ACRA sued Lexmark alleging violations of California Business and Professions Code §17500 (unlawful to disseminate untrue or misleading statements) and §17200 (prohibiting unfair business practices). Section 17500 allows causes of action without proof of actual deception and requires only proof that consumers are likely to be misled. A false advertising violation of §17500 gives rise to a §17200 unfair business practices violation. ARCA claimed that Lexmark violated these statutes by falsely advertising to consumers that purchasers of Lexmark Prebate printer cartridges had a legal obligation to honor the terms of the Prebate program. ARCA alleged further false advertising in Lexmark’s claim that Prebate cartridges were cheaper than normal cartridges; ARCA claimed that Lexmark could not guarantee prices set by wholesalers selling the Prebate cartridges to consumers. ARCA’s final allegation of unfair business practices was Lexmark’s use of a lock-out chip to prevent other companies from remanufacturing Lexmark’s printer cartridges.The district court granted summary judgment to Lexmark. The district court concluded that Lexmark created an enforceable agreement regarding post-sale usage of its cartridges and that its advertising program was not deceptively false. The court also found that ARCA did not establish that the lock-out chip was an unfair business practice. The Ninth affirmed.
The Ninth Circuit noted that ARCA, to prove its claim that Lexmark’s post-sale restrictions amounted to false advertising, must first show that Lexmark had no basis for making post-sale restrictions. Rather than do so, however, ARCA chose not to question Lexmark’s ability to make any post-sale restrictions and instead alleged a lack of an enforceable contract between Lexmark and consumers. The court relied upon Mallinckrodt, Inc. v. Mediapart, Inc., 976 F.2d 700 (Fed. Cir. 1992), which held that restrictions in the licensing of a patent are allowable so long as the restrictions are within the scope of the patent grant and the patent claims. Following the rationale of /Mallinckrodt/, the Ninth Circuit held that Lexmark’s imposition of post-sale restrictions were legally binding because their “patent rights were not exhausted.” In a footnote, the court acknowledged an amicus brief filed by the Electronic Frontier Foundation urging reconsideration of /Mallinckrodt/, but did not reach the issue of /Mallinckrodt’s/ validity because ARCA did not challenge the district court’s reliance on /Mallinckrodt/.
The heart of ACRA’s claim was that Lexmark did not have a valid contract with consumers of its printer cartridges to enforce these post-sale restrictions. Both the district court and the Ninth Circuit found that there was a sufficient contract. Relying on California’s statutory adoption of the Uniform Commercial Code to allow contracts “made in any manner sufficient to show agreement,” the court found that “box-wrap” licenses on the packaging of printer cartridges are sufficient notice to consumers of the post-sale restrictions. The court also found that consumers have a chance to reject these terms before opening the printer cartridge. The court distinguished box-wrap licenses from shrinkwrap licenses on software because shrinkwrap licenses impose restrictions after the software is opened and installed.
The court also noted that the lower price consumers paid for Prebate cartridges was sufficient consideration. Specifically, Lexmark presented evidence from a regional manager of a supplies retailer “that market forces compel wholesalers to pass the discount on to consumers.” The box-wrap also informed consumers that regularly priced cartridges without post-sale restrictions were available.
ACRA also argued there was no enforceable agreement because of a lack of privity connection due to Lexmark's “inability to ensure that consumers will receive the price-reduction benefit of the Prebate program.” The court instead found privity because the consumer of the printer cartridge is a party to the contract and the consumer is receiving the benefit of a reduced price for a Prebate cartridge.
The court concluded its findings about the validity of Lexmark’s post-sales restriction by holding that there was a valid contract—despite Lexmark not pursuing legal action against any consumers who have failed to return the cartridge—because “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.” Because of this enforceable contract, and the proof of a reduced price to consumers for Prebate cartridges, ARCA’s allegations of false advertising failed. The court did note, however, that its holding “does not preclude challenges to the contract that a customer – which, unlike ARCA, is a party to the contract – could raise.”
The Ninth Circuit also summarily disposed of ARCA’s final claim of unfair business practices regarding the lock-out chip. The court held that because the lock-out chip is a patent-related post-sale restriction allowed under /Mallinckrodt/, it could not be the basis for an unfair business practices claim.