Court Opinion

ID: 3033547
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:49:41.255905+00
Date Added: 2024-06-11T11:48:24.748824
License: Public Domain

FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

ARIZONA CARTRIDGE                        
REMANUFACTURERS ASSOCIATION
INC., an Arizona not-for-profit
corporation, individually, and on                No. 03-16987
behalf of its members and the                      D.C. No.
general public,
                 Plaintiff-Appellant,
                                                CV-01-04626-
                                                   SBA/JL
                 v.                               OPINION
LEXMARK INTERNATIONAL INC., a
Delaware corporation,
                Defendant-Appellee.
                                         
        Appeal from the United States District Court
           for the Northern District of California
       Saundra B. Armstrong, District Judge, Presiding

                  Argued and Submitted
         March 17, 2005—San Francisco, California

                     Filed August 30, 2005

     Before: Sidney R. Thomas and Raymond C. Fisher,
    Circuit Judges, and James L. Robart, District Judge.*

                    Opinion by Judge Fisher

 *The Honorable James L. Robart, United States District Judge for the
Western District of Washington, sitting by designation.

                               11793
11796 ARIZONA CARTRIDGE REMANUFACTURERS v. LEXMARK

                       COUNSEL

Ronald S. Katz, Eugene L. Hahm, Manatt, Phelps & Phillips,
LLP, for the plaintiff-appellant.

J. Thomas Rosch, James L. Day, Richard B. Ulmer Jr.,
Latham & Watkins, for the defendant-appellee.
       ARIZONA CARTRIDGE REMANUFACTURERS v. LEXMARK 11797
                          OPINION

FISHER, Circuit Judge:

   Appellant Arizona Cartridge Remanufacturers Association
(“ACRA”), an association of wholesalers that sell remanufac-
tured printer cartridges, appeals the grant of summary judg-
ment to cartridge-maker Lexmark on claims that Lexmark
engaged in deceptive and unfair business practices in viola-
tion of California law. The dispute arises from Lexmark’s
advertising of its “Prebate” program, under which it gives
purchasers an upfront discount in exchange for their agree-
ment to return the empty cartridge to Lexmark for remanufac-
turing — a form of post-sale restriction on reuse. ACRA
claims that Lexmark’s advertising and promotional materials
mislead customers into thinking the post-sale restriction is
enforceable and that they actually receive a discounted price
for the special cartridges. We agree with the district court that
ACRA has not offered evidence that Lexmark’s advertise-
ments constitute deceptive or unfair business practices and
affirm the grant of summary judgment in favor of Lexmark.

                               I.

   Lexmark, spun off from IBM in 1991, makes and sells laser
printers and toner (printer) cartridges. ACRA represents
wholesalers that remanufacture emptied Lexmark printer car-
tridges for reuse. Before 1997, Lexmark did not compete
against ACRA’s members because it sold only new replace-
ment printer cartridges. In 1997, however, Lexmark began to
remanufacture its own cartridges and launched an aggressive
new strategy to improve its position in the market for remanu-
facturing the used cartridges. Most notably, the company
introduced its “Prebate” program — a play on the word “re-
bate” — which gives consumers an upfront discount on
printer cartridges. The Prebate cartridges cost consumers on
average 30 dollars (or 20 percent) less than a regular car-
11798 ARIZONA CARTRIDGE REMANUFACTURERS v. LEXMARK
tridge. In return, Lexmark requires the consumer to return the
depleted cartridge to Lexmark or its agent.

