Thursday, 30 October 2003

Laser printers, razor blades, and the DMCA

The much-blogged-on exemptions from the Digital Millennium Copyright Act (DMCA), issued by the Copyright Office earlier this week, contain an interesting passage beginning at page 172. (The report is 198 pages long.) Lexmark, the #2 printer manufacturer, brought a widely publicized lawsuit against Static Control Corporation (SCC) alleging, inter alia, violations of the DMCA. When SCC filed for an exemption under the copyright rulemaking procedures, the Register was backed into the unusual corner of commenting on pending litigation.

Razor & Blades Business Model

Laser printers use an "ink" called toner, which comes in cartridges that are inserted into the printer. A new printer is sold with a full cartridge, and a moderate level of printing will use up one cartridge's worth of toner in about six months. Once this occurs, the user has two options: buy a new or refurbished (refilled) cartridge. Printer manufacturers sell new cartridges with full warranties against defective parts and workmanship. Refurbished cartridges are refilled by either the manufacturer or a third party in an aftermarket, and they generally do not carry warranties. Refurbished cartridges have two major selling points — one theoretical and one practical. First, refurbishing is a form of recycling and is more environmentally-friendly. Second, refurbished cartridges are cheaper than new ones.

The laser printer industry has long used the razor-and-blades business model famously pioneered by King C. Gillette. Shaving razors are a classic consumable good because ordinary wear and tear render them useless after a short time. A week or so of shaving will render the blade too dull to shave effectively, so the consumer discards the old blade and buys a new one. Once upon a time, razor blades were manufactured with their handles attached, as a single piece. Since each purchase entailed buying the entire unit, purchasing a Brand X blade one week did not bind a customer to buying the same brand the next week. While there may have been differences in quality among the various blades, most consumers could not objectively detect those differences, so there was no brand loyalty, and price was the chief (and perhaps only) discriminator. Gillette's innovation changed all that.

Gillette realized that he could manufacture the handles separately from the blades and that blades alone would be cheaper to make than the blade-handle combination. At the same time, he could make his handles and blades in a special shape so that neither unit would "fit" another brand. Once a consumer bought a Gillette handle, he would be locked into buying Gillette blades because nobody would want to buy relatively cheap blades that would not fit into an already-owned and relatively expensive handle. Consumers benefitted because they paid less money for blades in the long run — because they were consuming less material, since they discarded only the blades. Gillette benfitted with a steady stream of blade sales, proportional to the number of handles previously sold. (In IT jargon, the number of handles was Gillette's "installed user base.") To induce consumers to buy into this system, Gillette sold his handles as cheaply as possible, often just breaking even or taking a loss. He could afford to do this because the markup on blades was quite high, yielding a high per-blade profit, so he would make up for any loss on the handle after just a few blades.

The laser printer industry uses the same basic business model. Lexmark and competitors like Hewlett-Packard (HP) sell printers at- or below-cost, in an attempt to make them seem as inexpensive as possible in the first instance. Each manufacturer's printers work only with its own toner cartridges, as each company seeks to guarantee that its customers have to buy its toner for the life of the printer. Toner sales drive these companies' profits. (See, e.g., third quarter profit reports released by Lexmark and HP earlier this month.)

The Lawsuit

With this razor-and-blades model foremost in mind, Lexmark designed its T-series printers so that certain features that would work only with new toner cartridges or those refurbished by Lexmark but would fail with cartridges refurbished by third parties. Third-party refurbishers, Lexmark believes, hijack its aftermarket revenue stream from toner sales that "subsidize" the cheap initial price of printers. For example, T-series printers display a message when the level of toner in the current cartridge falls below a certain level, to warn the user that he should buy a new cartridge. A microchip in the cartridge feeds this information to the printer, and this chip cannot read the toner level after the cartridge has been refilled. Lexmark can correct this when it recycles its own cartridges, putting a new chip in the old cartridge that can read the toner level. However, when another company puts new chips in old cartridges (or manufactures its own cartridges and microchips in the same shape, that will fit in Lexmark printers), Lexmark cries foul. This is exactly what SCC did and how Lexmark responded. Lexmark sued SCC, alleging patent infringement and copyright infringement under the DMCA.

