Corporate hardball: Tiny US firm fights Japan copier giant. Many American firms say they need a more level playing field to compete with Japan. One US company's legal battle over copy-machine chemicals highlights this growing trade battle.
Hingham, Mass. — Three years ago Bob Langone clawed his way out of his sinking cabin cruiser 10 miles off Cohasset, Mass. Mr. Langone gave a companion who could not swim three life jackets, then started swimming in a direction he hoped would get him ashore. Seven hours later he pulled himself over the rocks in Hull, another seaside town. ``That's me,'' he says. ``I never give up.''
It is an attribute that Canon, the Japanese camera and copier manufacturer, is now learning about Langone, president of Aunyx, a small office-supply company here. With the same gritty determination that helped save him and his friend, Langone is taking on a Japanese giant that he believes would rather see him sink.
But sinking is not in his nature. Langone has hired Washington attorney Bart Fisher of Patton, Boggs & Blow and has charged Canon at the International Trade Commission (ITC) with unfair trade practices. Canon denies any wrongdoing.
This case, involving the small world of duplicating machines and the toner used in them, casts a revealing light on the United States trade deficit with Japan. The various lawsuits involved show a Japanese competitor that devises high-quality, low-cost products while ensuring that consumers must use its products to supply the machines. It is on the auxiliary supplies, in which Canon has a dominant market share, that the company makes a handsome profit.
Mr. Fisher, on behalf of Aunyx, is trying with a series of lawsuits to break up what he calls an illegal monopoly. He is seeking an embargo of imports on all toner, the powdery material that acts like a dry ink, used in Canon's 756,000 copiers in the US. This case is scheduled to be heard in May.
Fisher has filed a companion $300 million antitrust case in Boston's federal district court. This case will proceed after the ITC action. He plans to file other suits as well.
All of this legal overdrive is the result of what Aunyx claims is its attempt to sell a toner that will work in a Canon copier. Aunyx has developed toners that work in copiers made by Royal Business Machines, IBM, Xerox, Toshiba, Minolta, and Siemens. While Xerox vigorously competes for the toner business, none of those companies actively tries to impede other sources from supplying toner for its machines.
Aunyx in documents filed with the ITC alleges Canon has used anticompetitive methods to keep the toner market for its machines to itself. At issue is an estimated $100 million per year in sales, or about 15 percent of the total toner market.
According to Diamond Research, a California firm, Canon currently has up to 75 percent of the market in toner for its copiers. Some industry sources, however, believe Canon's share is closer to 95 percent. Harou Murase, a Canon vice president, says even Canon does not know what its market share is, but he denies it is the 99 percent claimed by Aunyx.
Langone faces an uphill fight. Canon has devised ways to ensure that once companies buy its products, they must also buy Canon-made supplies for them. For example, in the low-cost laser printers (in reality high speed duplicators) made by Canon, the toner is loaded into a cartridge that has over 100 parts, many of which are patented. No one has duplicated the cartridge, in large part because of fear of patent infringement.
``Clearly [such a tactic] is anticompetitive,'' says William Dunkleberg, an economist at Purdue University. ``In theory it precludes a small business from entering a market.'' However, the practice may not be a violation of US antitrust laws.
This is the challenge for lawyer Fisher, who hopes to prove a pattern of such behavior.
Langone's troubles with Canon began in 1981 when he offered to produce Canon toner in the US. Langone, who was a Canon distributor, realized that the profits in the copier market were in the supplies, not the equipment.
He named his company Aunyx, a combination of the symbol for gold and the semi-precious stone onyx, from when he worked at Xerox.
He recalls that when Xerox needed to boost its sales figures, it would push toner. Salesmen used to talk about selling ``black gold,'' because the profit margins were so high. According to Langone, one pound of Xerox toner cost $2 to $3 per pound to manufacture and was sold for $25 to $35 per pound.
Canon, a fast growing Japanese copier company, was aware of the profit in toner. While Xerox continued to charge for each copy duplicated, Canon practically gave away its copiers to get a share of the US market.
The strategy worked. Dataquest, a San Jose, Calif., research firm, estimates Canon sells 28 percent of the new personal copiers purchased in the US. Meanwhile, Canon made its toner very difficult to duplicate by using its own secret formula, and it charged high prices for it. One year before Aunyx cracked the toner code, Canon sold its powder for $51.95 per pound.
However, in April 1982 Richard Thompson, a former Nashua Corp. research scientist and now a partner at Aunyx, produced a toner that would work on Canon copiers and sold for 20 percent less. In July 1982, Aunyx introduced its toner for Canon copiers at the office equipment trade show.
In an affidavit, a former Canon employee, Michael Orphanides, says Canon sent samples of Aunyx's product to Japan for testing. After the test results in 1982, Mr. Orphanides says, Canon held a regional meeting to discuss the threat to its market dominance. Mr. Murase allegedly told his employees that Canon would, among other actions, hold back the supply of copier machine parts and supplies to Aunyx, warn Aunyx that business could deteriorate if it persisted in its challenge, and find a way to limit Aunyx's supply of new machines, thereby hurting the US company's ability to sell Canon copiers in the future.
Murase denies the conversation took place. Canon says Orphanides is a disgruntled former employee.
Orphanides says another Canon manager, Paul Fox, stated that Aunyx was ``cutting Canon's throat with the toner.''
Langone says Canon began a campaign of anticompetitive efforts to hurt his company. Canon drastically lowered the price of it toner, the same toner sold by Aunyx, to $21 per pound. To prevent Aunyx from buying the toner from Canon and reselling to other customers in the Boston area, Canon limited Aunyx to only enough toner to supply the number of machines its customers owned.
Aunyx is not alone in experiencing fierce resistance from Canon. James Keller, the former owner of Winston Technologies, now Esgraph, also worked on a toner for Canon products. He says Murase sent letters to Canon dealers in 1983 warning them against using non-Canon product. ``They were told they would be terminated as dealers if they used other suppliers,'' Mr. Keller says.
Keller, who started off with quality problems with his toner, did not fight Canon because it was not profitable. ``I shelved it until I could find a better way to make the product,'' he says.
Murase says the reason he fought Esgraph was that its toner was packaged to look like Canon toner. He claims he merely warned dealers of the packaging difference.
Industry analysts are watching the Aunyx case with interest. Ted Webster, president of Daytek Information Service in Newtonville, Mass., says, ``It seems to me Canon does not have a leg to stand on.'' He sees the Aunyx case as opening up the market to competition, reducing cost for the consumer.
However, Art Diamond of Diamond Research says, ``There is a fine line between innovation and protecting the supplies business.'' He does not believe the Japanese have crossed the line yet.
Canon is not taking the Aunyx case lightly. It has hired four law firms to help in its defense. Fisher claims Canon is outspending Aunyx by 10 to 1 on legal advice. Canon has attempted to get both the Justice Department and Federal Trade Commission to intercede, claiming the ITC is the wrong forum for an antitrust suit.
In its reply brief filed with the ITC, Canon has completely denied Aunyx's story. Last week it claimed patent infringement as part of its defense.
According to Mr. Moloshok, Aunyx instituted the actions to try to get a settlement. Canon, however, says it has done nothing wrong and does not plan to settle.
Langone denies he is suing in the hopes of a fat settlement. Recalling his swimming incident, he says, ``That's not me; I don't give up.''