*NEWS*LEXMARK LOSES VERDICT…(MUST READ)

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Lexmark loses verdict in patent case
Lexmark
International lost a court battle on Friday when a jury ruled that it
failed to prove that Static Control Components induced toner-cartridge
remanufacturers to violate Lexmark patents.Lexmark had alleged that
Static Control, by making a chip that bypassed a Lexmark
patent-enforcement mechanism, had encouraged some of its customers to
directly infringe on Lexmark’s patents.And while Friday’s verdict in
U.S. District Court was decidedly in Static Control’s favor, it does
not nullify the Lexmark program at the center of the case. The judge in
the case earlier ruled the program is valid, as well as ruling in
Lexmark’s favor on several key issues before and during the trial.The
verdict does not entitle Static Control to seek monetary relief from
Lexmark. The company had initially sought damages by claiming Lexmark
violated antitrust laws, but the judge threw that claim out.But Static
Control used claims of anti-competitive measures by Lexmark as a
defense in the case. The jury agreed, though that portion of its
verdict is only an advisory for the judge, who will have the final say.

Static Control hailed the jury’s verdict as a victory for the consumer.
“I
think this is a very pro-consumer, money-saving, economically sound
decision for the American consumer,” said Static Control CEO Ed Swartz
after hugging his general counsel Skip London. “This gives the consumer
a choice he would not have, had Static Control not fought Lexmark.”

Cartridges in crosshairs
The
5-year-old case centers on toner cartridges for Lexmark’s laser
printers. At the root of it is the Lexmark Return Program, which offers
upfront discounts to toner cartridge buyers if they agree to return the
cartridge after a single use to Lexmark and not other remanufacturers.
Lexmark then remanufactures the cartridges and resells them.The
presence of third-party remanufacturers has grown over the last decade,
siphoning off profits from printer companies who rely on profit-rich
ink and toner, since printers are often sold for little or no
profit.The case between Lexmark and Static Control involves only
laser-printer toner cartridges. The customers of the Return Program are
generally large companies, which purchase the cartridges through
contractual agreements.The case grew out of a past decision by Lexmark
to include a chip on its Return Program toner cartridges that
determined whether they had been remanufactured. If they had, the
cartridge turned itself off and would not print.The legal battle began
when Static Control developed a chip that turned off Lexmark’s,
allowing remanufacturers to buy up empty Return Program toner
cartridges, install Static Control’s chip and then resell them.The chip
was one of thousands of products produced by Static Control, which
helps remanufacturers repair toner cartridges and then resell them.

Lexmark
has said the chip violates the single-use patent license it includes on
the Return Program cartridges. The company also offers non-Return
Program cartridges that come with no license agreement and can be
remanufactured by third parties if the customers wish.Since Friday’s
verdict does not invalidate the Return Program, it “kind of maintains
the status quo,” said Tom Carpenter, a vice president and senior equity
analyst at Hilliard Lyons in Louisville. Carpenter’s firm or its
affiliates beneficially owned at least 1 percent of Lexmark’s stock at
the end of May.Charlie Brewer of industry tracker Lyra Research
concurred that the ruling doesn’t change the remanufacturer landscape;
however, “the aftermarket as an industry will feel re-energized after
having lost a lot of high-stakes, high-visibility battles … over the
years.”Brewer said the ruling also crowns Static Control “as the
champion of the aftermarket.”“It re-establishes them as the company
that stepped up to the plate and fought all the way,” he said.

Result not one-sided
The
case was not a complete victory for Static Control, though, as Judge
Gregory Van Tatenhove had ruled against it on several parts of the case
before and during trial.For instance, Van Tatenhove found earlier this
month that Static Control directly infringed on a Lexmark patent in the
production of an encoder wheel used on the toner cartridges.The encoder
wheel, as well as the chip, were prominently discussed in Lexmark’s
closing arguments.Lexmark attorney Mark Banner said Static Control sold
the two parts necessary to successfully remanufacture and sell a
working Return Program cartridge.“They were selling everything you need
as a remanufacturer to infringe,” he said. He went on to say that
Static Control “knew or should have known” that the remanufacturers
were infringing.In the course of the case, three major cartridge
remanufacturers who were supplied by Static Control were found to have
violated Lexmark’s patents. The three had made counter-claims against
Lexmark but settled and admitted the validity of the company’s
patents.Van Tatenhove also threw out Static Control’s claims that
Lexmark violated antitrust laws with its Return Program.The North
Carolina company used anti-competitive allegations, though, as part of
its defense, and the jury in almost all cases agreed with Static
Control.It agreed that Lexmark has market power in the aftermarket for
its toner cartridges and has used it to unreasonably restrain
competition.Static Control also alleged that Lexmark’s non-Return
Program cartridge labels mislead consumers. Lexmark had rebutted that
the labels were color-coded differently and included different part
numbers. Still, the jury agreed, for the most part, with Static
Control’s claims.