The reader should understand one additional point, too. Lexmark introduced an additional step into the razor-and-blades model, selling two types of toner cartridges. The first type embodies the classic model described above. The second type, called "prebate" cartridges, are sold at a $50 discount — but only under a contract that obligates the purchaser to return the empty cartridge to Lexmark once the toner is gone. In addition to this contractual protection, Lexmark builds into prebate cartridges an additional, technological measure of protection. As the Register explains, prebate cartridges contain microchips that engage

in an authentication sequence, or 'secret handshake,' with the Printer Engine Program on the Lexmark T-series printers. This authentication sequence runs each time a toner cartridge is inserted into a Lexmark T-series printer, each time the printer is turned on, or whenever the printer is opened and closed. This authentication sequence must be successfully performed in order for the Toner Loading Program to exchange information with Printer Engine Program and to allow the printer to function. If, on the other hand, the authentication sequence does not successfully occur, the printer will not recognize the toner cartridge as authorized and access to the Printer Engine Program will be disabled. [pages 174–75]

SCC designed its own printer cartridges and microchips that mimicked the functionality of Lexmark's products. Of course, SCC did this without Lexmark's permission; Lexmark never would grant permission for a product would deprive it of its most important revenue stream. So Lexmark sued SCC for patent and copyright infringement, seeking damages (money, measured as the sales of toner that Lexmark lost due to SCC's actions) and an injunction (a court order for SCC to stop).

The Register's Report

Patent law is supposed to protect inventions, devices and other functional technology, whereas copyright law is supposed to protect creative works like writings and music. This is why Lexmark's decision to invoke copyright law to protect its printers is so discordant. In my opinion, Lexmark alleged just enough creative/expressive content in its chips to avoid Rule 11 sanctions, but the District Court obviously disagreed with me — and granted it a preliminary injunction. It is generally understood in the industry and in (at least) some courts that computer software is expressive for copyright and first-amendment purposes — notwithstanding that it has functional (non-expressive) characteristics. It is also generally-accepted that someone may copy another's computer program for the sole purpose of reverse engineering it, so long as the reverse-engineered code is original and no copyrighted code is used in the final product. This is what Lexmark alleged that SCC did when it claimed copyright infringement. The District Court agreed with Lexmark that this constitutes "circumvent[ion of] a technological measure that effectively controls access to a work protected under" copyright law — which the very first section of the DMCA renders illegal.

The Register of Copyrights, in her report, pointed to § 1201(f) of the statute, which Congress "intended 'to avoid hindering competition and innovation in the computer and software industry.' Congress did not intend the DMCA to change the effect of pre- DMCA case law that allowed legitimate software developers to continue engaging in certain activities for the purpose of achieving interoperability between computer programs." (page 178, quoting House Manager's Report at 14 and citing the landmark case, Sega Enterprises Ltd. v. Accolade, Ind., 977 F.2d 1510 (9th Cir. 1992)) This concern for interoperatbility covers "not only … individual use, but [extends to] enabling competitive choices in the marketplace." (Id.) This "statutory exemption," the Register wrote, "goes far beyond the limits of this rulemaking" proceeding. (Id. at 180)

While the report denies a specific exemption to SCC, it recognizes that the exemption in § 1201(f) is broad and that SCC's activity falls within it. This interpretation of the statutory language — on the public record, by an entity with great persuasive authority in the courts — is a boon for competition. Furthermore, it reflects the instinctive dichotomy between patent and copyright law, leaving patents to protect technology and keeping copyrights focused on expression. The Register's opinion does not bind the Sixth Circuit, where the Lexmark suit is now pending, but courts of appeal do take notice when a specialized regulatory agency publishes such a strongly-worded opinion on the public record — so while SCC nominally "lost" (the Register refused to grant it an exemption), it may have "won" in a broader sense that it did not anticipate.

Posted at 9:20:33 AM | Permalink

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Topics: Civil Liberties, DMCA, Technology
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