For most hardware manufacturers, over half the revenue generated by their printer or copier businesses comes from the sale of consumables. Consumables also offer the fat margins manufacturers have come to rely on to make their respective printer and copier businesses profitable. When vendors need to get aggressive with hardware pricing, they know the machines will deliver a lucrative aftermarket annuity that pays dividends for years and allows for the industry’s hallowed “razor-and-blade” business model.
Because consumable sales are so critical to their overall success, hardware vendors are hyper-vigilant when it comes to protecting markets from supplies that infringe their intellectual property. Even back in the early days of analog machines, OEMs were filing suits against third-party firms, accusing them of marketing infringing consumables for light-lens copiers. These legal battles, of course, continued as the industry transitioned to digital technology. At first, infringing products were limited to a few ink tanks, which were easy to copy and targeted only certain inkjet devices. As third-party supply vendors became more technically savvy, however, their product catalogs grew to include toner cartridges. Today, the market is awash in a wide range of infringing ink- and toner-based products for use in many of the machines operating in the U.S.
Actionable Intelligence follows markets for consumables closely and we post dozens of articles about legal battles each year on our website www.Action-Intell.com. Our coverage includes following U.S. lawsuits filed by many of the leading hardware vendors, including Canon, Epson, Hewlett-Packard, Lexmark, Ricoh, Xerox and others. In addition to covering the courtroom dramas surrounding these cases, we also have chronicled the enforcement efforts of various U.S. agencies over the past several years.
U.S. Customs’ Busy Year
Often (but not always), infringing products are manufactured overseas and imported and marketed in the U.S. For cases involving products originating outside the country, OEMs typically file complaints with the U.S. International Trade Commission (ITC), along with accompanying lawsuits in federal court. The commission’s website explains that the ITC is an “independent, quasi-judicial federal agency” responsible for investigating matters related to international trade. The ITC is charged with protecting U.S. markets from foreign products that compete unfairly with legitimate products.
The commission is specifically empowered to adjudicate cases that its website says “involves imports that allegedly infringe intellectual property rights.” Section 337 of the Tariff Act of 1930 allows the ITC to investigate allegations of IP violations. Hardware manufacturers often request these investigations when they file federal lawsuits because a 337 action moves much more quickly than cases filed in the federal courts. Most so-called 337 investigations involve claims that overseas firms have imported products into the U.S. that violate a patent or registered trademark. Most claims can be resolved in less than two years. Although only the federal courts can award damages, the ITC is charged with taking steps to prohibit the infringing products from entering the U.S.
If the commission determines infringing products are being imported, it can issue cease-and-desist orders or limited exclusion orders (LEO), which restrict the importation of a certain product from a certain company or group of companies. If the ITC determines that there is a wide-spread practice by an industry to infringe an OEM’s IP, it may issue a general exclusion order (GEO) restricting the importation of an entire product category, regardless of the source. The commission tasks U.S. Customs and Border Protection (CPB)—a.k.a. “Customs”—with enforcing its orders. CPB monitors all U.S. points of entry to ensure no “excludable product” is imported. If an infraction is discovered, the ITC is notified along with the exporter. The company is given 30 days to take the shipment back or it is surrendered to CPB. If a second shipment of infringing product from the same company is discovered, the ITC will issue seizure-and-forfeiture orders executed by CBP.
CBP had a busy year in 2016, seizing the most shipments of ink and toner cartridges in its history. This increase in activities related to consumables followed a record number of similar seizures in 2015. Last year, the ITC issued 72 seizure-and-forfeiture orders that Customs agents executed against 50 companies and individuals. In 2015, 60 seizure-and-forfeiture orders were sent to 38 companies and individuals (see the complete list in the table below). Prior to 2015, only a handful of seizures were executed each year.
Why the Uptick?
There are several reasons for the increase in seizures over the past couple of years. First and foremost, OEMs have been increasingly successful in their attempts to have the ITC issue exclusion orders related to consumables. As I noted, the ITC moves much more quickly than the federal courts, so an ITC complaint is now commonly filed when federal lawsuits are brought involving imports. Today, more third-party supplies are excluded from entering the U.S. than ever before. In addition, CBP is better at finding and grabbing infringing products than it had been in the past. Several years ago, the agency was set up to handle more easily tracked products like shipments of steel coming into the U.S. but was not optimized to cope with the complexities of products like consumables. Now things have changed.
The CBP has been reorganized and it put new support systems in place to help Customs agents identify infringing goods in more complex product categories like printer and copier supplies. In particular, CBP has established various Centers of Excellence and Expertise (CEE), including the Electronics CEE, which is responsible for preventing the importation of banned consumables. The new centers gather multi-discipline teams together in one central location. The teams work with OEMs to identify and seize products that the ITC has excluded from the U.S. market. The CEEs also act as repositories of information: when Customs agents successfully enforce an ITC order, they collect the intelligence they gather in the field and can use it in future enforcements.
