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Friday, August 19, 2011

Executive Briefing Series: Legal Landscape August 2011

If you have been in the aftermarket cartridge business for more than a few months, chances are pretty good that you have heard about some type of legal issue(s) revolving around patents, copyrights and other forms of intellectual property. To put together an overview for the last couple of decades seems like a daunting task and probably wouldn’t be of much value to our all of our friends and readers anyway, so we asked Tom Ashley, Founder, Pivotal Research, to give us his take on recent actions that we all should be aware of due to their possible implications on our businesses.

Two important legal cases involving toner cartridges have recently been settled, and the outcome is reshaping the aftermarket for these printer supplies dramatically. As a result of the settlements and their aftermath, the “compatible” cartridge category has been all but eliminated from the US market.

Compatible cartridges are defined as those that are newly built and sold by manufacturers that are in direct competition with the original equipment manufacturer (OEM). They compete in a market that also offers new OEM cartridges, remanufactured (used) ones, and refill kits that allow the user to add more toner to a spent cartridge. Typically, the compatible cartridges are made in China or other parts of the Far East and are sold at a fraction of the price of a new or remanufactured one. Unlike the even-cheaper refill kits, some compatible cartridges perform reasonably well and have gained a significant share of the market. Most have been sold through the dealer channel and by internet sellers.

Problem StatementBut in today’s world, it is virtually impossible for an independent company to build a new compatible toner cartridge without infringing patents – often several of them.

BackgroundThe compatible toner cartridge market was pioneered by Green Cartridge Company (Hong Kong) a decade ago, but the settlement of an infringement lawsuit filed by Canon Corporation in 2006 led to GCC’s demise.

A few years later, the Ninestar Group (Zhuhai, China) began selling its line of compatible cartridges through US distributors and dealers. These cartridges included compatibles for Hewlett Packard products (all HP OEM toner cartridges are developed and manufactured by Canon) and for Lexmark products.

The Ninestar products, sold under several brand names, found their way quickly onto internet retail sites and were soon being distributed to dealers through prominent distributors. Users found new compatible cartridges available for a fraction of the cost of OEM or remanufactured ones, and the compatibles soon dominated the market in several channels. Some of these cartridges, such as those compatible with the HP Q2612A, sold for less than $10 as compared to $70-80 for a new OEM one.

In June, 2010, Canon (including its US subsidiaries) filed a complaint with the US International Trade Commission, requesting an investigation and claiming that the compatibles infringed two of its patents for drive gears on the photoconductor drum. In August, 2010, Lexmark filed a similar complaint against the Ninestar Group and Print-Rite Holdings (both of Zhuhai, China) and Jahwa Electronics of South Korea, and a number of distributors and dealers, claiming infringement of twenty-one of its cartridge patents. Both companies also filed similar lawsuits in US District Court.

Both of these cases were brought to a swift resolution (by courtroom standards) when all of the respondents either settled or defaulted (elected to present no defense). Canon announced an end to all of its proceedings in June, 2011, having obtained agreements from the Ninestar Group and all of the distributor and dealer respondents not to make or sell infringing products.

Lexmark has not yet ended its cases, but it has been granted a General Exclusion Order by the USITC, meaning that infringing Lexmark-compatible cartridges will not be allowed into the United States under positively Draconian penalties! Once the Order is signed by President Obama, US Customs will turn such shipments back at the border or seize them. Already, importers must post a bond equal to the value of each cartridge brought in.

Even before these cases had been resolved, compatible cartridges had begun to disappear from the market. The consent order approved by the judge in the Canon case stipulated that no respondent stock any infringing cartridge three months after it was approved in early April. This period has now passed. A brief survey of web sites shows that some dealers have stock remaining, but this is temporary. And certainly no more infringing Lexmark cartridges can enter the country.

Similar decisions have affected the ink jet cartridge market. The landmark case is that won by Epson in 2008, which includes a General Exclusion Order prohibiting the import of infringing Epson compatible ink jet cartridges. More recently, Hewlett Packard has won an ITC case and a General Exclusion Order prohibiting the import of infringing HP ink tanks, and another case involving integrated HP cartridges is currently working its way through the ITC.

SummarySupplies are the most (and arguably the ONLY) profitable segment of the printer business, and it is reasonable to expect that the printer OEMs will continue to file patents and lawsuits to protect their intellectual property and their markets. The remanufacture of imaging cartridges offers a legal and environmentally sound alternative to OEM products. This is not to say that remanufacturing is free of all possibility of infringement, but with care it is possible to produce remanufactured products without risk of infringement and with quality virtually equal to that of the OEM. This requires remanufacturers to have diligent development and legal teams and a commitment to avoid infringement.

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