The Prebate Program is invalidated by Federal Judge
by Tricia Judge, Int'l ITC

A Federal Judge concluded on March 31, 2009 that “the Prebate Program is invalid under patent law” in the case of Static Control Components vs. Lexmark International.  Judge Gregory Van Tatenhove reversed his earlier decision that Prebate restrictions were valid based on the recent U.S. Supreme Court decision in Quanta Computer Inc. v. LG Electronics.

The opinion reads:  “After reading the parties' briefs and hearing oral arguments, this Court agrees that Quanta compels reconsideration and reversal of the aforementioned Order. Quanta has changed the landscape of the doctrine of patent exhaustion generally, and specifically the application of the doctrine to the facts of this case.” 

“Static Control Components was committed to proving that Lexmark used its patents unfairly and to the detriment of remanufacturers and consumers alike,” said Static Control Vice President and General Counsel Skip London.  “We are very pleased with the Judge’s decision.”

Static Control filed a motion for reconsideration of the Judge’s earlier findings that Prebate was valid after the Quanta decision.  Lexmark opposed the motion on several grounds, but chiefly tried to distinguish the status of its sales as “conditional,” while those involved in the Quanta case were “unconditional.”

The Court refused to accept Lexmark’s efforts to distance itself from the Quanta scenario; “…like LG Electronics, Lexmark attempts to reserve patent rights in its products through post-sale restrictions on use imposed on its customers. This is what Quanta says Lexmark can not do.”

The case may have ramifications for those vexed by the Epson general exclusion order as well.  In his discussion of the case law leading up to Quanta, Judge Van Tatenhove addressed the issue raised in the Jazz Photo case regarding the exhaustion of patent rights on products first sold overseas. The Jazz Photo case raised the question of whether such products can be restricted because the patent rights were not exhausted in the U.S.  He concluded that more recent cases have applied Quanta to reach the conclusion that patent rights are exhausted, even when the first sale occurs overseas. Epson appears to rely on Jazz Photo with the restrictions it has placed on the import of its products. And that may no longer be a sound practice.

Static Control Component’s victory is the culmination of 12 years of industry efforts to fight prebate in the courts and with legislation. Lexmark initiated this lawsuit against Static Control in 2002, and the issue of the validity of Prebate was central to the case. Static Control may now revisit the issue of whether Lexmark’s programs were anti-competitive.

Although an appeal by Lexmark is likely, for once the existing precedent favors the aftermarket. The industry is finally free of the restrictions that chilled the remanufacturing of Lexmark cartridges.

The International Imaging Technology Council filed a brief in support of Static Control in the case, and provided testimony in early stages of the trial.  The Int’l ITC also filed a brief in the Quanta case, with the support of Static Control Components.  The Int’l ITC has also been involved in passing anti-prebate, pro-remanufacturing legislation as well as working to get the legislation properly implemented.