Customs Gets Tough as Clones Stream into U.S. Market

If you’re a regular reader of ENX Magazine, you know that the importation of infringing consumables is a serious problem in the U.S. Domestic demand for cheap ink and toner compatible cartridges has skyrocketed over the past decade and today overseas manufacturers do a brisk business supplying products to their ever-expanding U.S. customer base. Unfortunately, many of the compatible cartridges imported into the U.S. are manufactured with little or no regard for the patents and other intellectual property rights issued to OEMs to protect the inventions developed for their original branded products.

PORT of LA_Long BeachNot all compatible cartridges violate IP, but it’s fairly easy to spot the infringer. The ultra-low prices used to sell infringing compatibles betray their identity. If a cartridge is new and doesn’t violate any IP, the manufacturer had to painstakingly reverse-engineer the original SKU and work around the scores of patents associated with an OEM cartridge. That takes time and, as everyone knows, time is money. Remanufacturing a cartridge also requires an up-front investment to cover the fixed costs associated with raw materials like non-infringing empties, chips, and other parts. Any firm marketing a non-infringing, non-OEM cartridge has to spend upfront to bring a product to market and recoup that cost if they are to stay in business. Companies producing infringing products, however, don’t have such concerns because they don’t face high fixed costs. Rather than purchase non-infringing cartridge parts or invest in reverse engineering, IP violators simply copy—or “clone”—the original and sell it at a low price point while still making money.

Using super low price points as a guide, it is easy to see that infringing compatibles are flooding into the U.S. Don’t believe me? Well, just visit Amazon.com, search for the term “toner cartridge,” and see what comes up. I did this search in preparation of writing this article and had 491,863 hits for “toner cartridges.” The list included both OEM and non-OEM SKUs and included cartridges designed for use in an assortment of devices from competing hardware manufacturers.

While I found plenty of legitimate cartridges at Amazon.com, I didn’t have to research each SKU to see a significant portion of the nearly half-million cartridges were infringing. Making random checks was enough to prove my thesis. Just scanning through the first 100 or so offerings, for example, I found 42 non-OEM compatible toner cartridges selling for under $20 (not including shipping) and 17 compatibles selling for under $10, and checking a few dozen other pages produced similar results. To add insult to injury, the compatible was often promoted on the same page as the OEM brand product, which was usually at between 3 to 5 times the cost of the compatible. Remanufactured SKUs typically cost more than twice the price of the clone. While Brother and HP SKUs were most abundant in the first 100 cartridges I found on Amazon, there were infringing compatibles for Canon, Dell, Lexmark, and Samsung too.

Now, let’s face it, you can’t stay in business long selling legit remans or compatibles on Amazon for $10. The cost structures simply won’t allow it. The compatibles I found were infringing clones. And don’t get me wrong—it’s not just Amazon.com where this stuff is being sold. You’ll get similar results at eBay and it’s even worse on Alibaba. Expand the exercise to include Google and you’ll soon realize just how big the problem has become.

Bring In The Feds

Aside from the proliferation of infringing products online, the number of lawsuits OEMs have successfully pursued over the past decade is another indication that cloned cartridges are a huge problem. Today, many of the leading hardware manufacturers including Canon, Epson, HP, Lexmark, Ricoh, and Xerox have initiated and won at least one IP-infringement lawsuit in U.S. federal court during the past 10 years. Most have won more than one case and some have scored IP-related legal victories in courtrooms outside of the U.S. Currently, there are a number of IP-related cases involving consumables pending in courts around the world and as they’ve done so often in the past, I predict the OEMs will prevail and prove that cheap clones are infringing.

In addition to the lawsuits in U.S. federal court, some OEMs have found it advantageous to seek the assistance of the federal authorities to stop the free flow of infringing products into the U.S. To do this, OEMs such as Canon, Epson, HP, and Lexmark have filed complaints with the U.S. International Trade Commission (ITC). According to the commission’s website, it is an “an independent, quasijudicial federal agency with broad investigative responsibilities on matters of trade.” The ITC is charged with protecting U.S. markets from products that compete unfairly with legitimate products such as cheap, foreign, subsidized goods that are “dumped” in the U.S. The commission “also adjudicates cases involving imports that allegedly infringe intellectual property rights.”

As the ITC website explains, Section 337 of the Tariff Act of 1930 makes the infringement of IP rights an unlawful practice in the U.S. and allows the commission to investigate allegations of IP violations. Most so-called 337 investigations involve claims of patent or registered trademark infringement. In our industry, OEMs typically—but not always—file a complaint with the ITC when they file a lawsuit in federal court. If the ITC agrees with the complaint that an allegation warrants an investigation, it will assign an administrative law judge to preside over the investigation, who generally follows procedures like those used in federal court. The lawsuit in federal court is stayed until the ITC investigation is concluded.

