Dec. 29, 2004) (unpublished order). In light of the ruling, the parties stipulated to summary judgment against Lexmark on its DMCA claims. R. 216 (D. Ct. Order 2/23/06).

Before the Sixth Circuit ruled, however, Static Control initiated the 04 Action seeking declaratory judgment under federal copyright laws and the DMCA that its newly modified...