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Editor’s note: The following is a hypothetical case study, with fictional managers and fictional businesses, that provide a way for executives to learn more about some of the situations they or their companies may face. Executive Legal Adviser reporter Jeanne Graham wrote the hypothetical, and legal experts familiar with the kinds of problems described offered suggestions to remedy the situations. Their opinions are not intended to be legal advice. To submit suggested hypotheticals for “Case in Point,” go to www.executivelegaladviser.com. Rockoe Refurb Inc. is in the refurbishing business. The company takes the used ink cartridges from Prile printers, refurbishes the cartridges and then resells them for 20 percent less than the Prile retail price. In an effort to counteract the refurbishing and force consumers to buy new Prile cartridges, Prile began putting a computer chip in its printers that would prevent ink cartridges from being used more than once. But Rockoe’s product engineers have found a way to circumvent the chip’s software and allow restored cartridges to work on Prile printers multiple times. Prile claims that Rockoe is violating software copyright law, because the chip’s software is intended to prevent people from reusing the ink cartridges. Company president Ricky Rockoe says he’s just doing some creative and legal reverse engineering. Is Rockoe correct? Can Prile stop Rockoe from refurbishing the ink cartridges? ANSWER NO. 1 by Marcella D. Watkins Prile has no basis for stopping Rockoe Refurb Inc. Prile’s reliance on copyright law is misguided, because copyright law only gives Prile the right to stop unauthorized uses or copying of the company’s software; copyright law cannot be used to prevent unauthorized operation of a machine. Copyright law has only the following limited applicability to these facts. In one scenario, if normal operation of one of Prile’s printers requires running the code on the embedded chip, and this is the copyright violation asserted against Rockoe, then Prile’s case must fail, as the purchaser of each printer is entitled to run the operating code absent a contractual limit on that right. Alternatively, the copyrighted code may run when certain triggering factors occur, such as depletion of the ink cartridge, and the code itself may merely serve to prevent further operation of the printer. If that is the case, the facts closely resemble those in The Chamberlain Group v. Technologies Inc., decided by the Federal U.S. Circuit Court of Appeals in 2003. In Chamberlain, the plaintiff made garage door openers (GDOs) that contained software that would prevent unauthorized garage door openings. The defendant made universal transmitters for GDOs. The defendant’s transmitters were designed with knowledge of the plaintiff’s software and would transmit an effective door-opening signal without running the copyrighted code, which in turn would cause the GDO receiver to run copyrighted code. The Federal Circuit held that there was no copyright violation, as the garage door owners were entitled to use any transmitter to trigger their GDOs and run the door-opening software. Further, because there was no copyright infringement in this hypothetical, there could be no liability under the expanded protections provided by the Digital Millennium Copyright Act of 1998 (DMCA). The DMCA specifically prohibits the circumvention of any technological measure that effectively controls access to a copyrighted work and trafficking in any technology, service or device that is designed for the purpose of such circumvention. The Chamberlain court held that liability under the DMCA will only occur if the trafficker’s device enables either copyright infringement or a prohibited circumvention. Since the garage door owners were not infringing Chamberlain’s copyright, the defendant was not violating the prohibition against circumvention. The court expressly pointed out the problems that would arise if manufacturers such as Chamberlain — and in this hypothetical scenario, Prile — were allowed to restrict competition by using copyright law this way. Under the Chamberlain analysis, Prile’s product is not a prohibited circumvention. The DMCA also provides that circumvention is not prohibited if it consists of reverse engineering for the sole purpose of achieving inter-operability of another program with the copyrighted program. The court held that reverse engineering was moot in Chamberlain. It is likewise moot under the present fact pattern. Although copyright law cannot prevent unauthorized operation of a machine, patent law can protect this right, assuming that the machine in question embodies a novel technological feature. Even the monopoly granted by a patent cannot afford its owner infinitely long arms, however. The first-sale doctrine effectively truncates the patentee’s rights at the first exchange with a buyer. There are several cases in which the owner of a patent on a reusable device has been stymied in his attempts to control the market for the used devices. A case with facts similar to Prile and Rockoe’s is Hewlett-Packard Co. v. Repeat-O-Type Stencil Manufacturing Corp., decided by the Federal Circuit in 1997. In that case, Hewlett-Packard sold patented inkjet printer cartridges that were not refillable. Users were instructed to dispose of spent cartridges and