It appears that all the seizures may be helping to stem the tide of infringing product that’s been pouring into the U.S. According to our research, the importation of infringing product is beginning to slow. While many off-shore third-party supply vendors continue to look to the U.S. for growth, I do not see the market for infringing products expanding in the U.S. as it was five years ago. All the ITC and CBP activity has helped to slow imports. But other market dynamics are also helping to quell demand for infringing consumables. Many who supply office and imaging equipment are no longer willing to risk the lawsuits, supply-chain headaches and inconsistent quality issues associated with infringing products.
Putting Pressure on Amazon
One place that continues to be plagued with infringing cartridges is the Internet. E-tailers now make up the largest channel for these products in the U.S. The Internet is rife with sites selling ink and toner supplies at a fraction of an OEM’s price. With a combined total of approximately 1 million ink and toner cartridges, Amazon.com has one of the broadest ranges of consumables available online. The site offers SKUs from OEMs, remanufacturers, and new-build compatible manufacturers. While many of the ink and toner cartridges selling on Amazon do not infringe any patents, some do. Therefore, ITC and CBP have taken steps to eliminate infringing consumables from Amazon.com.
After the CBP discovered that Amazon was attempting to import ink and toner cartridges that were excluded by the commission from being sold in the U.S., the ITC issued several orders over the past couple of years to seize the shipments. As our table of 2015 and 2016 seizures shows, it is not uncommon for an individual importer to have multiple shipments seized, including Amazon. Importers identified as bringing in excluded goods are more closely monitored by Customs agents, and the Electronics CEE supports the increased scrutiny. The seizure orders targeting Amazon have been directed at the company’s headquarters in Seattle, Washington, as well as certain U.S. fulfillment centers. It appears Amazon is addressing the problem. In 2015, five shipments heading to Amazon were seized by the authorities. Last year, however, that number dropped to one.
In addition to increased CBP surveillance, OEMs have taken steps to stop individual companies from marketing infringing consumables on Amazon. Epson in particular has become increasingly aggressive. In November, Seiko Epson along with two of its U.S. subsidiaries, Epson America and Epson Portland, sued Nano Business and Technology for selling third-party inkjet cartridges that infringe two of Epson’s patents. A representative for Epson said that the suit was part of a crackdown on resellers on Amazon Marketplace.
The Nano suit wasn’t Epson’s only attempt to get infringing products off of Amazon. In December, Epson filed three patent-infringement complaints against Amazon Marketplace sellers. The defendants included HT Tech and HT Imaging Inc. in one suit and InkJet2U LLC and Worf Corporation in the second filing. The third suit was filed against three West Palm Beach, Florida firms: Shoppers Smart LLC, Houses Investing LLLP and Houses Investing of Florida, Corp. The suits involved cartridges that violated GEOs issued by the ITC. For many of the defendants, it was not the first time they were sued for selling infringing products. In addition to the cases related to ink cartridges, Epson sued Century21 Electronics last September in a trademark-infringement suit that alleged the Amazon seller was falsely selling refurbished Epson projectors as new.
After facing mounting pressure in recent years from manufacturers over infringing and counterfeit products being sold on Amazon.com, and after being criticized for inviting Chinese manufacturers to sell directly through its online site, Amazon took steps last year to address the problem. Last August, Amazon imposed a fee and new authentication requirements for certain brands in an apparent attempt to address the problems associated with infringing and counterfeit product. All new marketplace sellers who list certain brands must pay a fee of up to $1,500 per brand and provide documentation proving the products are legitimate. Hewlett-Packard and Samsung were among the brands to be protected by the new fees and more are expected. The move came after footwear giant Birkenstock announced that, commencing January 1, 2017, it would pull all sales of its products off Amazon because of concerns about counterfeiters.
What About this Year?
It is clear that the ITC and CBP will continue to apply pressure on firms attempting to import infringing consumables into the U.S. this year, but there are some indications that seizures may be slowing. In January, the ITC issued seizure-and-forfeiture orders on shipments of toner cartridges bound for the CBD Group Inc. of Walnut, California that violated a GEO issued to Canon in 2015. Clover Technologies and its Cartridges Are Us subsidiary also received a seizure-and-forfeiture order; however, it was quickly rescinded after the ITC discovered the inkjet cartridges in question did not violate a GEO awarded to HP.
With only one seizure in January, the ITC and CBP is far off the pace it set last year, which saw a record number of seizure-and-forfeiture orders. During the same period in 2016, the ITC had issued 11 such orders. The slowing ITC and CBP activity follows a pattern that emerged in the second half of last year. Between July and December of 2016, the ITC issued 18 seizure-and-forfeiture orders compared to 54 during the first six months of the year.
It will be interesting to see what impact—if any—a case pending before the U.S. Supreme Court may have on ITC and CBP activity. In December, the high court announced it will hear Impression Products v. Lexmark International, a case that could significantly change U.S. patent law. If the court sides with Lexmark, patent law will remain as it has been for years. If, however, SCOTUS sides with the plaintiff, patent holder rights could be diminished, which will presumably reduce the number of seizure orders because certain patent rights would no longer be valid. A decision is expected in June.
