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Lexmark Wrecked Your Business Model — What Now?

T he Lexmark legal team integrated a patent license into its company’s business model using a novel approach. But the US Supreme Court’s Impression Products v. Lexmark ruling wrecked the model. So where does this leave legal teams of Lexmark and others that integrate closely with their businesses?

There are still lots of options available for integrating legal support with a business model. Here are some examples with a focus on Lexmark’s situation. Before implementing any one of them, you should take your specific business circumstances into account.

Background

Lexmark uses a razor-and-blade business model: sell a printer at a bargain price, then make a profit later when more toner is purchased. The razor-and-blade business model became well known after Gillette used it in 1904. The razor handle and the blade are complements to each other because they become more useful when combined. Gillette gave away razor handles so it could profit from the sale of interchangeable blades, the complement product.

Third parties disrupted Lexmark’s model by refilling toner in printer cartridges first sold by Lexmark, cutting Lexmark out of additional toner sales it had anticipated. In an early attempt to prevent such losses, Lexmark added a Digital Rights Management (DRM) chip to its printer cartridges. Third parties developed a work around for the DRM chip and continued to refill toner. In response, Lexmark sued the re-fillers with claims that they violated the Digital Millennium Copyright Act (DMCA) by circumventing the features of the DRM chip. A court rejected Lexmark’s claims after finding that the DRM chip did not control access to a copyrighted work as the DMCA requires.

Not daunted after the DMCA strategy failed, Lexmark and its team persevered using a novel patent license theory. Lexmark sold discounted printer cartridges with a patent license agreement that required the consumer user to refill the cartridges only with Lexmark. The discount proved popular. Users accepted the license, allowing Lexmark to assert patent infringement claims against a third party who refilled the printer cartridge in violation of the license. However, the new approach did not work either. The Supreme Court ruled that Lexmark exhausted its patent rights by selling and cannot assert infringement claims related to the cartridge products it sold — the transfer of ownership marks the point where exhaustion occurs.

Options for next steps

Lease the product
To avoid exhausting its patent rights by selling, Lexmark can lease its print cartridges to users. That is, Lexmark can transfer less than all ownership rights to users. Lexmark can implement a program that has the hallmarks of a lease: regular payments and a right to use for a limited period of time. Such a lease program works like a subscription, which video and music streaming users are used to. For a monthly fee, a user can continue to use the cartridge and receive refills from Lexmark. Lexmark can provide two cartridges under this program, so one cartridge is on-hand while the other is sent for refill.

There are a variety of ways to structure such a lease program. As another thought, Lexmark could lease the printer as well as the cartridges — something like a Xerox copier lease. Lexmark might derive more overall revenue from a combined printer-cartridge lease offering across its customer base, where toner is presented as thrown-in for “free.” From a user perspective, this approach would parallel how Apple offered an expensive iPod along with cheap songs in iTunes.

The legal teams of Lexmark and other companies can develop a lease structure that will be best for a business, and have a good opportunity of surviving a court exhaustion review.

Obtain patent rights that better cover your product
Gillette makes its razor-and-blade model work by patenting the blade. It has over 70 patents on the Gillette Fusion. Gillette can enforce its blade-related patents against any third-party that makes and sells infringing blades to users who own a Gillette razor handle. This is a more traditional approach than what Lexmark attempted with its rights-limited end user patent license. The Lexmark ruling would perhaps only implicate Gillette if a third-party develops a way to re-sharpen Gillette blades.

Thus, a solution for Lexmark could involve obtaining a patent on toner, not only the printer cartridge. If Lexmark had a patent on the toner, it could sue third parties for refilling cartridges with infringing toner. The third-party supplies its own toner when refilling cartridges originally sold by Lexmark, and so could not raise an exhaustion defense. To make this work, Lexmark would have to innovate its toner to support patentability and develop technology to prevent its printers from functioning with other, non-patented types of toner.

A lesson for other legal teams is to ensure that the right complementary product is patented. Be like Gillette. Obtain coverage for the specific product third-party competitors will sell to your customers.

Use agreements
The Court suggested that Lexmark can still enforce the obligations of its user license agreements. But suing consumer customers in state court is not appealing.

As a better option, a legal team can negotiate exclusive distribution agreements with nation-wide chains and distributors. If such agreements can be obtained, they would be easier to enforce than the user license agreements.

Add complementary innovations around the core product
A modern take on razor-and-blade, described by David Robertson in The Power of Little Ideas, involves creating “multiple diverse innovations around a central product or service that make the product or service more appealing and competitive.” An advantage of this approach is how failure of any one innovation has minimal impact on the core product.

Consider GoPro, which sells a digital camera that is essentially a commodity. It achieved substantial growth by making the sharing of adventure experiences easy. GoPro offers customers complementary innovations, such as camera mounts, remote control app, software to select clips and add music, and features for posting videos to social media.

Rather than innovating to block competitors, Lexmark can use this approach innovate around its core printer product to make it more appealing. It can add conveniences that make sharing printed content easier, for example.

A creative legal team can contribute to this approach. Legal-related innovation around a core product tends to reduce customer risk. For instance, Lexmark can provide enhanced warranty support if a user demonstrates use of Lexmark toner, maybe a policy of no-hassle next day printer replacement to reduce downtime. Other examples of legal-related innovation include:
•    Helping a customer comply with laws and regulations;
•    Helping a customer achieve a certification, such as an ISO standard;
•    Reducing risk of third-party patent infringement allegations; and,
•    Providing insurance or indemnification in case of trouble.
Remember, any added legal innovation should fit with other diverse innovations that operate together to increase product appeal.

Use the DMCA
Lexmark failed in its attempt of using the DMCA to prevent third-parties from refilling toner cartridges. But in different circumstances, other legal teams have had success with the DMCA where a security safeguard controls access to a copyrighted work. For instance, software operating systems have been protected under the DMCA.

There are lots of options for a creative legal team to support business and drive sales. The Court’s Lexmark ruling is not the end of the story for Lexmark printers.

About the Author

Noah WebsterNoah Webster is counsel for AtHoc, a division of BlackBerry that provides networked crisis communication to government agencies and leading commercial enterprises worldwide. He cares for the company's general legal needs and has previously held roles at BlackBerry managing the global compliance program and leading the patent litigation team.


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