The intellectual property interests are at it again, trying to leverage their rights to take away yours. No one knows this better than 44-year-old Eric Smith of Charleston, West Virginia. Smith has devoted his life to the office supply company founded by his father—a company that’s now under legal attack by printing behemoth Lexmark International, Inc.
Although Smith trying to fend off Lexmark is like a lone Ukrainian trying to stop the Russian army, when I reached the embattled businessman at his office, he said that he’s determined to stick it out. “We have nothing else to fall back on.”
Smith started in the business as a teenager, delivering typewriter ribbons to customers around town. When IBM Selectrics gave way to computers and dot-matrix printers, Smith found a niche in recycling ink cartridges—buying up empties and refilling them. As revenue grew he hired buddies to work in the shop, and eventually he became president.
But in 2013, Smith started getting threatening letters from lawyers representing Lexmark. The letters accused his family company Impression Products, Inc. of patent infringement, based on a theory that Smith found baffling.
Some of the empty cartridges that Impression Products recycled had first been sold overseas. Lexmark insisted that as patent holder, it had the right to block Impression Products from refilling or reselling these foreign-market cartridges in the U.S.
By extension Lexmark’s argument applied to any patent-protected product that was first sold abroad. In the world according to Lexmark, an eBay user in the U.S. who bought a video game originally sold in Canada could be sued for patent infringement. An American traveler returning from Europe with a new Swiss watch could have it seized in Customs as unlawful for use in this country.
More ominously, patent holders could stop critically-important supplies from crossing the border. In times of shortage, technology users in the U.S.—hospitals, defense agencies, businesses, schools—might find themselves unable to secure replacement parts from overseas.
Illogical as it may sound, Lexmark’s position was supported by a 2001 case called Jazz Photo Corp. v. ITC. Because of Jazz Photo, when Lexmark sued Impression Products and dozens of other cartridge recyclers in federal court, most of the defendants threw in the towel.
But Smith hung tough, and now his battle with Lexmark is before the court of appeals for the Federal Circuit in Washington, D.C. In April 2015, the appeals court decided to reconsider Jazz Photo in light of the Supreme Court’s decision in Kirtsaeng v. John Wiley & Sons, Inc., which held that copyrighted products manufactured abroad could be freely traded in the U.S.
Although Smith hopes that the Federal Circuit will overrule Jazz Photo, he’s girding for a long fight. Oral argument is set for October 2, 2015, and the case may eventually wind up in the Supreme Court.
Eric’s father Walter Smith founded Impression Products in 1978, servicing typewriters and copiers in West Virginia’s capitol city. When Eric started making deliveries to customers around Charleston, it was supposed to be a summer job. “I noticed all the offices we weren’t making deliveries to,” he says. He skipped college and headed straight into sales.
In the 1990s, Smith segued from selling IBM-compatible typewriter ribbons to selling remanufactured printer ink cartridges. He bought the used cartridges from recyclers who offered them by the bin. Smith didn’t know where in the world the cartridges had first been sold – to him that didn’t matter. He wanted “virgin” cartridges that had never been refilled, and he invested many thousands of dollars into buying high-quality equipment.
“We deal with a lot of hospitals, law firms and banks,” says Smith. “If we can’t be as good as the new ones we won’t make it.”
Meanwhile, IBM sold its printer operations and the new entity became Lexmark, based in Lexington, Kentucky. Lexmark is now a publicly-traded company (NYSE: LXK) with more than 12,000 employees and $3.7 billion in annual revenue. Impression Products began recycling and reselling Lexmark cartridges along with cartridges originally made by HP, Canon and others.
The printer business – especially consumables – evolved into a huge profit center for the manufacturers. HP was the premier example: By 2004, ink and toner supplies accounted for half of HP’s profits. The recycled cartridge business was growing too, as remanufacturers offered customers big savings with cartridges that had been cleaned and refilled.
Impression Products remained small; Smith employed about 25 people, some only part-time. The workload was “nonstop,” he says, and profit margins shrank as competition increased, especially from companies based in China. Smith went the extra mile, repairing his customers’ printers and copiers for free if they kept buying the consumables from Impression Products.