   The Prebate cartridge package sets forth the following
license agreement on the outside of the package:

      RETURN EMPTY CARTRIDGE TO LEX-
      MARK FOR REMANUFACTURING AND
      RECYCLING

      Please read before opening. Opening of this package
      or using the patented cartridge inside confirms your
      acceptance of the following license agreement. The
      patented cartridge is sold at a special price subject to
      a restriction that it may be used only once. Following
      this initial use, you agree to return the empty car-
      tridge only to Lexmark for remanufacturing and
      recycling. If you don’t accept these terms, return the
      unopened package to your point of purchase. A regu-
      lar price cartridge without these terms is available1

Consumers can opt to buy Lexmark cartridges without the
Prebate post-sale restriction, but at the higher price.2
  1
    The packaging when the Prebate program was launched in 1997 con-
tained slightly different language:
      IMPORTANT! READ BEFORE OPENING. Opening this
      package or using the cartridge inside confirms your acceptance to
      the following license agreement. License Agreement: Patent car-
      tridge inside sold subject to Single Use Only restriction. It is a
      violation of this agreement and/or it is unlawful to resell, reuse,
      refill or remanufacture. If you don’t agree, return unopened
      package to point of purchase.
   2
     According to Lexmark, its post-sale restriction on reusing the Prebate
cartridges does not require consumers to return the cartridge at all; it only
precludes giving the cartridge to another remanufacturer. The plain lan-
guage of the contract does not clearly reflect this position. However, the
distinction drawn by Lexmark is unnecessary to our resolution of the pres-
ent case, which is not a direct challenge to the terms of the contract itself.
        ARIZONA CARTRIDGE REMANUFACTURERS v. LEXMARK 11799
   Lexmark asserts that it devised the Prebate program to
boost its competitive position in the remanufacturing market,
to preserve the quality of the product offered consumers and
to be environmentally conscious by recycling used cartridges.
Lexmark advertises the program in packaging, media and on
the company’s Web site. Id. It pays a fee to authorized resel-
lers who collect and return empty cartridges.

   The program has been successful. The company estimates
that 50 percent of the cartridges sold are returned as empty
cartridges to Lexmark, and cartridge returns have increased
by 300 percent since the implementation of the Prebate pro-
gram. Additionally, from 1997 to 2001, Lexmark’s cartridge
sales in the United States increased by nearly 100 percent and
its sale of printers that use Prebate cartridges increased by 60
percent.

   ACRA filed this diversity action against Lexmark in federal
district court, alleging that several of the company’s state-
ments regarding the terms and benefits associated with pur-
chasing a Prebate cartridge are false and violate California’s
unfair competition laws. Most important for purposes of this
appeal, ACRA argued that Lexmark deceptively suggests that
the conditions placed on the outside of the Prebate package
create an enforceable agreement with consumers to return
used cartridges. ACRA also contended that Lexmark misleads
consumers by falsely promising that they will save money
when purchasing Prebate cartridges, when in fact Lexmark
cannot control the price charged by retailers. Finally, ACRA’s
complaint challenged Lexmark’s use of a so-called “lock-out”
chip as an unfair business practice.3
  3
    The Sixth Circuit described the chip’s functioning as a “secret hand-
shake” between the printer and the chip in each cartridge. Lexmark Int’l
v. Static Control, 387 F.3d 522, 530 (6th Cir. 2004) (addressing copyright
infringement action against rival chip maker). “If the two values do not
match each other, the printer returns an error message and will not operate,
blocking consumers from using toner cartridges that Lexmark has not
authorized.” Id.
11800 ARIZONA CARTRIDGE REMANUFACTURERS v. LEXMARK
   The district court concluded that Lexmark’s Prebate pro-
gram advertising is not deceptively false. Arizona Cartridge
Remanufacturers Ass’n, Inc. v. Lexmark Int’l, Inc., 290 F.
Supp. 2d 1034, 1049 (N.D. Cal. 2003). It found that the com-
pany could legally enforce the post-sale restriction under a
Federal Circuit decision allowing patent holders to limit the
use of their products after sale. Id. at 1042-45 (citing Mal-
linckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708 (Fed. Cir.
1992)). The court further found that Lexmark’s restriction
created a valid agreement with consumers and that Lexmark’s
claim of discount pricing accurately reflects its sales practice.
Id. at 1045-46. It also found that ACRA failed to establish
that Lexmark’s use of the lock-out chip amounts to unfair
competition. Id. at 1049-50.

                               II.

   We review the district court’s grant of summary judgment
de novo. Delta Sav. Bank v. United States, 265 F.3d 1017,
1021 (9th Cir. 2001). We must determine, by “viewing the
evidence in the light most favorable to the nonmoving party,
whether there are any genuine issues of material fact and
whether the district court correctly applied the relevant sub-
stantive law.” Id.

