Lexmark Loses Lanham Act and Induced Patent Infringement Appeal: Sixth Circuit

Practical Law Legal Update 9-521-1583 (Approx. 5 pages)

Lexmark Loses Lanham Act and Induced Patent Infringement Appeal: Sixth Circuit

by PLC Intellectual Property & Technology

Key Litigated Issues

The key litigated issues in Static Control Components, Inc., v. Lexmark International, Inc. were the Court of Appeals' appellate jurisdiction over Lexmark's patent infringement claims and whether the district court erred in holding that:

Static Control lacked standing to bring its counterclaims against Lexmark for false advertising under the Lanham Act.
Lexmark was not entitled to a new trial or judgment as a matter of law against Static Control on Lexmark's claim that Static Control induced its customers to infringe Lexmark's patents on its toner cartridges.
Lexmark's design patents for certain toner cartridges were invalid because they were primarily functional.
Static Control lacked standing to bring its federal antitrust counterclaims.

Background

Lexmark produces and sells laser printers and toner cartridges for its laser printers. Lexmark developed microchips for both its toner cartridges and printers that enable these printers to reject any toner cartridges that do not contain a matching microchip. Static Control developed a means to replicate the cartridge microchips. It sold these replicated microchips to remanufacturers who participated in the toner cartridge aftermarket by acquiring used Lexmark toner cartridges, repairing and refilling them, and selling them to printer owners at a lower price than Lexmark's.

Lexmark sued Static Control in December 2002 for copyright infringement, claiming that Static Control's microchip:

Infringed Lexmark's copyrights by copying Lexmark's Toner Loading Program.
Violated the Digital Millennium Copyright Act (DMCA) by circumventing technological measures designed to control access to Lexmark's Toner Loading and Printer Engine Programs.

Static Control counterclaimed against Lexmark:

Under federal and state antitrust laws, alleging that Lexmark’s Prebate program, in which Lexmark issued single-use licenses and required its cartridge customers to return their used cartridges to Lexmark, unlawfully excluded competition in the aftermarket for Lexmark-compatible toner cartridges.
Under federal and state false advertising laws, including the Lanham Act, for falsely telling Static Control's customers that Static Control's products infringe Lexmark's patents.

In 2004, while the suit was pending, Static Control redesigned its microchips and sued Lexmark for a declaratory judgment that the redesigned microchips did not violate the DMCA or infringe Lexmark's copyrights. Lexmark counterclaimed again for copyright violations and added counterclaims for patent infringement against Static Control and three cartridge remanufacturers as third-party defendants.

In January 2003, the US District Court for the Eastern District of Kentucky granted Lexmark a preliminary injunction on its 2002 DMCA and copyright infringement claims. In 2004, on appeal, the US Court of Appeals for the Sixth Circuit vacated the injunction and, in a lengthy opinion, rejected Lexmark's DMCA and copyright claims.

On remand, the parties stipulated to summary judgment against Lexmark dismissing its DMCA claims and the district court:

Granted Static Control's motions for summary judgment dismissing Lexmark's copyright infringement and design patent claims, holding two of Lexmark's design patents invalid.
Granted Lexmark's motion to dismiss Static Control's Lanham Act and antitrust claims for lack of standing.
Granted summary judgment to Lexmark on its claims of direct patent infringement against the three remanufacturers.

At trial, the jury was asked whether the unnamed remanufacturers (Static Control's customers) directly infringed as a class and whether Static Control induced any direct infringement. The jury found that Lexmark had failed to show that the remanufacturers as a class directly infringed Lexmark's patents and that Static Control did not induce patent infringement. Lexmark renewed an earlier request for judgment as a matter of law and also filed a motion for a retrial. The district court denied both motions.

Outcome

In its August 29, 2012 decision, the Sixth Circuit reversed the dismissal of Static Control's claims under the Lanham Act and affirmed the remainder of the judgment on appeal. Among other things, the Sixth Circuit specifically:

Ruled that it had appellate jurisdiction over Lexmark's patent counterclaims.
Reversed the district court's decision that Static Control did not have standing to bring claims under the Lanham Act.
Affirmed the district court's holding that Static Control failed to show any cognizable antitrust injury and therefore lacked standing to bring its antitrust claims.
Affirmed the district court's denial of Lexmark's motions for judgment as a matter of law or a new trial on its induced infringement patent counterclaims.

