As summer came to a close, milestones were reached in two of the digital imaging industry’s mostly closely watched patent-infringement cases in the United States. First, the review period ended for orders issued in late June by the U.S. International Trade Commission (ITC) barring the importation of toner cartridges that infringe Canon patents. With the review period over, the GEO is now in place and is unlikely to be modified. As the Canon matter concludes, Lexmark’s investigation into companies marketing monochrome toner cartridges that violate its patents continues with no end in sight. The company requested that the deadline to move the case forward be extended until the end of the year so various foreign defendants can be served. Dozens of companies have been already been implicated in the case and it appears that more will be added as Lexmark’s suit enters its fourth year.
While the Canon and Lexmark lawsuits are distinctly different, they are similar in that they are profoundly changing the U.S. consumables market. Because the GEO will restrict the importation of many third-party cartridges that currently infringe Canon’s patents, it should go a long way to clean up the U.S. market. Lexmark’s install base is nowhere near as large at that of machines with Canon engines, so the volume of cartridges potentially affected by the Lexmark suit is much smaller. The number of companies named as defendants in the Lexmark suit, however, is greater than those directly involved in the Canon matter. Moreover, the seemingly endless discovery phase that Lexmark is enjoying has allowed it to further enlarge the number of companies named in the case. At this late date, I understand that many large third-party supplies vendors doing business in the U.S. have reached settlements with Lexmark—either in or out of court—and the number of small- to medium-sized firms negotiating with the OEM keeps growing.
The Canon GEO
The much-anticipated GEO on Canon cartridges was formally announced by the ITC on June 28. It bars importing toner cartridges into the U.S. that infringe two Canon patents: U.S. patents 5,903,803 (’803) and 6,128,454) (‘454). The patents cover the design of a “twisted prism” shaped protrusion on gears used to rotate the imaging drum in most Canon toner cartridges. Because Canon supplies laser print engines to Hewlett-Packard, which are sold under the popular LaserJet brand, the list of SKUs affected by the order is long. LaserJet is the leading desktop line of laser printers and MFPs in the U.S.
Like all GEOs, the Canon order issued in June was provisionally in place pending the review of the U.S. Trade Representative, a member of President Obama’s team. The review period is 60 days long, during which time the GEO can be overruled. Although it is rare that the ITC’s orders are revoked, it happened this summer in a separate case, raising the hopes of some third-party supplies vendors that perhaps the Canon GEO would reach a similar fate. In early August, U.S. Trade Representative Michael Forman vetoed the ITC’s order excluding the importation and sale of certain iPhones and iPads, which had been issued in June following a complaint brought by longtime Apple rival, Samsung. Hopes that Mr. Forman would veto the Canon GEO ended when the 60th day of the review period passed last month without any action.
Prior to the Canon GEO being issued in June, the market for imported Canon and HP third-party cartridges already began to soften. Initially, U.S. customers stocked up on imported cartridges as the commission reviewed the case. But as it became increasingly clear that products infringing the ‘454 and ‘803 patents would most likely be barred from the U.S. market, third-party supplies vendors began searching for alternative suppliers that would not be impacted by the order. As a result, U.S.-based remanufacturers have benefited from the Canon GEO as third-party supplies vendors began placing more orders with domestic suppliers and stopped purchasing foreign-made cartridges for Canon and HP machines. Certain foreign firms, however, have advertised that their products are not subject to GEO because they do not infringe the Canon patents in questions. A few of these firms are now reporting a brisk business.
Union Technology International (MCO) Co. (Utec), the master distributor for Print-Rite Imaging Products, for example, has been quite vocal that shipments of its toner cartridges for Canon and HP machines have not been disrupted by the GEO and are growing. A representative for the firm told me that all remanufactured Canon and HP cartridges that Utec imports into the U.S. now feature its so-called NoTwist gear, which is based on a patent internally developed by Print-Rite and does not have the twisted protrusion found on the Canon gear. The firm says its NoTwist gear design has received special clearance from U.S. Customs and Border Protection (USCBP). Print-Rite currently produces 20 different versions of the gear and they are used on over 130 different SKUs. In addition to the uninterrupted supply of remanufactured products fitted with the NoTwist gear, Utec reported that in the month subsequent to the issuance of the GEO, it received over 100,000 orders for compatible cartridges in its SmarTact line of SKUs for HP printers and MFPs. The products in the SmarTact line also feature the special gear cleared by USCBP.
Several overseas vendors including China’s Ninestar Technology also claim to have non-infringing cartridges for Canon and HP machines. In addition to companies marketing finished cartridges, certain raw material providers such as the Japanese toner and drum manufacturer Mitsubishi say they have OPC drums featuring gears that are beyond the scope of the GEO. Static Control Components, the Sanford, NC-based supplier of cartridge parts to remanufacturers, is also marketing drums with non-infringing gears. I am not sure if Static Control Components is exporting its gears but the domestic market for them ought to be strong. While products shipped by U.S.-based remanufacturers may not feel the effect of the GEO, these firms are at risk of a Canon lawsuit if they continue to use infringing gears on the cartridges they sell domestically.
With so many companies now marketing products that do not infringe Canon’s ‘454 and ‘803 patents, it seems like third-party vendors will have access to remanufacturer cartridges despite the GEO. It remains to be seen, however, if Canon will find other reasons for future lawsuits.
Lexmark’s Never-Ending Lawsuit
As the Canon matter moved towards its resolution, Lexmark’s attorneys indicated that after more than three years their case is still not ready to proceed to trial. On August 30, Lexmark’s lawyers asked the U.S. District Court for the Southern District of Ohio to push back the deadline for the case another 90 days from September 3 until December 2, 2013. The firm says the additional time is needed in part to allow Lexmark to serve certain foreign defendants that were named in the OEM’s first amended complaint filed back in April, a process that may take several months.