At the end of the 337 investigation, the administrative law judge renders a determination as to whether or not the ITC should issue orders that will limit the importation of infringing goods. The commission can issue a range of orders including cease and desist orders, limited exclusion orders (LEO), which restricts the importation of a certain product from a certain company or group of companies, or a general exclusion order (GEO) restricting an entire category of product regardless of the source. The ITC usually follows the determination. As part of the executive branch of the federal government, the president must then sign off on the commission’s orders before they can be implemented.

Once the ITC issues its orders, the task of enforcement falls to U.S. Customs and Border Protection (CPB)—a.k.a. “Customs.” CPB then monitors all points of entry into the U.S. looking for product that are excluded. When a shipment of “excludable product” is discovered, the importing company is notified and given 30 days to export the offending shipment before it is surrendered to CPB. The ITC is also notified. If a second shipment of infringing product from the same company is discovered, the ITC will issue seizure-and-forfeiture orders, which will be executed by CBP.

CBP OFFICER AT PORTA Whole Lot Of Seizures

All the infringing product online and the growing number of lawsuits indicate that a lot of clones are being shipped to the U.S. As a result, CBP is cracking down on clone importation and the number of seizures at various ports is climbing. Normally, we might write a couple of seizure-and-forfeiture stories a year related to the ITC cases we follow. In 2015, however, we’ve had to work hard to keep on top of all the seizure news. Beginning in January, we’ve seen CPB issue 36 seizure orders to 22 different companies trying to bring infringing cartridges into the U.S. (Note that the greater number of seizure orders than companies indicates that some firms are multiple offenders.)

Companies holding exclusion orders issued by the ITC must be delighted to hear of the surge in seizure-and-forfeiture activity by CBP. And that’s what we’re hearing at Actionable Intelligence. Matt Barkley, worldwide IP and brand protection program manager for HP, a firm that has been issued three GEOs, is one guy singing CPB’s praises. Like his counterparts at other OEMs, Mr. Barkley recently told us that much of the seizure-and-forfeiture activity stems from positive changes implemented at CBP, in particular the establishment a couple of years ago of so-called Centers of Excellence and Expertise, which allow for better communication and support between OEMs and Customs officials.

According to Mr. Barkley, in the past CBP was set up to snag easily tracked products coming into the U.S. like steel or a highly-specialized piece of equipment, but with all their complexities, printer cartridges represented a product category that the agency lacked the resources to manage effectively. Mr. Barkley explains that the agency has been “reorganized with their new Centers of Excellence where they have staff assigned to a category and can develop an institutional competence around the subject matter—develop knowledge of the players in the industry and how they are related, for example.” As a result, CBP is much more effective at stopping infringing products from entering the U.S.

Lexmark also holds a GEO on patented technologies found in various monochrome toner cartridges and Andrew Gardner, worldwide brand protection manager for Lexmark, echoes Mr. Barkley’s sentiments. “Over the last couple of years, U.S. Customs has done some reorganization of how they approach certain aspects of enforcement.” He says that CBP’s Centers of Excellence and Expertise (CEE), in particular the Electronics Center of Excellence and Expertise, which is responsible for excluding the importation of infringing consumables, has been a key development. The CEE provides a new level of support, like making it easier for OEMs to educate CBP about how to identify infringing products. “Now there’s a single focal point for us [Lexmark and other OEMs] to go and talk to [CBP],” says Mr. Gardner. In addition to the training sessions OEMs provide Customs officers in ports around the country, Mr. Gardner says that OEMs meet quarterly with CEE “to provide the latest intel on what is going on in the market.”

Allen Westerfield, the president of the Imaging Supplies Coalition (ISC), a non-profit trade association made up of OEMs focused on combating illegal activities related to digital supplies, points to the quarterly meetings Mr. Gardner noted as a key to the higher rate of seizures. “Through quarterly meetings and other interaction, the ISC members have worked with the Electronics CEE to provide education and market intelligence,” he says. “This, coupled with increased resources and focus from the CEE has resulted in a significant increase in seizures and forfeiture of infringing products.” Mr. Westerfield is delighted with the efforts of the Electronics CEE and CBP. “We expect this relationship to continue well into the future,” he predicts.