                              III.

   Although this case involves our consideration of important
questions of patent and contract law, at its core the dispute
between Lexmark and ACRA reduces to state claims of unfair
competition and misleading business practices related to Lex-
mark’s advertising. The key issue here is whether Lexmark
misleads consumers and engages in unfair competition when
it advertises cartridges for sale at a reduced price but with
restrictions on their use. ACRA sues under two California
laws that provide broad consumer protection for misleading
and unfair practices by businesses. California Business and
Professions Code § 17500 makes it unlawful for a business to
         ARIZONA CARTRIDGE REMANUFACTURERS v. LEXMARK 11801
disseminate any statement “which is untrue or misleading,
and which is known, or which by the exercise of reasonable
care should be known, to be untrue or misleading. . . .” In
turn, California Business and Professions Code § 17200, et
seq., prohibits “any unlawful, unfair or fraudulent business act
or practice and unfair, deceptive, untrue or misleading adver-
tising and any act prohibited by” § 17500.4 To state a cause
of action under § 17500 for injunctive relief requires a show-
ing that members of the public are likely to be deceived, but
does not call for a showing of “[a]ctual deception or confu-
sion caused by misleading statements.” Day v. AT & T Corp.,
74 Cal. Rptr. 2d 55, 59 (Cal. Ct. App. 1998). The law encom-
passes not just false statements but those statements “which
may be accurate on some level, but will nonetheless tend to
mislead or deceive. . . . A perfectly true statement couched in
such a manner that it is likely to mislead or deceive the con-
sumer, such as by failure to disclose other relevant informa-
tion, is actionable under these sections.” Id. at 60. The
plaintiff has the burden of proving that the challenged adver-
tising is false or misleading to a reasonable consumer. Nat’l
Council Against Health Fraud, Inc. v. King Bio Pharm., Inc.,
133 Cal. Rptr. 2d 207, 214 (Cal. Ct. App. 2003).
   4
     California’s Proposition 64, passed in November 2004, amended the
statute to prohibit unaffected plaintiffs from bringing suit on behalf of the
general public. Cal. Bus. & Prof. Code § 17204. Under this change,
ACRA may lack standing to assert that Lexmark is deceiving consumers
or engaging in unfair competitive practices that harm consumers. How-
ever, California courts are split on whether this requirement applies retro-
actively to cases that have not been fully adjudicated. Compare Bivens v.
Corel Corp., 24 Cal. Rptr. 3d 847 (Cal. Ct. App. 2005) (finding plaintiff
lacked standing because it was not affected), review granted, 110 P.3d
1218 (Cal. 2005), with Californians for Disability Rights v. Mervyn’s,
LLC, 24 Cal. Rptr. 3d 301 (Cal. Ct. App. 2005) (finding the standing
requirement to apply only prospectively), review granted, 110 P.3d 1216
(Cal. 2005). Because we affirm the district court’s grant of summary judg-
ment, we do not address the effect of Proposition 64 on ACRA’s claim,
if any.
11802 ARIZONA CARTRIDGE REMANUFACTURERS v. LEXMARK
   “Unfair competition” under § 17200 “means conduct that
threatens an incipient violation of an antitrust law, or violates
the policy or spirit of one of those laws because its effects are
comparable to or the same as a violation of the law, or other-
wise significantly threatens or harms competition.” Cel-Tech
Communications, Inc. v. Los Angeles Cellular Tel. Co., 973
P.2d 527, 544 (Cal. 1999). Section 17200 is not limited to
anticompetitive business practices targeted at rivals, “but is
equally directed toward the right of the public to protection
from fraud and deceit,” Comm. On Children’s Television, Inc.
v. Gen. Foods Corp., 673 P.2d 660, 667 (Cal. 1983) (internal
quotation marks and emphasis omitted) (quoting Barquis v.
Merchants Collections Ass’n, 496 P.2d 817, 828 (Cal. 1972)),
and permits “courts to enjoin ongoing wrongful business con-
duct in whatever context such activity might occur,” id. A
violation of the false advertising law automatically gives rise
to a violation of the unfair competition provision. Id. at 668.