According to court documents, the OEM is in the process of serving China-based Eco Service China Ltd., Shanghai Orink InfoTech International Co., Zhuhai Richeng Development Co., and the German firm Product Cycle GmbH. If the court agrees to move the date back, it will be at least the seventh such extension I know of granted by the judge overseeing the case since 2011. Although the court had not formally pushed the deadline back as of this writing, September 3 had come and gone and it appeared that it was business as usual with the case, suggesting that an extension of some duration will be granted although perhaps not back to early December as Lexmark has requested.
Lexmark’s last plea for an extension came back in April after the firm added 31 new defendants to the original complaint filed in August 2010. Initially, the OEM accused 25 firms of infringing various patents on monochrome cartridges used in an assortment of machines. The firm filed complaints with the International Trade Commission (ITC), which later issued a GEO, as well as with the federal court in Ohio. The original defendants included Ninestar and affiliated companies and distributors; Print-Rite and various distributors; and the so-called Jahwa group of companies from South Korea as well as some additional distributors. At that time, Lexmark took the unusual step of including in its complaints references so-called “John Doe” defendants that would remain unnamed until some future date. It was those “John Does” that were named in the amended complaint filed in April. It is possible but not certain that more Joe Doe defendants will be named.
After filing its original complaint, Lexmark seemed to rack up settlements with relative ease. Some 36 companies had opted to settle with the OEM prior to its amended complaint including the companies overtly named in the 2010 matter. Both before and after filing the amended complaint, the OEM also successfully subpoenaed information from additional firms not named as defendants including some big name companies in the third-party consumables industry such as Micro Solutions Enterprises (MSE) and Cartridge World North America. Presumably, the subpoenaed information provided Lexmark with additional evidence for its case against the 31 companies named as defendants in April. Moreover, the subpoenas may have provided Lexmark with the ammunition it needed to name more John Does in a future complaint.
Gloves Are Coming Off
I do not want to suggest that everything in the case has gone Lexmark’s way. While the OEM has certainly won more than its share of legal skirmishes in this protracted battle, several companies have challenged Lexmark along the way and some of those challenges have yet to be resolved. One such contest is from FBA Holdings. The firm operates the empties broker Core Recovery Company, the remanufacturer Unitone Imaging Supply, and various firms in the channels including Unitone Imaging Group, Martek Supply Source, Imcopex America, Velox Systems, and International Digital Solutions. FBA filed suit against Lexmark in the U.S. District Court for the Central District of California seeking a declaration of non-infringement for the patents that Lexmark is asserting in the Ohio suit.
FBA asserts, “Any patent rights that Lexmark may have with respect to its products arising from the Patents-in-Suit have been exhausted.” The suit was filed in March and further alleges that FBA and its businesses were threatened to be named defendants in Lexmark’s lawsuit in Ohio, which in fact did happen in April. According to FBA, Lexmark served a subpoena to Core Recovery Company in July 2012 and Martek Supply Source and Imcopex America received subpoenas last December. In January, Lexmark’s attorneys requested information from FBA’s attorneys about all of its businesses regarding the purchase and sale of Lexmark cartridges. FBA says Lexmark sent emails threatening to add Core Recovery and Martek to the Ohio lawsuit if FBA did not supply the requested information and settle with the OEM.
The empties broker Blue Trading filed a similar suit against Lexmark in the U.S. District Court for the Southern District of Florida, which was later transferred to the Southern District of Ohio at Lexmark’s request. Like FBA, Blue Trading is seeking a declaration of non-infringement. The firm, which was also named as a defendant in April, asserts that Lexmark’s amended complaint is deliberately vaguely worded “with the singular purpose that no person or entity that sells Lexmark toner cartridge may escape Lexmark’s reach.”
The latest company to challenge Lexmark is the Charleston, WV-based remanufacturer Impression Products. The firm retained Edward O’Connor to represent it. He has years of experience representing third-party supplies vendors in patent cases. Mr. O’Connor filed a motion with the Ohio court in late July to dismiss the case against his client specifically for failure to state a claim upon which relief can be granted. He adds, however, that the central issue in his motion applies to the other defendants as well. “This case is essentially a one-issue case as it applies to the vast majority, if not all of the defendants,” Impression Products’ motion claims. “The issue is whether or not the first sale extinguishment of patent rights applies if that first sale occurs in a country other than the United States.”
Rulings from various courts in the U.S. over the past 10 years or so indicate that patent holders such as Lexmark retain certain rights to their patents if their products are first sold outside of the U.S. Lexmark has based much of its case against the various defendants on this tenet of U.S. patent law. The OEM says defendants violated their patents by remanufacturing empty cores that were first sold outside of the U.S. and then selling them domestically. Mr. O’Connor is challenging Lexmark because of a recent ruling from the U.S. Supreme Court that appears to indicate the first sale of a product exhausts intellectual property rights regardless of where the first sale takes place.
It is unclear however if Impression Products can prevail in this argument because the high court’s ruling was in a copyright case, not a patent right case. Mr. O’Connor argues that the ruling is broad enough to apply to the rights of various IP holders including those that hold patent rights. Not surprisingly, Lexmark holds that U.S. patents have not been affected by the high court’s recent ruling on copyrights.
We must now wait to see how the Ohio court rules. If the court sides with Impression Products, Lexmark’s long case could come to an abrupt halt. If, however, the motion to dismiss is overruled, I would expect that Lexmark will continue its aggressive hunt for more infringing companies throughout the second part of this year—or at least until the yet-to-be-determined deadline comes. In either instance, it would seem that both sides will have some grounds for appeal, which all but guarantees the case will drag on well beyond 2014.