As the CEE for Electronics has gotten up and running, both Mr. Barkley and Mr. Gardner describe a virtual cycle that has been established between OEM and Customs officers. As CBP finds infringement, Mr. Gardner says, “It becomes more successful at finding subsequent infringement. It [what CBP gleans from enforcement activity] builds on itself.” Mr. Barkley fleshes the cycle out and describes it as a “positive feedback loop from enforcement.” He says, “Customs makes one enforcement and learns something—such as certain parties where the infringing products are coming from and how to identify them. Once this is in their intelligence process they can find more based on the information and intelligence they gather. They [CBP] learn there are ways the products get in and then this gets targeted in their identification.”

Ahead Of The Curve

Alan Aprea, branch chief at the Electronics Center of Excellence and Expertise, which is located in Long Beach, CA, confirms that interacting more closely with the OEMs has paid off in terms of better enforcement. “Before the Electronics CEE was in place [when a GEO was issued], the OEM would engage with certain parts of CBP and travel typically to high volume ports to conduct training. It was left at that level.” The difference now, he explains, is that the CEEs multidiscipline team “bring all of CBP’s expertise to bear under one umbrella.”

Mr. Aprea also attributes CBP’s improved enforcement of GEOs to another strategy CBP has adopted—“getting ahead of the curve.” He explains, “Now, we are trying to expand our knowledge even before an order is issued.” Mr. Aprea acknowledged that even before a GEO is issued, such as when it is recommended shortly after an Administrative Law Judge’s initial determination, CBP begins doing its homework and “putting in place a strategy to prepare for what is coming.” He says, “If we feel there’s a 50 percent chance it [the investigation] will turn into an exclusion order, we’re already doing our homework.” The ISC is supporting CBP in its efforts to get ahead of the curve.

To further enhance an understanding of consumables, Mr. Westerfield says the ISC is coordinating visits to member companies for the Electronics CEE to review areas like cartridge development and manufacturing processes. At Mr. Aprea’s request, the ISC coordinated a visit to Canon Virginia Inc. and Canon Environmental Technologies Inc. on August 6 so that he could experience cartridge manufacturing first hand.

Despite the best efforts of CBP and the OEMs, of course, those who would ship infringing product to the U.S. are changing their playbooks in their own attempt to stay ahead of the curve. My visit to Amazon.com suggests the efforts of firms marketing infringing products continues to bear fruit. One new technique employed by infringers is to move clones by air rather than sea. Mr. Gardener explains that it’s easy to place an order offshore via the Internet and then have it delivered by air. “The volume of products coming in by air is increasing, and infringing product coming in by air is difficult to identify and catch. This is a new challenge for both OEMs and Customs.”

Mr. Aprea expresses confidence that CBP is improving its ability to enforce GEOs, however. He says, “If someone is importing infringing items, they are walking a very tight rope. We are stopping, examining, and taking action. The word is spreading that we are taking aggressive enforcement actions.” Mr. Gardner agrees that the word is getting out that there’s an uptick in enforcement actions. “It would be very difficult for someone to plead ignorance,” he tells vendors that may be caught peddling clones.

Mr. Gardner’s HP counterpart, Mr. Barkley, offers a more stark warning to the channel. “Pick your suppliers wisely and really understand what you are bringing in,” he says. “Some suppliers are contagious, and if you source your product from them you may catch their contagion.” He explains that CBP agents keep an eye on companies that violate the ITC’s order. Vendors issued seizure orders may later cease business with an infringing supplier and try to move on, but cautions Mr. Barkley, it could be too late once you’re on “Customs’ watch list.”

Considering my earlier example of the infringing product available online, clearly more enforcement is needed. But savvy folks in the channel will take the warnings of CBP and the OEMs to heart. You don’t want to be caught marketing infringing products and the risks of being caught were never greater than they are right now. Wonder if those merchants selling $7 cartridges online know that? I’ll keep running checks from time to time, and I bet others will too.

Charles Brewer
About the Author
CHARLES BREWER is the president of Actionable Intelligence, the digital imaging industry’s leading market research firm. A veteran of the U.S. Navy and the Massachusetts National Guard, he holds a BA and MA from the University of Massachusetts-Boston and was an editor for Inc. magazine and ComputerWorld during the 1990s. He was the managing editor of The Hard Copy Supplies Journal, which was published by Lyra Research. In 2009, Brewer launched Actionable Intelligence and its website (www.Action-Intell.com), which is visited by thousands of industry decision-makers each week. In addition to the website, Actionable Intelligence provides custom research to hardware and consumables manufacturers as well as to various industry stakeholders such as Wall Street analysts and law firms.