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Copyright Versus Consumers' Rights:
How Companies are Using the Digital Millennium Copyright Act to Thwart Competition


Tuesday, Mar. 25, 2003

The DMCA immediately became controversial - in part because its broad language swept in even the limited forms of copying (for example, for comment, criticism, or parody) that have traditionally been allowed as fair use.

Early DMCA cases were also controversial. They targeted the circumvention of access and copy controls in various media, from streaming audio, to DVD films, to computer games, to e-books. Like the statute itself, the results in these cases arguably trampled fair use, and inhibited innovation. Nonetheless, in all of these cases the claims were at least related to Congress's intent in enacting the DMCA - the protection of independently marketed copyrighted works against digital piracy.

Recently, however, Lexmark - the Lexington, Kentucky company that is the world's second largest manufacturer of computer printers and printer supplies - filed a new kind of DMCA case that arguably does not track Congress's intent.

Unlike in prior DMCA disputes, the object of Lexmark's DMCA claim is not to prevent piracy of a copyrighted work. Instead, it is to prevent rivals from offering cheaper cartridges for Lexmark's printers. This is not copyright protection, but profit protection.

Looking at the DMCA's legislative history, it's easy to see what Congress had in mind - protecting Hollywood's profits from pirates. Unfortunately, the text of the statute is so broadly drawn that all sorts of companies will be tempted to use suits like Lexmark's to shut out legitimate competitors.

The Basis for Lexmark's DMCA Suit

In Kentucky federal court, Lexmark has sued Static Control Corp. - a North Carolina firm that makes over 3,000 parts for 70 models of printer cartridges, so that other companies can recycle used cartridges and sell them at substantially discounted prices. Lexmark asserts in its suit that Static Control has infringed Lexmark's copyrights, and violated the DMCA.

To understand the conflict, a bit of background on the economics of the printer business is necessary. Printer manufacturers sell their machines on the cheap. They make most of their profits selling the replacement ink and toner. (It's somewhat like the razor industry, which makes its money off expensive razor blades, not relatively cheap shaver handles.)

Lexmark itself is no exception: Its sale of printer supplies grew 19 percent last year, and accounted for more than half of the company's $4.4 billion in sales. In contrast, revenue from its printers rose less than 1 percent.

Here's what I mean by "steep": Suppose you have a Lexmark Optra T622 laser printer. A Lexmark printer cartridge for that model costs about $375. A remanufactured cartridge costs about $165--yet is basically the same in terms of both longevity and print quality. Obviously, no one in their right mind would buy the $375 cartridge.

Sensing doom, Lexmark responded this way: It installed tiny computer chips on its printer cartridges. And it designed its printers to function only if they complete an authentication sequence - also known as an "electronic handshake" - with a program residing on the chip.

(The program on the Lexmark chip also tells the printer when toner is running low. Interestingly, Lexmark also sells a version of its cartridges that does not use a chip - and can therefore be remanufactured - but charges an additional $20 to $50 per cartridge.)

In response, Static Control designed its own "Smartek" chip that allows remanufactured cartridges to work in some of Lexmark's printers.

Lexmark sued, bringing both copyright infringement and DMCA claims. Soon, it moved for a preliminary injunction, and won its motion.

Lexmark's Initial Win: The Preliminary Injunction

A "preliminary injunction" is a temporary injunction that commands the defendant to do, or desist from doing something, for the remainder of the case. It requires proof both of likelihood of success on the merits - that is, proof the defendant is likely to win at trial - and proof of irreparable harm - that is, harm money damages cannot fully compensate.

Finding that Lexmark has proven both points, the Kentucky federal court granted the injunction, ordering Static Control to cease making and selling its Smartek chip. In so doing, it made a number of important findings of fact.

First, on the copyright claim, it found that that Static Control had copied wholesale the programs stored on the Lexmark chip - rather than reverse engineering them as it had claimed. (Indeed, embarrassingly for Static Control, its code even contained a non-functional ASCII code sequence spelling out Lexmark's stock market ticker symbol!) That, the court held, suggested Static Control had likely violated the copyright laws.