But Lexmark, HP and other manufacturers didn’t want companies like Impression Products sharing in the spoils. As their lawyers looked for ways to attack the recyclers, patent law became a weapon of choice.
With jargon like “Jepson claim” and “file wrapper estoppel,” U.S. patent law can seem impenetrable, but it originates from a single phrase in the U.S. Constitution. The Copyright & Patent Clause grants Congress the power to “promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries…”
In 1790, Congress passed the first of many laws protecting copyrights and patents. But over time, as authors and inventors sought to expand their rights, they clashed with owners of the items that embodied their intellectual property.
In the 1908 case Bobbs-Merrill v. Straus, the publisher placed a legend inside the novel The Castaway, purporting to set a minimum retail price of one dollar. When the Straus brothers, owners of R.H. Macy & Co., bought a large quantity of the books at wholesale and then resold them at a retail price of 89 cents, Bobbs-Merrill filed suit for copyright infringement. The U.S. Supreme Court decided in favor of the brothers Straus, holding that when Bobbs-Merrill sold a copy of The Castaway, its rights in that copy were exhausted – a rule that became known as the “first sale doctrine.”
About the same time period, patent law developed the parallel doctrine of “patent exhaustion.” In the 1917 case Motion Picture Patents Co. v. Universal Film Manufacturing Co., the patent holders in a film projector tried to stop the owner of the projector from using third-party film reels. The Supreme Court held that the projector, once sold, had been “carried outside the monopoly of the patent law and rendered free of every restriction that the vendor may attempt to put upon it.”
But in the following decades, argument raged about whether copyright law’s first sale doctrine, and patent law’s doctrine of patent exhaustion, applied to products manufactured or first sold overseas. In copyright, the debate finally came to a head in the 2013 case Kirtsaeng v. John Wiley & Sons, Inc.
Wiley pursued a business strategy called “market segmentation,” charging higher prices for textbooks sold in the lucrative North American market and less for textbooks sold overseas. Supap Kirtsaeng, a student from Thailand, had his family buy textbooks and ship them to his apartment in the U.S. As Supap pursued a doctorate in mathematics he helped finance his education by running an eBay business, reselling the foreign-market textbooks to American students.
Wiley sued Supap in federal court, claiming that his importation and resale of the textbooks constituted copyright infringement. Supap fought the publisher all the way to the Supreme Court, where he won a 6-3 decision.
The Court held that an authorized first sale of the textbooks anywhere in the world exhausted Wiley’s copyrights. Writing for the majority, Justice Stephen Breyer explained that “the Constitution’s language nowhere suggests that its limited exclusive right should include a right to divide markets…”
Kirtsaeng was a victory for consumers and the tech industry, which benefit from unfettered worldwide markets. But paraphrasing Yogi Berra, “it’s déjà vu all over again” as the same issue gets litigated in the patent arena. The Supreme Court has yet to decide whether patent exhaustion, like copyright law’s first sale doctrine, applies without territorial limitation. Meanwhile, there’s lower-court case law that cuts the other way.
The key case is Jazz Photo, a 2001 Federal Circuit decision. The case involved importation of “single use” Fuji cameras that had been reloaded and repackaged. The appeals court held that refurbishing the cameras didn’t infringe Fuji’s patents because an owner has a right of repair. But with little legal analysis, and no regard for the broader implications, the court limited its decision to cameras first sold in the U.S. because “United States patent rights are not exhausted by products of foreign provenance.” For recyclers and others who care about free trade and ownership rights, it was a jaw-dropping, “WTF-were-they-thinking” moment.
Fast-forward to 2010, when Lexmark launched a massive patent infringement case in federal court in Ohio against cartridge recyclers from around the world. After Lexmark discovered that Impression Products had acquired empty toner cartridges first sold overseas, Lexmark’s lawyers sent a letter to Eric Smith, basically saying “shut down your recycling business or we’ll sue you too.”
Smith told me that the letter left him flummoxed. “I thought it was a bluff,” he admits. “What did I do? I didn’t do anything wrong.”
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