Single Use Restrictions on Wrapper for Patented Printer Cartridge Were Enforceable and Not Unfair

Case: Arizona Cartridge v. Lexmark Int'l Inc. , No. 03-16987 (9th Cir. 8/30/05).

The One Sentence Summary: California state law false advertising and unfair competition claims arising out of contractual "prebate" restrictions on patented printer cartridges were properly dismissed on summary judgment because the contractual restrictions were not misleading and were enforceable.

What They Were Fighting About: Lexmark sells patented printer cartridges at a reduced price under a "prebate" program where the package contains contract terms obligating the customer to return the empty cartridge. The cartridges also incorporate a lock-out chip preventing use of an unauthorized cartridge. Arizona Cartridge Remanufacturers' Association ("ACRA") sued Lexmark, claiming unfair business practices and unfair advertising under sections 17200 and 17500 of California's Business and Professions Code. The district court granted summary judgment against ACRA.

Ninth Circuit Holdings:

• A patentee can restrict use of its invention by means including a single-use restriction: "The district court found that Lexmark could condition the use of its patented Prebate cartridges by consumers under the principle articulated by the Federal Circuit in Mallinckrodt, Inc. v. Medipart, Inc., which held that a restriction on a patented good is permissible as long as it is “found to be reasonably within the patent grant, i.e., that it relates to subject matter within the scope of the patent claims.” 976 F.2d at 708. A condition is impermissible where “the patentee has ventured beyond the patent grant and into behavior having an anticompetitive effect not justifiable under the rule of reason.” Id. (remanding for a determination of whether the patentee’s single-use restriction on its medical device was reasonable and within the scope of its patent); see also Monsanto Co. v. McFarling, 302 F.3d 1291, 1298-99 (Fed. Cir. 2002) (upholding infringement injunction against farmer who purchased patented seeds under an agreement that the seeds be used for “planting a commercial crop only in a single season,” and who then replanted the seeds); B. Braun Med., Inc. v. Abbott Laboratories, 124 F.3d 1419, 1426 (Fed. Cir. 1997) (concluding that although typically “an unconditional sale of a patented device exhausts the patentee’s right to control the purchaser’s use of the device thereafter,” this does not hold true where the patentee specifically places restrictions on the sale of the item)."
  
• The printed restrictions on the package formed a valid contract with the customer because the customer had notice and an opportunity to refuse acceptance of the terms by not opening the package: "We hold that the contract on its face appears to be enforceable based on the district court’s findings that consumers (1) have notice of the condition, (2) have a chance to reject the contract on that basis and (3) receive consideration in the form of a reduced price in exchange for the limits placed on reuse of the cartridge. The contract permits Lexmark to restrict the use of its patented item and gives Lexmark a legal basis for asserting its ability to enforce its restriction. Therefore, ACRA has not raised a triable issue of fact that Lexmark’s advertising statements as to its Prebate program are false, mislead or tend to deceive consumers or that they constitute a form of unfair competition. See Day, 63 Cal. Rptr. 2d at 59-60."
• The lock-out chip was not an unfair business practice when it allowed the patent holder to enforce restrictions on the use of the patented invention.