   ACRA argues that specific statements made by Lexmark in
conjunction with its Prebate program — offering cheaper car-
tridges that come with restrictions on their reuse — violate
§§ 17200 and 17500. We address these allegedly offending
statements — the focus of ACRA’s appeal — in turn.

A.   Enforceability of Post-Sale Restriction

   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 out-
side 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 vio-
lates California’s consumer protection laws. To satisfy its bur-
den 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.   Patent Law

   [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 Mallinck-
rodt, Inc. v. Medipart, Inc., which held that a restriction on a
patented good is permissible as long as it is “found to be rea-
sonably 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 ven-
tured 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) (uphold-
ing 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) (conclud-
ing that although typically “an unconditional sale of a pat-
ented 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 con-
strained. [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.    Contract Law

   [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 Com-
mercial 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 recog-
nizes 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 undeter-
mined.” Id. at § 2204(2).

   [3] We agree with the district court that Lexmark has pres-
ented 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 dis-
trict 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 con-
clusion 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 car-
tridge, 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 evi-
dence that market forces compel wholesalers to pass the dis-
count 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 pass-
ing on only a portion of the discount from Lexmark to the
consumer. But he said, “in a very competitive wholesale dis-
tribution 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 agree-
ment 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 pur-
chased, 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 bar-
gain 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 reg-
ular cartridge without the restriction at the regular price; the
notice specifically states that a “regular price cartridge with-
out 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.” Wat-
son 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 car-
tridge box with notice of the restriction on reuse. ACRA con-
tends, 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 con-
sumers 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 consum-
ers (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 Lex-
mark to restrict the use of its patented item and gives Lex-
mark 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.

B.   Lexmark’s Statements as to Price Reduction

   ACRA contends that Lexmark’s advertising is misleading
in promising consumers a price reduction for buying a Prebate
rather than a regular cartridge, because Lexmark cannot guar-
antee consumers will pay less for a Prebate cartridge. We
have already rejected this argument. See supra Section
III.A.2.

   ACRA further alleges that Lexmark engages in deceptive
advertising and unfair competition by suggesting that the
price difference between Prebate and non-Prebate cartridges
approximates the value of an empty cartridge. According to
ACRA, Lexmark wants consumers to believe that the Prebate
discount reflects the benefit that accrues to Lexmark by get-
ting an empty cartridge back. We agree with the district court
that nothing in the record supports ACRA’s claim. Arizona
Cartridge, 290 F. Supp. 2d at 1047.

C.   Use of the Lock-Out Chip

    [7] ACRA argues that Lexmark’s use of the lock-out chip,
which prevents consumers from having their Prebate car-
tridges remanufactured by a different company, is anticompe-
titive and is intended to preclude competition in the after-
market. The district court found ACRA’s claim that the lock-
out chip is a form of unfair competition to be unsupported by
facts or legal authority, as do we. Id. at 1050. As discussed
above, the district court relied on the Federal Circuit’s Mal-
linckrodt decision to find that Lexmark could restrict the post-
sale use of its patented cartridge. ACRA has not challenged
the court’s determination or alleged that Lexmark is acting
beyond the scope of its patent in imposing a condition that it
uses the lock-out chip to enforce. Additionally, ACRA has not
attempted to show that the use of the lock-out chip — even
11808 ARIZONA CARTRIDGE REMANUFACTURERS v. LEXMARK
if designed to keep other companies from remanufacturing
Prebate cartridges — impermissibly exceeds the patent grant
to produce anticompetitive effects.

   [8] In sum, ACRA has failed to raise a triable issue of fact
as to whether Lexmark’s restriction on the use of its patented
cartridge is valid and, in turn, whether the lock-out chip is a
proper mechanism to ensure compliance with the restriction.
We affirm the district court’s decision on this issue as well.

                            IV.

  We AFFIRM the district court’s grant of summary judg-
ment to Lexmark.