court my name is ronald katz with me is eugene hom i'd like to reserve five minutes for rebuttal the there is a correct way of creating a post sale restriction without uprooting the important and fundamental concept of privity that way is actually set out in a case that is cited in our brief a federal circuit case called monsanto  three o two half second twelve ninety one two thousand and two case and that says the twelve ninety three monsanto authorizes various companies to manufacture the patented seeds which are then sold to farmers monsanto requires that the sellers of the patented seeds obtain from the farmers slash purchasers a quote technology agreement close quote and the farmers pay a license fee to monsanto of six dollars and fifty cents per pound for a fifty pound bag of soybeans to eat the reason that that proper way wasn't followed in this case is that next mark had this problem of an antitrust violation they could not tell people downstream from them in the distribution chain what price to charge which was a key component of the prepaid that was admitted by mr almer at the hearing and it appears in our excerpts of record ten twenty four page seven seventy two lexmark some disputed that lexmark sold to distributors without any condition regarding price or anything else there certainly was no condition regarding returning the cartridge to lexmark because that condition is only activated by opening the package and lexmark knows that its distributor is not opening the package they're just passing it on and if we look at the lower court  this is on the box and both the old and the new well here's the old ones as opening this package or using a cartridge inside confirms your acceptance etc and the new one says opening this package or using the patented cartridge inside confirms your acceptance it's time disputed the distributor does not open the package so you're saying that if the first violation well with theirs because there are probably there's a law that says because it is i mean you know in the mallinckrodt decision recognizes the supreme court line of authority that says you can't use those sale restriction to tire passing through now applying that analysis to the current case it's passing through the distributor the first user is and that is the one that opens the package and the user is told the patent he's from doing that with respect to price they are disabled there's no question about it there are no other restrictions that they are stable but it's not because of probity they are disabled because of the any trust all right obligation legal obligation when they don't well the evidence that's the legal conclusion mallinckrodt says they can't patented as long as they aren't expanding the patent can now they expand the patent the honest proper use when they get into pricing and when they user were and that has the opportunity to invoke the patented item that they don't want to have more than use more than once is the purchaser who's going to put the cartridges into its printing and what does that use think think that i have my choice i can either go out i don't have to buy it i don't have to buy this cartridge i can go buy a different cartridge that doesn't have that restriction on if i want to resell it well what for what that user thinks is exactly the error that was made below your honor that user thinks that in exchange for a lower price he or she has an obligation to return this cartridge to l xmark and if we look at the lower court decision at page ten forty four at the bottom says moreover the lexmark purchaser has accepted the single use condition in exchange for a lower price this patented cartridge it's sold at a special price lexmark cannot tell that anyone lexmark does not know they cannot know and they cannot say what the price is which it's going to be stole that is a misleading statement that is what causes the customer to believe that he or she has to return this and that is misleading and it has worked they have increased as they have admitted themselves their returns by three hundred percent so i'm not sure what point you're made of the misrepresentation is that what's the mis represent is inflation a misrepresentation is we lax market are giving you a break on price in exchange for you returning well that's true isn't it at the time well it's not true well lexmark isn't lexmark gives nothing to the end user and lexmark cannot control what without the rice there are and without well you know the price will change with market conditions maybe it's higher maybe it's lower that's not the point the point is that lexmark has no control over that and lexmark is saying to customers we do control that we're giving you a lower price that is false lexmark is giving the customer no price lexmark has no control over that price whether it's higher or lower or the lower price or is the representation true that they are obliged if they open the package they are obliged to use it only once it's why why are they apply what is the consideration coming from much market you know you just get a package you don't know what your obligations are they're telling you where you have an obligation to do this because we're giving you a special price they say that so it's actually in the if you that is just false they have no reason they can't know they can't say and they can't control that is just a misleading statement and it mark cannot tell them that it's being sold at any price whether it's special not special there's lexmark has no way of knowing and no way of controlling whether that price is special are not they don't they can't the this is confirm if you look at their brief on page six for example they talk about the alternatives that the customer has now page six of their brief and the second  second full paragraph it says the second alternative of the consumer was to purchase one lexmark cartridge price thirty dollars less than the regular card for its subject to the condition that the customer would return the empty cartridge only to le remanufacturing and or recycling so here they are saying well they're purchasing it for thirty dollars less they have no way of knowing that and then they say it again on page eight it's the same thing they can't do this they not sell to its distributors for use like sparks sells was distributors to distribute distributors don't open it up they don't use it they just pass it on to the next person in the start out by addressing this notion that we don't have any way of knowing whether the pre buy pre baked discount gets to the end user or not but we do have a way of knowing it's in the record of this case but you do to distribute to the distributor or correctly for the customer if the sale is through the internet we know from the testimony of the depositions that akra took and they asked those witnesses this question every time in those depositions the distributors the people who are actually out there on the front lines and each of those witnesses said there is no way that i cannot pass that discount along because  competition in this industry is so fierce that i must do sell that's the evidence in this case there's no evidence to the contrary if that were not the case that would be something it's it turns out to be true now as and this market in fact you cannot control the price it is an accurate statement that the that the customer is getting a special price that's true that's undisputed on this from making the patented article from selling the patented article from using the patent article so what what lexmark does here is to put a condition on the article from the time it lexmark hands that condition passes through every purchaser it's conditional all the way this used stick is never in that bundle of rights that sold to the distributor or on to the retailer only at the time that the end user or someone in the distribution chain could do the same by opening the box and using the cartridge you are ac ocker i will give you this use right if you agree to the terms of my previous license single use and return only lexmark i would like to step back and briefly consider the context of this case because context is very important here first this case is brought soley under california business and professions code section seventeen two hundred and seven thousand five hundred and it is almost entirely under