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Static Control Claims Partial Victory In Lexmark Suit
NEW YORK (Dow Jones)–Static Control Components Inc., a Sanford, N.C., privately held Maker of printer cartridge parts, said Wednesday it won a partial victory in its ongoing battle with printer maker Lexmark International Inc. (NYSE: LXK – News) .
Since December of 2002, Static Control has been embroiled in a legal battle with Lexington, Ky.-based Lexmark over laser-printer cartridges. Lexmark sued Static Control contending its so-called smart chip violates copyright laws because the chip allows companies to remanufacture toner cartridges to work in Lexmark printers.
Lexmark has incorporated a chip of its own in its printers that prevents cartridges from being reused unless the cartridge is refilled by Lexmark. The cartridges at the center of the case are used by corporate clients, who get a discount from Lexmark in exchange for sending the used cartridge back to Lexmark so that it can refill and resell them.
In February, a judge in the U.S. District Court in the Eastern District of Kentucky issued a preliminary injunction preventing Static Control from selling its chip. But the company said a ruling late Tuesday from the U.S. Copyright Office strengthens its case.
In the Tuesday ruling, the agency declined to give Static Control a new exemption to circumvent Lexmark’s technology, but said an existing reverse- engineering exemption already covers that.
According to Skip London, Static Control’s general counsel, the company independently developed software to circumvent Lexmark’s technology, so therefore it didn’t infringe copyright laws. In a press release, Static Control said the ruling from the copyright office validates its stance.
Static Control, which has countersued Lexmark claiming antitrust violations, said it plans to seek damages from Lexmark, although London wouldn’t disclose how much.
Officials at Lexmark weren’t immediately available to comment. But in the past Lexmark has contended that Static Control infringed on its intellectual property when designing its chip.
Following news of the ruling, shares of Lexmark gained 2%, or $1.56, to $ 74.59, on volume of 839,400 shares. Average daily volume is 1.6 million shares.
While Static Control is positioning the ruling as favorable to the company, Merrill Lynch analyst Steven Milunovich said it’s only a positive if Static Control did indeed use reverse engineering when developing its chip.
“On one hand, this suggests a setback for Static Control which may have directly copied Lexmark’s copyrighted printer/cartridge communication and authentication software,” wrote Milunovich in a research report. “On the other hand, it suggests Static Control can effectively pursue its goal of distributing programs that circumvent Lexmark’s smart chip to third-party cartridge remanufactures, so long as Static Control uses reverse engineering rather than copying.”
According to Milunovich, a key question is how difficult or costly a reverse- engineering approach would be for Static Control. He said Lexmark could advance its technology to make reverse engineering “technically infeasible or economically unviable.”
While the courts will decide the eventual outcome, Milunovich noted the case serves largely as a distraction and only secondarily as a potential factor affecting Lexmark’s business fundamentals
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