Jurisdiction

Before addressing the merits of the case, the Sixth Circuit had to determine whether it was precluded from reviewing Lexmark's patent counterclaims by the US Court of Appeals for the Federal Circuit's exclusive jurisdiction over substantive issues of patent law. The court concluded that the Federal Circuit does not have exclusive jurisdiction to review this case under Section 1295(a)(1) of Title 28 of the US Code.

Under Section 1295, the Federal Circuit has exclusive jurisdiction over appeals from a district court's final decisions if the district court's jurisdiction was based, in whole or in part, on Section 1338(a) of Title 28 of the US Code. Section 1338 gives federal district courts original jurisdiction over any civil action "arising under" any Act of Congress relating to patents.

Relying on Supreme Court precedent, the Sixth Circuit held that, absent special circumstances (such as an actual or constructive amendment to a complaint), because Lexmark's patent issues were raised in its counterclaims, they were insufficient to confer exclusive Federal Circuit jurisdiction (citing Holmes Grp., Inc. v. Vornado Air Circulation Sys., Inc.). However, the court specially noted that, under the Leahy-Smith America Invents Act (AIA), the Federal Circuit now has exclusive appellate jurisdiction over compulsory patent counterclaims, but only for actions filed after the effective date of the statute's enactment, September 16, 2011.

Static Control's Lanham Act Standing

The Sixth Circuit reversed the district court's decision that Static Control does not have standing to bring claims against Lexmark under the Lanham Act. The court rejected the district court's holding that factors for Lanham Act standing are the same factors for antitrust standing articulated in Associated General Contractors of California, Inc. v. California State Council of Carpenters. After reviewing a circuit split on the appropriate standard for determining Lanham Act standing, the Sixth Circuit relied on the reasonable interest test. Under this test, a claimant has standing to assert a false advertising claim under Section 43(a) of the Lanham Act (15 U.S.C. § 1125(a)) if it can demonstrate a reasonable:

Interest to be protected against the alleged false advertising.
Basis for believing that the interest is likely to be damaged by the alleged false advertising.

The court found that Static Control has standing because it alleged:

A cognizable interest in its business reputation and sales to remanufacturers.
That its interests were harmed by Lexmark's statements to the remanufacturers that Static Control was engaging in illegal conduct, namely, patent infringement.

Lexmark's Patent Counterclaims

The Sixth Circuit affirmed the district court's decision denying Lexmark's renewed motion for judgment as a matter of law and motion for a new trial on its induced patent infringement claims. The court also affirmed the district court's summary judgment ruling that Lexmark's design patents were invalid as a matter of law.

Inducement of Patent Infringement

To prove inducement of patent infringement, Lexmark had to show, by a preponderance of evidence, that:

Static Control's customers directly infringed Lexmark's patents.
Static Control took active steps that induced the customers' infringement.
Static Control intended the customers to take the infringing acts.
Static Control knew or willfully disregarded the risk that those actions by its customers would constitute direct infringement.

The court noted that direct patent infringement by a third party is a necessary predicate to proving that the third party was induced to infringe. Based on the evidentiary record, the Sixth Circuit found that the jury reasonably could have concluded that Lexmark had not met its burden of showing that the remanufacturers as a class directly infringed Lexmark's patents. Therefore, Lexmark was not entitled to judgment as a matter of law or a new trial on its claim that Static Control induced this alleged infringement.

Design Patent Invalidity

The court affirmed the district court's decision that the two Lexmark design patents in suit were invalid because they were primarily functional. The district court found that the cartridges on which Lexmark obtained these design patents were primarily functional because their design was dictated by that of the printers in which they were used. The Sixth Circuit agreed and held Lexmark's design patents invalid, finding that the cartridges are functional and not ornamental because:

The cartridges are visible to users at some points, but are generally hidden from view inside the printer.
Their design is dictated solely by the printer with which they are compatible.
The cartridges' appearance had no other role in the purchaser's decision of which cartridge to purchase.

Practical Implications

This decision clarifies the factors a claimant must show in order to have standing to bring Lanham Act false advertising and federal antitrust claims in the Sixth Circuit. The Sixth Circuit's decision also highlights that:

Where, as in this case, a patent dispute arises only as a counterclaim, the Federal Circuit does not necessarily have exclusive jurisdiction over the appeal.
This conclusion must be modified to account for cases filed after September 16, 2011 because, under the AIA, the Federal Circuit now has exclusive appellate jurisdiction over compulsory counterclaims asserted in these cases to the extent these counterclaims relate to patents.

Lexmark Loses Lanham Act and Induced Patent Infringement Appeal: Sixth Circuit | Practical Law