Friday, September 07, 2012

Dismissal of Antitrust Claims Against Printer Maker Upheld

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The U.S. Court of Appeals in Cincinnati has upheld dismissal of antitrust claims against Lexmark International, Inc., a major producer of laser printers and toner cartridges for its printers. Static Control Components, Inc., a company that made components for toner cartridges, lacked standing to pursue those claims. However, the appellate court ruled that Lanham Act false advertising and claims under the North Carolina Unfair Deceptive Trade Practices Act should not have been dismissed on standing grounds.

Lexmark developed toner cartridges containing microchips that communicate with printers to ensure that Lexmark printers only work with its cartridges. In addition, Lexmark acquired and repaired its used toner cartridges for resale. Static Control replicated the cartridge microchips and sold the microchips to remanufacturers. Remanufacturers refilled Lexmark cartridges and sold them to Lexmark printer owners at a lower cost.

Lexmark offered its larger customers a “Prebate” program in which it sold new toner cartridges at an upfront discount if the customer agreed to a single-use license and to return cartridges to Lexmark rather than a remanufacturer. The price of Lexmark's toner cartridges allegedly increased following the implementation of the program because of reduced competition from remanufacturers.

Standing to Assert Antitrust Claims

Static Control lacked standing to assert antitrust claims based on the “Prebate” program. The program targeted only the market for remanufactured cartridges, the court explained. Static Control was neither a competitor nor a consumer in the market for replacement toner cartridges. The implementation of the Prebate program decreased the number of remanufactured cartridges for Lexmark printers, which in turn decreased Static Control's sales; however, the intended targets of the Prebate program were the end users and the remanufacturers, not Static Control.

Moreover, Static Control’s alleged injury was not inextricably intertwined with the injuries in the market for replacement toner cartridges. The court also noted that the number of potentially more direct victims counseled against a finding of standing.

Antitrust Injury

Static Control also failed to plausibly allege any antitrust injury stemming from Lexmark’s decision to use the “lock-out” microchips in its cartridges and Lexmark’s exclusive distribution agreement with its own microchip supplier. Static Control failed to allege how the existence of a microchip requirement alone caused it any injury. It was possible that, without the microchips, Static Control would have been able to sell more component parts for remanufactured cartridges, but Static Control did not make this allegation. Moreover, Static Control did not allege how the removal of one of its direct competitors from the components and microchips market following an exclusive distributorship agreement with a single customer caused any damage to the seller' position within those markets or profits. The firm did not allege that Lexmark was a former customer or that absent the exclusive agreement the printer marker would have purchased from it.

There was no cognizable antitrust injury resulting from Lexmark’s continuous redesigns of its microchips, the court also ruled. Static Control contended that Lexmark engaged in the redesigns “to exclude competitors from the relevant markets, restrict output, and increase end-user prices.”

If Lexmark were able to maintain a monopoly on remanufactured toner cartridges by making cartridge parts wholly unavailable, then Static Control might have standing to pursue an antitrust violation. However, the firm did not sufficiently allege such behavior, the court noted. Static Control did not allege how the redesign decreased competition in the markets in which it competed, the market for microchips or parts.

Noerr-Pennington Immunity

Lexmark was immune under the Noerr-Pennington doctrine from an antitrust claim based on Lexmark's filing of an unsuccessful copyright action. Static Control did not offer any allegations upon which one could plausibly conclude that the copyright action was “objectively meritless.” Although a federal appellate court ultimately concluded that Lexmark did not have a valid copyright claim, this was not determinative of whether the suit was reasonable, according to the court.

False Advertising, State Law Claims

Static Control did, however, have standing to pursue a Lanham Act false advertising claim, even though it was not a competitor of Lexmark. The court refused to impose a standing requirement, found in other federal circuits, that a Lanham Act false advertising plaintiff be a competitor of the defendant. Static Control alleged a cognizable interest in its business reputation and sales to remanufacturers and sufficiently alleged that these interests were harmed by Lexmark's statements to the remanufacturers that it infringed Lexmark's intellectual property.

Dismissal of the federal antitrust claims for lack of standing did not require dismissal of North Carolina Unfair Deceptive Trade Practices Act claims, the appellate court ruled. Generally, federal case law was persuasive and instructive in construing North Carolina’s own antitrust statutes. However, North Carolina would be more flexible in its standing analysis, in the court’s view. North Carolina would not apply the factors enunciated in U.S. Supreme Court’s 1983 decision in Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 1983-1 Trade Cases ¶65,226, to deny Static Control’s standing to pursue state law unfair competition claims.

The decision is Static Control Components, Inc. v. Lexmark International, Inc., CCH Trade Regulation Reporter ¶78,027.

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