the false advertising provisions of those statutes you must of like that from an insurance  is it's not and i trust case your honor as you've already pointed out it's not a patent infringement or patten this use case it's not a breach of contract case it's not any other kind of case it's  seventeen two hundred seventeen five hundred case that's all that's been brought despite that fact and this is interesting neither section seven thousand five hundred nor section seven thousand two hundred is mentioned anywhere that's very important because what we're doing here is ignoring the causes of action that are really pleaded here and there's a reason for that which i'll get to in a moment second the two main issues that are now being a on appeal are actors notion of this contract will prevail and the patent exhaustion doctrine but neither of those issues was ever pleaded i went through that and quite again this morning  inveighing to find either the word per the t v or the word exhaustion and this didn't get past judge armstrong below she she was very adamant about not liking the fact that this pr argument was raised for the first time in a reply brief on the summary judgment motion that your honour's is also very telling thirty this is supposed to be a consumer protection case but there's been no outcry from the businesses that lexmark has participate in this program and not one consumer is the plaintiff in this case and as judge armstrong noted there's no evidence none of any consumer who claims that they were misled nor is there any evidence from an expert which you would typically  in one of these deception cases no evidence whatsoever and this is all despite the fact that the pre pay program has been operating for eight years now you would expect  sophisticated businesses that are that are the customers for this program would have alleged that they were being deceived somewhere along the line during those eight years if they work it's your own what is the state of the record for the program it was thirty dollars that was a twenty percent margin between the prepaid and the nonprofit cartridge and that has been maintained throughout the other the other programs typically this would not be a situation where one in went into office depot or a store like that five like let's say that a business did that they would go up to the shelf they would say they would see a prepaid cartridge and a non special price issue is that that that hasn't been pleaded as an issue on appeal the issues on appeal are this prudy issue exhaustion issue and the lockout chip issue that's not an issue on appeal so when we look at these three factors that i've just talked about the next capable conclusion is that this appeal isn't really about this case at all instead what it does is it seeks an advisory opinion about matters that aren't really before this court and let me make make no mistake about it your honour's the advisory opinions that are being sought are very far reaching and they're wholly unwarranted now the amicus brief is right up front about what it wants it wants this court to create a split with the federal circuit's mallinckrodt decision and how as we've shown in our papers mallinckrodt is well decided it flows directly from the sylvania case supreme court case back in the sevent has been the law for thirteen years now it's followed in courts across the country and there's been no decision contrary to mallinckrodt but even if one wanted to create a split with the patent owners can through conditional sales impose post sale restrictions on in users so patent owners like lexmark are free to impose post sale restriction that's what lexmark has been saying all along and i would point your honour's to the record in there is a document that's called in defense of creepy was written very early in the program widely distributed throughout this industry and you will see there on page four ninety one complete description of the mallinckrodt case said this is what we like smart believe we're relying on the mallinckrodt case next paragraph relies on the proceeding case which i'll get to in a moment we've been very upfront about that to now accurate itself also wants to create a circuit split here this split would be with mallinckrodt with the seventh circuits proceed decision and with the many other courts that have up held shrinkwrap licenses and the courts uphold those licenses whether the sale is directly from the manufacturer or if the sale goes through distribution channels no difference in fact proceeded itself despite what you can use this patented cartridge if you agree to the use terms that are being imposed you open in use you have accepted that agreement that's proceeding and that's what we relied upon in setting up this program now and have again even if one wanted to create a circuit split here with pros the the in all of these other cases licenses to be legal that's also at page four ninety one of the record and that includes licenses on products that are sold through distribution chain not just products that are sold directly from the manufacturer to the user and again it's important to keep in mind that this is soley a false advertising claim it's not and i trust claim or any other kind of claim it's just a false advertising claim so how could lexmark possibly be liable for falsely advertising what is entirely true the great  authority in courts around the country is that shrinkwrap licenses whether they're directly from the manufacturer to end user or whether they go through a chain of distribution are entirely legal that's what lexmark s if they had wanted to bring and i trust claims or some sort of relief action on this issue or some other way of actually properly putting the issue forward they could have done that they didn't do that they just sued for false advertising and this can't be false advertising when it's entirely true thank you could tech data reduce the size of the discount for example if they got a fifty dollar discount from lexmark they then give a forty dollar discount to the people they they bought are they sold the cartridges to answer yes they can charge any price they want because controlled but in a very competitive wholesale distribution market there are too many competitors really to be able to do that ok today there is no falsity in their representation the falsity in the representation is that it's a special price you just said it was it is not a special price for you so you read the testimony that says the market in force is the disk so where's the falsity first of all one person one distributor can i cannot speak for the market on one day where's th that is the burden of proof is on you all to prove your case ok tab nine page three twenty eight to three thirty these are the lexmark document frequently asked questions that they're telling people about this program lexmark or refill or of an amount at least equal to the prepaid amount on page three twenty nine still this is a lexmark document to consumers you must still honor the terms of the prepaid license agreement ensuring that the set at an amount equal to at least the approximate value of the empty cartridge question why are you giving me such a significant discount answer lexmark recognizes that empty cartridges have some residual value and it goes on for a paragraph or so i would cite your honor for this it is understood that lexmark is telling the consumer you're getting a special price and it is not at all clear as mr almer said that a consumer would know that that special price only going to the first link in the distribution chain after that like mark has no control whatsoever we are not asking your honour's to split with the federal circuit we love the metal part case it's a great case because it says concerning the conditions of sale that's all it's about you can make a contract you give away your right of repair you can do anything you want but you've got to be a party to the contract you still have to have pretty many parts says nothing about not having pr there's no pretty in this case it is undisputed there's no privity in this case you do not have to split with that a part i would command through your honors i know i'm off my time now the cross cd case i think the judge ester serious argument in the next case on the calendar which is that versus four and change of course