The DMCA has a specific exception for reverse engineering. (As I detailed in an earlier column, reverse engineering - here, using programming methods to reconstruct an approximation of the underlying source code of the Lexmark chips - can sometimes be legal as "fair use" under copyright law.) To fit within the DMCA's exception, the reverse engineering must be geared to achieve interoperability, by way of an "independently created computer program." But, the court held, Static Control's copied program was plainly not an independently created one. Thus, it did not qualify for the DMCA's reverse engineering exception.

Back to the Drawing Board for Static Control?

How great a loss was the preliminary injunction ruling for Static Control, from a business standpoint? Interestingly, not as great as it might seem.

The court made a specific finding that Static Control could have figured out by reverse engineering how to write a different program that passed the authentication test. So if Static Control now does so in a "clean room" environment - that is, one where none of Static Control's engineers ever see Lexmark's source code - the resulting chip may be perfectly legal.

In sum, the problem, the court suggested, was not Static Control's result, but its process. If a reverse engineering process produces the same result - the same kind of chip as the Smartek chip - that's fine from a legal standpoint.

Meanwhile, for now, Hewlett-Packard, the world's largest printer manufacturer, has refused to follow Lexmark's lead. And the European Parliament, which is concerned about the amount of "electroscrap" - that is, computer-related waste - headed to landfills, recently approved a law that is likely to promote third-party remanufacturers of printer cartridges.

The Chips in Your Future: Other Industries the Ruling May Affect

What's the larger relevance of the suit? If Lexmark is successful, the suit may cause a significant shift in the balance between intellectual property rights, and free and open competition. Not only the printer industry, but others, may be profoundly affected.

Consider the multi-billion dollar U.S. market for car parts. About 75 percent of cars with expired warranties are repaired by independent repair shops that regularly use cut-rate parts manufactured by aftermarket firms. Many of these parts - for example, antilock brakes, ignition systems, airbags, emissions sensors - contain microchips. Car manufacturers could re-design these parts, and others like them, to contain DMCA-protected software programs that interact with a car's on-board computers to allow only manufacturer-approved parts to be used.

The computer industry, too, could take a similar course, with even more damaging results. The near ubiquity of computers and the Internet have given rise to an overwhelming need for interconnection between different elements of computer systems.

If hardware or software companies can add access controls to their interfaces - as Lexmark did with its printers - then those companies will be able, in effect, to determine which products made by other firms could interoperate with their products.

If a dominant company or group of companies uses access controls to limit interoperability, competition and innovation may be seriously harmed. Even the temporary delays caused by the need for reverse engineering to occur could be very harmful to competitors; by the time reverse engineering is complete, the dominant company may have moved on to next year's model - and another, harder-to-reverse-engineer chip.

The DMCA could also cause mischief in the markets for consumer electronics by limiting the availability of both replacement parts and third-party accessories. One might imagine, for example, a cell phone manufacturer applying technological measures to exclude competition in replacement batteries.

Or consider a case that has already arisen, involving remote control garage-door openers. Chamberlain is a manufacturer of both doors and remote control openers for them; its openers have a feature that guarantees that they work only when certain software codes are received. It has sued Skylink, a company that makes universal remote controls that circumvent this feature, under the DMCA.

Static Control Seeks a DMCA Exemption

What should be done to protect competition? Static Control has already begun to explore one possibility.

In passing the DMCA, Congress adopted a safeguard provision directing the United States Copyright Office to undertake a triennial review relating to the statute. The purpose of the review is to exempt from the statute's anticircumvention provisions classes of works where the Copyright Office found that technological protection measures had impeded lawful uses.

Static Control has filed a petition with the Copyright Office asking for an exemption that would cover its Smartek chip. Specifically, it has asked the Copyright Office to exempt from the DMCA small, embedded computer programs that "do not otherwise control the performance, display or reproduction of copyrighted works that have an independent economic significance."

Twisting the statute beyond Congress's intent works to no one's advantage, except that of corporations who seek to squelch competitors. Static Control's request should be granted. If it isn't, consumers will predictably suffer.

Chris Sprigman is an antitrust and intellectual property lawyer in Washington, D.C.

Interested readers can review comments submitted to the Copyright Office on Static Control's request, including one by Senator John McCain concerning the possible anticompetitive effect of Lexmark's DMCA interpretation, and check the schedule for upcoming hearings on DMCA exemptions including this one. Those who wish to testify at the hearings must notify the Copyright Office at by April 1.

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