A Legal Fight Involving Lexington Based Company

Associated Press Writer

FRANKFORT, Ky. (AP) - It's an electronic chip that has sparked a lengthy legal fight that could potentially result in hundreds of millions of dollars in damages and turn the toner cartridge industry on its head.

Facing a federal jury Monday, the CEO of the North Carolina company being sued by printer giant Lexmark tried to put things in perspective.

"It's just a little piece of plastic," said Static Control CEO Ed Swartz, defending his company's chip from the one Lexmark claims it copied in violation of federal patent law.

The chip in question may be little, but this trial is enormous to the industry. It's particularly so for Static, which makes its business by selling the parts required to rebuild printer cartridges, allowing corporate customers to refill their ink for far less money than they would pay in buying new cartridges from Lexington, Ky.-based Lexmark.

But the arguments being considered by a U.S. District judge and jury, who began hearing Static's side Monday, are far more specific.

They deal with Lexmark's "prebate" program, as it was formerly known, which allows upfront discounts for customers who promise to send their cartridges back to the company when they're empty.

Those who turn down the discounts are allowed to sell them to other companies willing to refurbish them, but an encrypted chip inserted inside the prebate version was designed to block its re-use by anybody else. That is, until Static figured out a way to duplicate the chip.

The legal battle began in 2002, when Lexmark sued Static Control under the Digital Millennium Copyright Act, a federal law to prevent people from tampering with technology. It has since included a countersuit by Static alleging Lexmark's prebate program is a monopoly, and the case has made it all the way up to a U.S. appeals court. Now it's back in Kentucky this week for what could be the final front.

"It's a huge issue for the remanufacturing industry," said Jim Forrest, an analyst with Lyra Research in Boston. "The outcome of this trial will have a big bearing on that. Folks in the industry are anxiously awaiting a verdict."

Last year, toner cartridges generated more than $30 billion in revenues worldwide, and remanufactured versions account for nearly a quarter of that, Forrest said.

Although other companies haven't followed Lexmark's lead on a prebate program, Forrest predicts some might, should Lexmark prevail.

Swartz contends his chip wasn't copied, and even includes components Lexmark's doesn't offer, such as a sensor that prevents dark smudges from showing up at the end of a toner cartridge's lifespan.

He says his company is only rebuilding prebate cartridges that would otherwise be thrown away and views the matter as more of an abandoned property case, not a question about patent violations.

"It just seems ludicrous to me that somebody could say they have a claim against garbage," he said.

But, during cross-examination Monday, Lexmark attorney Andrew Copenhaver pressed Swartz on whether he had any proof that the cartridges would have gone to landfills if they didn't end up at Static Control. Swartz said it was common sense.

"You're just making your own assertions to this without any reasonable facts or any research," Copenhaver said.

Attorneys for both sides declined to comment afterward, and neither Lexmark nor Static Control returned calls seeking comment.

The trial could last several more weeks.

(Copyright 2007 by The Associated Press. All Rights Reserved.)

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