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Exhausting Patents, And Customers

It’s tough to make money in the lower end of the car market, where Hyundai mostly competes, so the South Korean automaker might be tempted to try a different gambit – sell the cars cheap and make money on the gas that fuels them.

It would take a little ingenuity, but Hyundai could set up its own network of gas stations and program its cars so they refuse to run unless they are refilled at factory-authorized pumps. This could be marketed as a benefit to consumers. I can hear the commercial now: “Your car is a big investment, and we want to help you protect it. So, to prevent damage to your vehicle, take to the road with genuine Hyundai gas – or just take the bus.”

This might sound preposterous to you and me, but that’s only because we are not in the business of making printers and copiers. Those makers have been using this tactic for years.

Selling relatively cheap copiers and enormously expensive ink has been the business model of choice practically since the computer printer was invented. (And, long before that, there were makers of razors and blades.) Back in 2004, the San Francisco Chronicle reported that filling an Olympic-size swimming pool with printer ink from HP or Lexmark would cost about $5.9 billion. Anyone unlucky enough to regularly buy printer ink knows it has not gotten any cheaper in the 13 years since. A refill toner cartridge for a Lexmark machine costs about $130 these days, which is over a quarter of the price of the laser printer that uses it.

The business model only works, however, if printer-makers can ensure that customers can’t get cheaper ink elsewhere. This explains Lexmark’s motivation in Impression Products v. Lexmark International, a case centered on keeping cheaper ink out of circulation.

Impression Products is a small company, based in West Virginia, which buys used Lexmark cartridges and refills them. Impression sells the refilled cartridges for cheaper than new. Lexmark claimed that doing so was illegal because of the fine print on some of its cartridges that says users who open the packaging agree not to resell the product inside. This agreement, Lexmark argued, overrides the principle of “patent exhaustion,” which means that under most circumstances a consumer can do whatever he or she wants with a product after purchasing it.

Patent exhaustion as a concept has been under fire for years, on a variety of fronts. It has been at issue in “right to repair” arguments, discussions of DRM and measures meant to prevent jailbreaking mobile devices. In Impression Products v. Lexmark International, however, the high court’s position was admirably straightforward.

In a 7-1 decision, the court made clear that once Lexmark sells its cartridges, it has no standing to enforce its patent against a third party like Impression or any other “remanufacturer” that lawfully obtains used products. Justice Ruth Bader Ginsburg substantially agreed with the decision, but dissented from part of it because she would have exempted foreign sales from the patent exhaustion principle. The Supreme Court’s decision overturned that of the U.S. Court of Appeals for the Federal Circuit (which, as SCOTUS Blog mentioned, has an abysmal recent track record where patent cases are concerned).

It is worth noting that the high court’s ruling only deals with patent claims directed against a third party, such as Impression. Remanufacturers are not violating patent law because Lexmark already sold its product; they aren’t violating a contract, because there was never any contract between Lexmark and the third party. The Supreme Court’s decision does leave the door open for Lexmark to pursue claims of contract violation against its own customers. The cartridges in question are sold at a discount in exchange for the customers’ pledge to return the used cartridge to Lexmark itself. (Customers who shell out for the more expensive version of the cartridge also buy the right to do whatever they like with it once it’s empty.) However, suing your customers is not generally a winning business model. Just ask the recording industry.

As some observers have pointed out, Lexmark may instead simply stop offering the “discount” cartridges, charging the higher price across the board. This strategy will probably help companies like Impression more than it will hurt consumers, at least in the short term. But printer-makers like Lexmark have plenty of other tools on hand to turn customers into hostages. Many manufacturers, including Lexmark, make ink cartridges region-specific; if you try to use ink from the wrong region, you risk rendering your printer unusable. And if you actually move to another region, enjoy the hassle – and potential expense, if it requires a visit from a technician – of getting the company to reset your device. Some ink cartridges expire at a predetermined date, even if they are not empty. Many printers will not print in black and white if a single (typically minuscule) color cartridge is empty. Some multi-function machines will even grind all functions to a halt if the ink runs out, though no ink is necessary for, say, scanning a document to PDF.

None of these tactics are outlawed by the Supreme Court’s recent decision, but their days are nevertheless numbered. Luckily, the need for printers is quickly declining. Other than the manufactures, no one is apt to mourn this shift since, as consumer-review site The Wirecutter puts it, “Most of you are going to hate something about any printer that you buy, and there’s nothing you can do about it.” For years, consumers have put up with printer-related aggravation because there was no other choice. But with the cloud available to store our paperless documents and smart devices in our pockets to make them accessible anywhere, the ultimate in environmentally friendly printing is printing to a PDF or other electronic file.

The folks at Lexmark and the other printer-makers surely know this. My guess is they want to drain the last drop of cash from customer pockets before the inkwell goes dry for good.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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