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OEM's and the Compatible's Market Do Battle

14 Mar, 2003 By: Alicia Ellis imageSource

OEM's and the Compatible's Market Do Battle

Temperatures are
rising as OEMs and the compatible products industry prepare to go to battle over
copyrights, fair competition, "lock-out" chips and cartridge pricing
issues. Where once the compatible products industry was made up of a handful of
suppliers with little market presence and virtually no support, over the past
ten years, remanufacturers and compatible parts suppliers for copiers and
printers have developed technologies and successful products that are enabling
them to compete in the growing aftermarket.

With most, if not
all, OEMs generating the majority of profits from the sale of consumables like
cartridges and parts, they are becoming more aggressive in their attempts to
hold on to the supplies and consumables markets with programs designed to return
cartridges back to the manufacturers, patch technology on drums that make it
hard to use aftermarket drums, buying programs that lock up all of the dealers
supply business, and microchips that essentially "lock out" the
competition and prevent them from remanufacturing.

The compatibles
market has matured and has garnered respect over the past ten years. With this,
comes an increased percentage of profits which are being taken from the OEMs.
Although lawsuits were not unheard of, there have been an increased number of
filings recently involving manufacturers and compatible products' suppliers.

Two lawsuits, in
particular, have been filed over the past two years, with the cartridge
remanufacturing industry's primary antagonist, Lexmark, being the center of
both. Lexmark has taken a proactive approach to dealing with the compatible
products industry by laying the foundation for other OEMs to keep the
aftermarket for supplies fighting for every penny it earns.

Fighting for Their

The first suit was filed by the Arizona Cartridge Remanufacturers Association (ACRA)
against Lexmark in September, 2001 for what it alleges are acts of deceptive,
untrue and misleading advertising and unfair competition in regards to Lexmark's
controversial Prebate program which gives consumers a discount on the purchase
price of a cartridge when they agree to return the empty cartridge to Lexmark.

According to the
ACRA, Lexmark engaged in a scheme which had the intent and effect of misleading
consumers into believing that their printing costs would decrease and that the
environment would improve through the purchase of Lexmark Prebate program laser
toner cartridges. The Prebate program, according to ACRA, has harmed consumers
by increasing the price they must pay for Lexmark laser toner cartridges, has
limited consumers' choices for cartridges, has lessened the number of vendors
from whom they can purchase cartridges, has lessened the supply of cartridges,
and has harmed the environment by lessening the number of recycled cartridges.

Although Lexmark
declined interview requests saying they could not comment on pending litigation,
Lexmark did e-mail copies of the lawsuit and materials on its filing and its
Prebate program.

According to
Lexmark's Prebate Offering Fact Sheet, Lexmark contends that of all the brands
and types of cartridges sold in the U.S. in 2001, only about two and one-half
percent were Lexmark Prebate cartridges, based upon industry analyst CAP
Ventures view of the total United States sales of all brands of toner

"The regular,
remanufacturable toner cartridges are readily available from resellers, or
directly from Lexmark, and refilled versions of ours and other companies'
cartridges are being offered by numerous remanufacturers," Lexmark wrote.
"Our customers are not restricted to Prebate cartridges only. If they
choose Prebate, we incent and facilitate the return of the used cartridges to
Lexmark. If a customer wants to be able to have a third party remanufacture its
cartridges, he or she simply needs to purchase the regular version of the
cartridge, available either directly from Lexmark or from our dealers."

A trial date has
been set for October 6, 2003 and with the help of compatible product
manufacturers, distributors and dealers, ACRA hopes to be able to see this
lawsuit through to the end.

Will the Chips Fall?

Filed in December, 2002, Lexmark v. Static Control centers around the recent
addition of microchips or "lock-out" chips which OEMs are attaching to
toner cartridges and effectively preventing the remanufacture of certain
cartridges. According to chip manufacturer, Static Control, they were able to
reverse engineer a chip for Lexmark's T520 and T620 series of printers and, in
September of 2002, began to sell these chips to enable the cartridges to be

The case, filed in
U.S. District Court in Kentucky, alleges that Smartek chips made by Static
Control Components (SCC) for Lexmark's T520/522 and T620/622 laser printer
series violate both the Copyright Act and the Digital Millennium Copyright Act (DMCA).

According to the
suit, Lexmark utilizes a technological measure, or authentication sequence in
the form of a chip, to prevent unauthorized access to its copyrighted software
programs. This authentication sequence requires a "secret handshake"
between the printer and the toner cartridge to enable printer functionality.
Unless the "secret handshake" takes place successfully, the printer
will not recognize the toner cartridge as being an authorized Lexmark toner
cartridge and "lock-out" or prevent the printer from printing.

Count I of the
lawsuit filed by Lexmark alleges that Static Control has violated the Copyright
laws secured by Lexmark on its toner loading program software by infringing and
selling Static Control's Smartek microchips that contain unauthorized, identical
copies of these programs.

Count II and III
have Lexmark invoking the Digital Millennium Copyright Act (DCMA), a 1998
copyright law, which Congress originally intended to limit Internet piracy. This
suit is the first of its kind to be lodged against a member of the compatible
industry and could have disastrous effects should Lexmark succeed in its

It is Lexmark's
contention, through the suit, that Static Control's Smartek microchip is
designed for the purposes of circumventing Lexmark's technological measure that
effectively controls access to Lexmark's copyrighted toner loading programs and
printer engine programs. The suit further states that the Static Control chip
has only limited commercially significant purpose or use other than to
circumvent the measure that controls access to the programs.

