I've been around the aftermarket office supplies industry for most of my career and have observed and even participated in many critical events that shaped the industry as we know it today.
In 1988 Nukote
launched a "secret" project to study the possibility of manufacturing new-build laser cartridges compatible with the Canon SX design. We code-named the project "Pegasus" and spent a million dollars investigating potential paths to build a compatible cartridge. We abandoned the effort after 18 months, concluding certain Canon patents were insurmountable.
This was when I was first introduced to Jim McKee, a partner at Fay, Sharpe, Fagan, Minnich & McKee, a law firm specializing in intellectual property based in Cleveland, OH. I didn't have that much direct contact with Jim in those days. After all, ribbons had few IP issues besides the IBM Selectric typewriter ribbon dispute and the Smith Corona complaint that Pelikan ended up in a lawsuit and jury trial over. However, these were the first days and months of two decades of exposure to patents and trademarks' intellectual property law.
In 1993 I was the Director of Product Management at Nukote International, responsible for all new product introductions. Inkjet was starting to make a big splash in the office product headlines. Nukote had previously entered the laser cartridge market with ICMI and Future Graphics acquisitions and had looked at a deal to acquire an inkjet business in Houston, TX. The value didn't work out for one reason, and we decided to enter the market with a blend of third-party and in-house products.
At that time, Nukote was increasing and getting much attention in the industry media. The company had just undergone a successful Initial Public Offering, and a secondary offering was looming. The supply market was increasing, and Nukote was well positioned in the emerging retail distribution channels, traditional office products, and wholesale channels. The business outlook was promising.
We launched the inkjet product category around this time frame; a few months later, in 1994, Nukote was sued by a major OEM with allegations of patent infringement and trademark violations. The first lawsuit was quickly followed by two more from other prominent OEMs.
Nukote's secondary offering had been successful, the deal to acquire Pelikan was nearing completion, we had patent infringement insurance, and there was an undercurrent of feeling within the company that we were the victims of targeting by the OEMs, with false claims of patent infringement motivated through our emerging threat to them and their market shares.
Well, we should have listened more closely to our friend Jim McKee. We hadn't done our patent due diligence to the depth it had needed to be done. Competent legal advice was expensive, and there were only one or two employees at that time that had any idea of what we should have been doing and that a $1MM+ annual budget was needed to pay for competent patent advice if we were serious about being in the ink and laser aftermarket. We were about to go up a steep learning curve!
Jim urged caution, and I wish we'd been more receptive to his advice. Instead, Nukote embarked on aggressive litigation, retaining an aggressive litigator and his California-based law firm. It's always easy in hindsight, but this was not an intelligent decision. Five years later, while protected by a Chapter 11 bankruptcy, we lost a jury trial, having been found guilty of patent infringement and false advertising. Over those five years, I had been summoned to more than thirty depositions and spent eight weeks in a trial subpoenaed as a hostile witness for the plaintiff and a critical witness for Nukote.
After the jury verdict, we finally abandoned the litigation, reached settlements with each of the plaintiffs, and were fortunate to be granted permission from our prior adversaries to remain in the aftermarket inkjet business, albeit on strict compliance terms and conditions and ongoing royalty payments. In the scheme of things, we were treated very fairly by the organizations we had only recently been embroiled in bitter, multi-year disputes with. I like to think the OEMs could see we had started to rely on the far more appropriate and conservative advice from Jim McKee and his associates at Fay, Sharpe. We took great strides to get our IP house in order, which, in turn, had a lot to do with how the OEMs started to treat us.
Back for a moment to the summer of 1996, the Pelikan deal had been completed, Nukote had annual revenues approaching $500MM and was well capitalized to continue its growth strategy. I moved to Zurich, Switzerland, for nine months to help integrate and coordinate the efforts of the two companies research and development organizations. Pelikan had historically spent far more on research and development than Nukote. When we came on the scene, they were already jetting ink through compatible thermal print heads in their research labs - a product, if it could legitimately be brought to market, that could have been a competitive threat to the major OEMs such as Hewlett Packard.
Well, this time, we listened to Jim McKee - we met in Munich that summer - I remember the group pretty well - Jim, Don Snyder, Karl Buehler, Mark Broschart, and myself. Maybe Felix Nobel from Pelikan also attended. Anyway, we went through hundreds of patents. Jim taught us the structure of patents, how to read them, the significance of dependent and independent claims, and how to read the claim language. We were machines over those few days in Munich, churning through all the relevant patents. Ultimately, we concluded there was no way around the core technology owned by Hewlett Packard and Canon, and it would not be possible to build patent-safe, compatible inkjet cartridges. Much like the Pegasus project from nearly a decade earlier, we had to abandon our dreams of new build ink cartridges.
The knowledge foundation had now been established at Nukote for understanding patents and third-party intellectual property rights. By the 2000s, $2MM+ annual budgets for IP advice at Nukote were the norm. We were on the phone with Jim and his associates every single day. Insurance was a thing of the past - never again would an aftermarket company have access to insurance to protect them from patent infringement complaints! With Jim's help and guidance, we introduced patent policies for all new product introductions; we introduced employee patent incentives, we rewarded inventions and successful patent applications.
The aftermarket had started to grow in understanding the significance of patents and just how dangerous it was to ignore them. Without Jim McKee and his associates at Fay, Sharp, this would never have happened when it did.
Another critical event in the late 1990s shaped the industry as we know it today. I was introduced to a small Chinese company headquartered in Hong Kong and with manufacturing facilities in Zhuhai. I recall it was a pretty small city then, and the facilities I was taken to were primitive. Nukote still had a $60MM+ ribbon business at that time and wasn't making any money on the products. The Chinese quoted, and their offer was half the Nukote cost then. Eventually, we decided to outsource all our ribbon production, and over six months, more than 600 products were moved to China. We moved tools, transferred specifications, demanded our existing raw material suppliers be used, and transferred all our technology.
By 2003 or so, Nukote was again increasing. Ink Jet was approaching a $100MM+ annual business, and the company was under increasing pressure to reduce prices to its giant "big-box" retail customers. The pressure became acute, and, to cut a long story short, we moved all the inkjet production from Tennessee to Zhuhai to reduce costs. If I recall correctly, we were selling over one-million cartridges per month at that time. This project was much bigger than ribbons, but we approached it similarly. We transferred all our technology and specifications. We outsourced the labor; everything else was the same.
We also transferred our requirements for IP due diligence. If our partner built the products, we agreed they should invest in legal, due diligence. This requirement wasn't plain sailing, but we accomplished our goal. Jim McKee and his associates and partners at Fay Sharpe were instrumental in making this a success. Nukote was never sued again for patent infringement - we had much to thank Jim for.
Today, Zhuhai is proudly labeled as the imaging supplies capital of the world. How far it came from those humble days in 1997! However, Zhuhai is more than the imaging supplies manufacturing capital of the world; it is also the aftermarket imaging supplies intellectual property capital of the world. Of course, there are still manufacturers making infringing products, but look at the big three or four imaging supplies companies in Zhuhai - they all proudly promote their IP, patent portfolios, and patent applications - as well as they should. It's a far cry from the Nukote Pegasus project in 1988 and our Munich ink jet meeting in 1996. Look at the aftermarket technology and resources today, the quality, the technical help, and the overall depth of aftermarket intellectual property and understanding. It's truly night and day from what it used to be!
The aftermarket industry has much to thank Jim McKee for and his contribution that helped shape the industry as we now know it. Jim sadly passed away on July 25th - he will be deeply missed as a friend, mentor, and super intelligent, practical man who invariably knew what he was talking about.