Opinion ID: 3033547
Heading Depth: 3
Heading Rank: 1

Heading: Enforceability of Post-Sale Restriction

Text: ACRA contends that Lexmark engages in false advertising and unfair competition by telling consumers they have a legal obligation to honor the post-sale restriction printed on the outside of the cartridge package, when in fact they are not legally compelled to do so. Under ACRA’s theory, Lexmark cannot enforce the post-sale conditions and to suggest otherwise violates California’s consumer protection laws. To satisfy its burden on summary judgment, ACRA essentially must show that Lexmark has no legal basis for the restriction featured in its advertising. We agree with the district court that ACRA has failed to make such a showing. ARIZONA CARTRIDGE REMANUFACTURERS v. LEXMARK 11803
[1] 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). Applying the Mallinckrodt principle, the district court determined that Lexmark imposed an enforceable condition on the Prebate printer cartridges because Lexmark’s patent rights were not exhausted. Arizona Cartridge, 290 F. Supp. 2d at 1045. On appeal, ACRA does not challenge the district court’s reliance on Mallinckrodt or the validity of the Federal Circuit’s decision, nor does it argue that Lexmark is acting beyond the scope of its patent.5 In fact, ACRA concedes that 5 The Electronic Frontier Foundation, in its amicus brief, argues that Mallinckrodt was wrongly decided and urges us to reject explicitly the 11804 ARIZONA CARTRIDGE REMANUFACTURERS v. LEXMARK the otherwise unfettered use of a patented good can be constrained. [Blue Brief at 21]. But to do so, ACRA contends, the patent holder must have a valid contract with the consumers of its product.
[2] ACRA thus asks us to conclude that Lexmark lacks a valid contract with consumers to limit the post-sale use of the cartridge. California law, adopting the relevant Uniform Commercial Code provisions, establishes that a “contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.” Cal. Com. Code § 2204(1). Additionally, California law provides that an “agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.” Id. at § 2204(2). [3] We agree with the district court that Lexmark has presented sufficient unrebutted evidence to show that it has a facially valid contract with the consumers who buy and open its cartridges. Specifically, the language on the outside of the cartridge package specifies the terms under which a consumer may use the purchased item. The consumer can read the terms and conditions on the box before deciding whether to accept them or whether to opt for the non-Prebate cartridges that are sold without any restrictions. The district court found that the ultimate purchasers of the cartridge — consumers — had notice of the restrictions on use and had a chance to reject the condition before opening the clearly marked cartridge container. Arizona Cartridge, Federal Circuit’s reasoning. However, ACRA has not challenged the district court’s reliance on or application of Mallinckrodt. Thus, we need not pass on the merits of the Federal Circuit’s decision for resolution of the case before us. ARIZONA CARTRIDGE REMANUFACTURERS v. LEXMARK 11805 290 F. Supp. 2d at 1044-45. These findings support the conclusion that the consumer accepts the terms placed on usage of the Prebate cartridge by opening the box.6 [4] In exchange for agreeing to the restricted use of the cartridge, consumers receive consideration in the form of the price discount.7 The district court explicitly found that “the Prebate is offered at a special price that reflects an exchange for a single-use condition.” Arizona Cartridge, 290 F. Supp. 2d at 1045. ACRA argues that because Lexmark distributes its cartridges through wholesalers, it has no way to ensure that consumers actually receive the price discount, but offers no factual support for this contention. Lexmark presented evidence that market forces compel wholesalers to pass the discount on to consumers. A regional manager of one supplies retailer said it would be hard, albeit not impossible, for the wholesaler to skim the discount off as profit for itself by passing on only a portion of the discount from Lexmark to the consumer. But he said, “in a very competitive wholesale distribution market, there are too many competitors, really, to be able to do that.” Furthermore, the Prebate notice printed on 6 This case is different from those instances in which a consumer lacks notice of the condition at the time of purchase. See, e.g., Step-Saver Data Sys. v. Wyse Tech., Inc., 939 F.2d 91, 105 (3d Cir. 1991) (treating box-top license as an additional term not incorporated into the parties’ contract where the term’s addition to the contract would materially alter the agreement and the consumer did not see license until after paying for product). Another variant involves “shrinkwrap licenses” on software, which impose restrictions that a consumer may discover only after opening and installing the software. See e.g., ProCD v. Zeidenberg, 86 F.3d 1447, 1452-53 (7th Cir. 1996) (holding that contract included license agreement terms that appeared on screen even though they came after user had purchased, opened and installed software). 7 Lexmark represents that it has not taken legal action against any user for failing to return a cartridge to Lexmark because it “assumes customers will be honest and send cartridges back.” To the extent that Lexmark fails to enforce its Prebate policy, a consumer receives the benefit of the bargain through the price reduction without necessarily having to carry through on its obligation to return the cartridges to Lexmark. 11806 ARIZONA CARTRIDGE REMANUFACTURERS v. LEXMARK the cartridge informs consumers that they can purchase a regular cartridge without the restriction at the regular price; the notice specifically states that a “regular price cartridge without these terms is available.” ACRA has failed to rebut this evidence to create a triable issue of fact. [5] ACRA’s argument that no enforceable agreement exists because there is no privity of contract also fails. ACRA cites a California case stating “the general rule that one may not sue upon a contract unless he is a party to that contract.” Watson v. Aced, 156 Cal. App. 2d 87, 91 (Cal. Ct. App. 1957). The privity requirement is met here, because the consumer is a party to the contract with Lexmark. As described above, the contract is formed when the final purchaser opens the cartridge box with notice of the restriction on reuse. ACRA contends, however, that the lack of privity is shown by Lexmark’s inability to ensure that consumers will receive the price-reduction benefit of the Prebate program. We have already explained why ACRA has failed to show that consumers do not pay a reduced price. It does not matter that this price discount results from distributors choosing to pass along their savings — the consumer still receives consideration for agreeing to the restriction. [6] 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.8 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 8 Our holding here does not preclude challenges to the contract that a customer — which, unlike ACRA, is a party to the contract — could raise. ARIZONA CARTRIDGE REMANUFACTURERS v. LEXMARK 11807 that they constitute a form of unfair competition. See Day, 63 Cal. Rptr. 2d at 59-60.