The
jury also agreed with Static Control’s claims that Lexmark improperly
placed patent licenses on some toner cartridges it sold to IBM.Those
parts of the verdict, though, are merely an advisory opinion to Van
Tatenhove. Van Tatenhove asked the attorneys after the verdict was
announced to file certain documents with the court on those advisory
opinion issues within about a month. He will issue his decision
sometime after that.Neither company made any immediate comment about
appeals in the case, though London, of Static Control, said he suspects
“there will be plenty of appeals.”

Lexmark loses recycling ruling
Federal jury rejects program
In
a victory for bargain recyclers of laser toner cartridges that could
transform the business model for printers, a jury in Frankfort ruled
yesterday that Lexmark International “unreasonably restrained
competition” and exploited customers into believing that they had to
pay more by recycling empty cartridges only through the Lexington
company.At stake is the lifeblood of Static Control of Sanford, N.C.,
and about 3,500 U.S. firms that recycle and refill laser and inkjet
cartridges, then sell them at prices up to 30 percent less than Lexmark
does.
The printer industry reaps profits from ink cartridges, not printers themselves.

The
jury’s ruling rebuked Lexmark labeling practices used since 1997 to
entice customers to return empty cartridges to them instead of cheaper,
alternative suppliers.The verdict by the nine-member jury is
nonbinding, although U.S. District Court Judge Gregory Van Tatenhove
said he will give it serious consideration when he makes his final
ruling in 30 days.Basically they were saying that Lexmark was cheating
their customers,” said Rob Enderle, an industry analyst and chief of
the Enderle Group. “They want to see consumers get choice.”
At issue
is Lexmark’s “Prebate” or “Return” program, in which corporate
customers received large discounts on their ink cartridges in exchange
for a pledge to return the empties to Lexmark. A higher-priced
cartridge that can be freely recycled is also available.

The
prebate cartridges included a chip that disabled the printer if a
non-Lexmark recycled cartridge was inserted. But Static constructed a
similar chip that allowed the recycling industry to continue refilling
cartridges.
Static’s lawyers argued that the prebate program
was not only wasteful, because many cartridges ended up in the garbage,
but also amounted to a monopolistic practice by Lexmark. The jury
agreed as part of its 19-page verdict, but Van Tatenhove has ruled
Static could not collect damages from Lexmark.”We’re very pleased and
gratified,” said Static Control Chief Executive Ed Swartz. “I think
this is a very pro-consumer … decision.”

Lexmark, which receives 51 percent of its profits by recycling its own empties, will likely appeal the verdict.“Lexmark’s
Return program benefits customers, is good for the environment and is
fair to the competition,” Lexmark chief counsel Vincent J. Cole said.
“We will continue to pursue claims whenever and wherever necessary to
protect Lexmark’s intellectual property.”Jim Forrest, an analyst
with Lyra Research in Boston, says toner cartridges generated more than
$30 billion in revenues worldwide, with remanufactured versions
accounting for nearly a quarter of that. Forrest said a Lexmark victory
might have sparked other printer giants to create similar
programs.Instead, the ruling threatens to change forever the razor and
razor blade business model of the industry, where printers are sold at
a discount and profits are made on the supplies, Enderle said. “This
will have an awful lot to do with changing the market,” he said.

Jury rules Lexmark patents not violated
A
federal jury determined yesterday that Lexmark’s patents weren’t
violated by a North Carolina company that makes parts that lets the
company’s printer-toner cartridges be reused.The jury found that the
actions of Static Control Components of Sanford didn’t cause the makers
of remanufactured cartridges to infringe on patents held by
Lexmark.Lexmark had sued under federal copyright law after Static
Control sold a microchip to the remanufacturers that allowed them to
rebuild certain Lexmark cartridges, refill them with ink and sell them
to customers for far less money.Although the verdict isn’t binding,
Judge Gregory Van Tatenhove of U.S. District Court said he will give it
serious consideration when he makes his final ruling within 30 days.
Both sides could appeal.Van Tatenhove found earlier that Static Control
did violate a Lexmark patent regarding another product, known as an
encoder wheel. However, Static Control stopped producing the wheel in
2004, so no damages were awarded to Lexmark.The legal fight between the
two companies dates back to 2002.The most recent trial dealt with a
Lexmark program that allowed corporate customers large discounts on
their ink cartridges in exchange for a pledge to return the empties to
Lexmark. The “prebate” cartridges, as they were called, included a chip
that blocked their reuse by anybody but Lexmark, but Static constructed
a similar chip that allowed the cartridges to be duplicated.

Lexmark also sold a more expensive non-prebate version that customers were free to sell to remanufacturers.
Static
Control’s attorneys argued that the program not only was wasteful,
because many ended up in the garbage, but also amounted to a
monopolistic practice. The jury agreed, but Van Tatenhove had
previously ruled that Static couldn’t collect monetary damages from
Lexmark because the remanufacturers, not Static Control, were harmed.

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June 25, 2007 at 10:51 AM