From the opening weeks of 2012, right through December, the headlines have been dominated by news of lawsuits and settlements. The year began with Canon suing dozens of third-party supplies vendors for violating its patents on gears used in toner cartridges. In the spring, word came that Lexmark was demanding royalties from an unknown (but presumably large number) of firms because they were encroaching on the OEM’s patents by marketing remanufactured toner cartridges made from empties that were first sold overseas. And at the end of May, a couple of independent dealers hauled Canon into court claiming the firm violated various state and federal laws.
Companies in the digital imaging industry are a litigious bunch, so a year full of lawsuits is not unusual. What has been unique about the 2012 cases, however, is how quickly the suits have been resolved. In late October, the two dealers suing Canon, the Merizon Group and R.K. Dixon, dropped their suit and settled the matter. Over the course of the year, all of the firms named in the Canon complaint either settled or defaulted and it now looks as if that matter will be resolved in favor of the OEM sometime during the first part of next year. Likewise, several dozen firms decided to take Lexmark up on its offer, pay the royalties fees and settle the matter. Although others may step forward, there is only one firm that I know that is currently fighting Lexmark.
Law and Order
Because the market for Canon and Laserjet toner cartridges is so large, the Canon lawsuit has probably been the industry’s most closely watched case in 2012. On January 23, Canon Inc. and its subsidiaries Canon U.S.A. and Canon Virginia filed complaints in U.S. federal court and with the U.S. International Trade Commission (ITC) alleging dozens of companies violated U.S. Patents 5,903,803 (‘803) and 6,128,454 (‘454), which cover the design of a coupling found on most Canon and Hewlett-Packard integrated toner cartridges. The unique design of the coupling allows the cartridge to be easily inserted into or removed from a printer and helps synchronize the rotation of the drum with the drive motor during the imaging process while preventing the drum from slipping.
By the end of March, a number of companies named in the complaints had either settled or signaled their intent to resolve the matter with Canon. About half the defendants, however, indicated they were ready to fight. The list of combatants included the world’s largest remanufacturer, Clover Technologies, and a group of its affiliates. Regardless of their vows to fight on, by mid-summer Clover’s lawyers were looking to cut a deal. The group of Clover defendants settled in October along with several other holdouts. On the day the last contestant, Green Project, settled, Canon began taking procedural steps to fast track a determination from the ITC. The last settlement also all but ended the matter pending in the federal court.
Canon’s lawyers prevailed as defendants as well as plaintiffs this year. After being acquired by Xerox’s Global Imaging Systems (GIS), the office-equipment dealers Merizon Group Incorporated and R.K. Dixon Company filed suit against Canon U.S.A. and Canon Business Solutions. The pair said in violation of the Sherman Antitrust Act, Canon refused to sell them replacement parts and supplies. Canon was also accused of violating of the Robinson-Patman Act by engaging in price discrimination. The plaintiffs further claimed that Canon had breached certain contracts and violated certain state statutes. Merizon and R.K. Dixon sought a preliminary injunction that would compel Canon to supply them with parts and supplies.
Although Canon did not file a formal answer to the complaint, it did oppose the preliminary injunction claiming the suit was “nothing more than an attempt by Xerox to enlist the powers of this Court to aid its competitive maneuvers against Canon USA.” The judge hearing the case apparently agreed with Canon and in July the court denied the request for a preliminary injunction until the parties completed mediation. In the end, that was not needed, however, and the firms struck a deal without the help of a mediator. Merizon and R.K. Dixon filed notice with the court in late October indicating that they were voluntarily dismissing the suit and an order terminating the case was issued on November 5. Terms of any settlement were not made public.
At last count, Lexmark had settled its case with 35 third-party supplies vendors. While the matter seems to be favoring the OEM, however, it is the only one of the three suits that may be contested. Lexmark was recently granted an extension pushing the deadline to add defendants to the matter back from November 28, 2012 to February 4, 2013 so it appears that the case may not be completely resolved for a while.
Lexmark sent out warning letters to third-party supplies vendors saying the firms had infringed its patents by marketing remanufactured cartridges made from empties that originated outside of the U.S. Under U.S. patent law, a patent holder’s rights are only exhausted if the first sale of a product occurs within the U.S. Because the cores in question are from cartridges that were first sold on foreign markets, Lexmark asserts that its intellectual property rights were violated when the cores were brought back to the U.S., recharged, and then offered for sale.
Lexmark’s letters told recipients that they could agree to the OEM’s settlement terms or face the prospect of being added as a so-called “John Doe” defendant in an ongoing patent-infringement suit in the U.S. District Court for the Southern District of Ohio. The warning letters went out after the Canadian empties broker Greentec International was compelled by a Canadian court to turn over its customer list to Lexmark, and the OEM asserted that some of the Lexmark empties supplied by Greentec were first sold outside of the United States.
More to Come
As noted, one firm is currently challenging Lexmark’s claims. IJSS, which does business as TonerZone.com and Ink Jet Superstore, was one of original defendants named in Lexmark’s suit. The firm is a reseller that does most of its business online and, while it had settled with Lexmark, the OEM claims the firm violated the terms of the settlement and in June brought IJSS back to court to face a contempt charge. On October 25, the company filed documents with the court saying that Lexmark had failed to establish its contempt charge. IJSS has called into question Lexmark’s claim that it purchased cartridges from IJSS that were made from the cores first sold in the Asia-Pacific region. IJSS asserts that this “fundamental factual uncertainty” means that Lexmark has failed to establish its contempt claim.
IJSS has asked the court to deny Lexmark’s contempt motion and it has requested a single evidentiary hearing on the motion. However, before that can happen, Lexmark has the opportunity to file a reply in support of its motion. The judge presiding over the case recently issued an order allowing Lexmark time to conduct depositions before filing a reply. As of yet, no date for a reply has been set.
There is a good chance that more companies will join IJSS in its fight against Lexmark. We do not know how many companies received letters from the OEM, so the potential exists that a number of “John Doe” defendants will be added to the case. Presumably, if these companies have opted not to pay the proffered royalty fees, they are girding themselves for a legal battle. After the February deadline passes, the scope of the case should be clearer.
A final determination should also come early next year in Canon’s gear case. With dozens of settlements in hand, the firm is looking for the ITC to find that the U.S. market is being flooded with infringing products. Canon has requested that the ITC issue orders to protect the market and limit the importation of third-party supplies for Canon and HP laser printers. It is likely that the ITC will find in favor of Canon. This does not mean, however, that all third-party Canon and HP toner cartridges will be denied entry. Various firms say that they are currently using gears on their cartridges that do not violate Canon’s ‘803 and ‘454 patents. Given how hard it has fought for the ITC to grant an exclusion order, it seems unlikely in the extreme that Canon will allow cartridges made with these gears to enter the U.S. market without a challenge.
The stage is set, then, for more courthouse drama in 2013. It is ironic that despite the quickness with which the various cases have moved through the courts, the final determinations will linger into the New Year with new cases all but certain to follow. Stand by!