But, without the
chip, Static Control would not be able to gain access to the cartridge and would
subsequently be unable to remanufacture it. If the court recognizes this
violation, it could open the door to any OEM who wanted to utilize smartchip
technologies to prevent access to its copyrighted softwares and prevent its
remanufacture by anyone other than a designated party.

On January 6, Static
Control agreed to a Temporary Restraining Order (TRO) which ceased the sale of
the 520 and 620 Smartek chips until a judge could rule on a Request for a
Preliminary Injunction filed by Lexmark. On February 7, following a full-day
hearing, Chief Judge Karl Forrester stated he would render a decision on the
preliminary injunction by February 28 and ruled that the existing TRO would
remain in effect until that time. He further ruled that the bond that Lexmark
must post for payment of damages to Static Control should be increased from
$75,000 to $250,000. As of the date of this printing, information on the outcome
of the suit was unavailable. Look to the April imageSource for updates on the

OEMs Fight to
Preserve Quality

Few manufacturers were willing to be interviewed for this article citing little
knowledge of the suits or a company policy not to discuss issues that pertain to
law. Those who did speak to this reporter, including Xerox and Ricoh, both cited
quality issues as reasons for recommending OEM products and offered general
responses to inquiries about compatible products, company policies and
"lockout" issues.

In an interview with
CNET News.com, Hewlett-Packard's Senior Vice President, Pradeep Jotwani
condemned Lexmark's use of the DMCA against Static Control. Jotwani was quoted
by CNET as saying, "The DMCA was put in place (to protect) things like
movies, music and software applications. We think it is stretching it."

According to the
interview, Jotwani said that although HP thinks its own supplies deliver the
best quality and value for most customers, he believes there should be a place
for those companies that sell refilled cartridges and refill kits.

Fighting Back

Although most manufacturers were taking a wait-and-see attitude, dealers,
distributors and manufacturers of compatible products, however, were eager to
get their points across with comments on the industry, microchips and fair

In an interview with
imageSource, 67-year old Ed Swartz, CEO and Founder of Static Control, is bound
and determined to see this lawsuit through. "This has become my pet
project," Swartz said. "We won't make any money this year because
we'll be fighting this lawsuit, but that's o.k. What Lexmark is doing is just

"If Lexmark
succeeds," Swartz said. "the implications are devastating. This goes
far beyond parts and cartridges. This suit could actually kill innovation and
make it illegal for anyone with dedication and drive to compete against large
corporations with competitive products." And what does it mean for the
consumer? According to Swartz, consumers would be the ones who ultimately suffer
with fewer product choices, higher costs and little to no competition.

"I think that
any company should be able to offer comparable products as long as they don't
infringe on any copyrights," said Bruce Friend, Business Development
Manager for Q-Imaging, an independent manufacturer of new alternate laser,
copier and fax cartridges. Bruce said that Q-Imaging spends more than $2 million
on each new cartridge developed just to design around the patents."

Bob Willmes,
President of Printer Essentials, a wholesaler of compatible and remanufactured
cartridges, papers, rolls, ribbons and supplies, said that the Temporary
Restraining Order in effect against Static Control is already impacting his
company and his dealers.

"Neither of the
two vendors we have who supply the Lexmark cartridges in question are
shipping," said Willmes. "If this goes on much longer, our vendors
will be forced to go to South Africa where it is legal to make the chips. There
are other sources that we can go to and OEMs will not stop us from having

Support for Static
Control has come in many faces and from many industries that understand the
implications of a suit of this magnitude and its repercussions should Lexmark

According to a
prepared statement from William London, Static Control VP and General Counsel,
multiple amicus curiae (friend of the court) legal briefs have been filed by
parties who could be impacted by such a decision.

The Automotive
Aftermarket Industry Association, representing a $250 billion dollar industry
employing 3.7 million people in the U.S. stated, "Lockout devices could be
used to destroy the market for motor vehicle replacement parts produced by the
independent automotive aftermarket."

An amicus curiae
brief filed by a group of 38 law professors specializing in copyright law
pointedly summarizes the potential impact of such an expansion of the scope of
the DMCA. According to their amicus curiae, "If the (DMCA) could be applied
to such functional software, then it could be susceptible to widespread abuses
across a plethora of industries."

It is with the help
of his family and the numerous companies and industries that have stepped up to
show their support, that Ed Swartz decided to take the suit a step further for
all remanufacturers and ask the United States Copyright Office to declare EXEMPT
from prosecution under the DMCA any copyrighted works in the form of embedded
computer programs in printers and toner cartridges that control the
interoperation and functions of the printer and toner cartridge; computer
programs embedded in a machine or product and cannot be copied during the
ordinary operation of the product; and computer programs embedded in a machine
or product that control the operation of a product connected thereto, but do not
otherwise control the performance, display or reproduction of copyrighted works
that have an independent economic significance.

"I have
complete confidence, that we will ultimately prevail in this lawsuit with
Lexmark," said Swartz. "When we do prevail, we will have won not just
for ourselves but for freedom of choice…. the consumers right to be treated

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