replace them. According to the opinion, defendant Repeat-O-Type (R-O-T) bought new cartridges, pried off the permanent plastic cap that prevented access to the ink reservoir, replaced it with a removable cap and then marketed the cartridges as refillable. R-O-T also sold bottles of ink that could be used to refill the cartridges. The Federal Circuit held that R-O-T’s activities were akin to permissible repair of the cartridges, in part because when the original supply ink was depleted, the rest of the cartridge was not spent. Likewise, in Rockoe’s case, the used ink cartridges are clearly not spent. Rockoe’s circumvention of Prile’s software is analogous to R-O-T’s removal of the permanent ink cap. Even if Prile’s cartridges are patented, then, it is unlikely that Rockoe would be liable for patent infringement. Rockoe has avoided copyright and patent liability. As long as he doesn’t set himself up for trademark liability, Rockoe can stay in business. ANSWER NO. 2 by James E. Hudson III Three issues that Rockoe needs to consider are: 1. the lack of a reverse engineering defense to claims of copyright infringement; 2. copyright infringement, particularly the Digital Millennium Copyright Act (DMCA); and 3. trademark infringement associated with sales of the refurbished ink cartridges. While reverse engineering is permissible as a defense to trade secret misappropriation, it is of limited applicability to copyright cases. Copyright law historically has protected the author’s original expression fixed in a tangible medium. Under such law, a copyright owner has possessed the exclusive right to reproduce the protected work and to create derivative works based on the original. Rockoe may have infringed on Prile’s copyright if the reverse engineered product, here the software developed by Rockoe, is substantially similar to the original work of Prile’s to which Rockoe had access, namely Prile’s encryption key. Had Rockoe developed code not substantially similar to Prile’s or which was developed without access to Prile’s, Rockoe would be in position to prevail on a standard copyright infringement claim. However, Rockoe must also consider liability under the DMCA, signed into law Oct. 28, 1998. The DMCA creates liability for circumventing anti-piracy measures built into most commercial software. Prile may argue that Rockoe’s method of circumventing the software encryption on the ink cartridges, which was designed by Prile to prevent third-party refurbishment, constitutes such liability. However, printer manufacturer Lexmark’s recent failure to prevail on such a theory may encourage Rockoe. In Lexmark International Inc. v. Static Control Components Inc., decided last year by the 6th U.S. Circuit Court of Appeals, Lexmark sued Static Control Components due to Static’s alleged reverse engineering of Lexmark’s authentication procedure incorporated into Static’s printer cartridges, which permitted such cartridges to be used in Lexmark printers. Lexmark claimed copyright infringement and a violation of the DMCA. While Lexmark prevailed initially, obtaining a preliminary injunction, the 6th Circuit reversed the order, holding no such infringement. The court first held, among other findings, that lock-out codes fall beyond copyright protection by falling on the functional-idea side of the line separating original protectible expression from mere ideas. Lexmark asserted its lock-out code fell on the protectible original-expression side. The 6th Circuit also held that the authentication sequence enabling use of specific printer cartridges did not control access to the work, namely the printer engine program. The court found that the authentication sequence was not necessary for copying the printer engine programs. As the authentication sequence did not control access to the program at issue, the 6th Circuit found no liability under the DMCA. While the opinion is not binding in Texas, as Texas is subject to the rulings of the 5th U.S. Circuit Court of Appeals, the 5th Circuit may find such reasoning persuasive and reach the same conclusion. Finally, Rockoe must consider issues of trademark infringement. If Rockoe is refurbishing ink cartridges bearing Prile trademarks, sale of such refurbished ink cartridges may constitute trademark infringement. Trademarks function as an indicator of the source of the product and a guarantee of specific quality. If consumers or potential consumers, even post-sale, encountering Rockoe refurbished ink cartridges are likely to believe, even initially, that the cartridges in question originated from Prile, Rockoe may be liable for trademark infringement. In Texas, companies have litigated more than a few such cases, involving products such as multiple-ton presses, valves and Rolex watches. Such cases tend to turn on consumer perception as to source. A well-marked refurbished valve encountered by purchasers is not likely to cause confusion about the source of the valve, while a refurbished or a modified Rolex watch altered by a third party may cause such confusion. More disconcerting for Rockoe — if Prile establishes Rockoe sold the infringing refurbished product knowing it was not a genuine Prile cartridge, and a court determines that Rockoe infringed on Prile’s trademark — Rockoe may be liable for triple damages and a near-mandatory award of attorney’s fees.

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