I've been around the aftermarket office supplies industry for most of my career and have observed and even participated in many of the key 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 cartridge 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 or so, concluding certain Canon patents were insurmountable.
This was about the time I was first introduced to Jim McKee, a partner at Fay, Sharpe, Fagan, Minnich & McKee, a law firm specializing in intellectual property based out of Cleveland, OH.I didn't have that much direct contact with Jim in those days - after all ribbons didn't have too many IP issues besides that of the IBM Selectric typewriter ribbon dispute and the Smith Corona complaint that Pelikan ended up in a law-suit and jury trial over. However, these turned out to be the first days and months of what became 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. Ink jet was starting to make a big splash in the office product headlines. Nukote had previously entered the laser cartridge market with the acquisitions of ICMI and Future Graphics and had looked at a deal to acquire an ink jet business in Houston, TX. The deal didn't work out for one reason or another and we decided to enter the market with a blend of third party and in-house products.
At that time Nukote was growing rapidly and getting a lot of attention in the industry media. The company had just gone through a successful Initial Public Offering and a secondary offering was looming. The supplies market was growing rapidly and Nukote was well positioned in the emerging retail distribution channels as well as the traditional office products and wholesale channels. The business outlook was very promising.
We launched the ink jet product category around this time frame and a few months later, sometime during 1994, Nukote was sued by a major OEM with allegations of patent infringement and trademark violations. The first law suit 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 really 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 really steep learning curve!
Jim urged caution and I wish we'd been more receptive to his advice. Instead, Nukote embarked on a path of hostile litigation retaining an aggressive litigator and his California based law firm. It's always easy in hindsight but this was not a smart decision. Five years later, while under the protection of a Chapter 11 bankruptcy, we lost a jury trial having been found guilty of patent infringement and false advertising. In total, 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 as a key 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 ink jet 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 then 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 had moved to Zurich, Switzerland for nine-months to help with the integration and coordination of the efforts of the two companies research and development organizations. Pelikan had historically spent far more on research and development than Nukote and, 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 ink jet cartridges. Much like the Pegasus project from nearly a decade earlier, we had to abandon our dreams of new build ink cartridges.
The foundation of knowledge had now been well and truly 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 for inventions and for successful patent applications.
The aftermarket had started to grow-up in terms of 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 key event took place in the late 1990s that shaped the industry as we know it today. I had been introduced to a small Chinese company, headquartered out of Hong Kong and with manufacturing facilities in Zhuhai. I recall it was a pretty small city at that time and the facilities I was taken to were primitive. Anyway, Nukote still had a $60MM+ ribbon business at that time and wasn't making any money on the products. The Chinese quoted and it turned out their offer was basically half the Nukote cost at that time. Eventually we decided to outsource all our ribbon production and over a six-month period more than 600 products were moved to China. We moved tools, we transferred specifications, we demanded our existing raw material suppliers be used and we transferred all our technology.
By 2003 or so, Nukote was again growing rapidly. 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 ink jet production from Tennessee to Zhuhai to reduce cost. If I recall correctly, at that time we were selling over one-million cartridges per month. This was a much bigger project than ribbons but we approached it the same way. We transferred all our technology and specifications. Basically we outsourced the labor, everything else was the same.
We also transferred our requirements for IP due diligence. If our partner was to be building the products, we agreed they should also be investing in the necessary legal due diligence. This requirement wasn't plain sailing by any means 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 has come 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, take a look at the big three or four imaging supplies companies in Zhuhai - they all proudly promote their IP, their patent portfolios, their patent applications - as well 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 that exist today, look at the quality, look at the technical resources and look at 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 a lot 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, a mentor and as a super smart practical man who invariably knew what he was talking about.