THE BOTTOM LINE: R.K. DIXON WAS BOUGHT OUT BY XEROX AND NO LONGER SERVICES CANON MACHINES.

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Acquisition of Independent Dealers Sparks Lawsuit and OEM Animosity

Over the past several years, the number of independent office-equipment dealers has dwindled. Original equipment manufacturers (OEMs) such as Canon, Konica Minolta, Ricoh, Xerox and others have been busy acquiring such dealers to grow their installed base and put more machines under contract. Obviously, once an OEM acquires an independent dealer, that OEM is interested in seeing the dealer place more of its own hardware and less hardware from the rivals the dealer may have formerly represented. How such transitions take place can cause acrimony between dealers and their one-time suppliers, as illustrated in a recent lawsuit that Merizon Group Incorporated and R.K. Dixon Company, a pair of office-equipment dealers recently acquired by Xerox’s Global Imaging Systems (GIS) unit, filed against Canon U.S.A. and Canon Business Solutions.

In the complaint, filed on May 31, before the U.S. District Court for the Eastern District of New York, Merizon Group and R.K. Dixon claim that Canon has violated the Sherman Antitrust Act by failing to sell them replacement parts and supplies, engaged in price discrimination in violation of the Robinson-Patman Act, breached its contracts with the two firms, and violated various state statutes.

Dealers Say Canon Got Stingy with Its Supplies

According to the lawsuit, Merizon entered into an agreement with Canon to supply Canon office equipment in 2006, and R.K. Dixon had four different agreements with Canon to distribute Canon products, all signed in 1999. Xerox’s GIS unit acquired Merizon on December 8, 2011, and purchased R.K. Dixon on February 7, 2012.

The office-equipment dealers say that Canon sent a letter to Merizon on December 22, 2011, to notify the company that it was terminating its retail dealer agreement. R.K. Dixon received a similar termination letter on March 29, 2012. The plaintiffs say that the letters purported to terminate the agreements immediately, although the letters cited a clause in its retail dealer agreements that states that Canon can terminate the agreement effective after 30 days of delivery of notice if there is a change in the management or control of the dealer that is unacceptable to Canon.

Canon told Merizon and R.K. Dixon that it would cease to sell them any Canon-brand equipment, parts, or supplies as of May 31. Until that date, the OEM said it would continue to offer the dealers equipment, parts, and supplies under less favorable terms. No discounts or promotions would apply, for example, and payment was due in advance. The dealers were also restricted to purchasing parts and supplies for equipment already sold and serviced before Canon sent its termination letters.

Merizon had 3,000 active leases with 2,100 customers for 6,000 Canon devices at the time it received the termination letter. R.K. Dixon had more than 5,000 units of Canon equipment under lease. Service and supplies are required as part of these leases.

The plaintiffs alleged that while certain parts for Canon equipment are available on the secondary market, some replacement parts, toner cartridges, drum units, and fuser and film assemblies, particularly for newer machines, are available only from Canon. Thus, the plaintiffs assert that Canon and its affiliates “have monopoly power, or at least market power” in the Canon parts and supplies market and the market for Canon service.

Merizon and R.K. Dixon have asked the court for a preliminary and permanent injunction that would enjoin Canon from refusing to sell parts and supplies “on reasonably competitive terms and conditions.” The firms are also looking for damages, a declaration that the termination of Merizon’s agreement with Canon is null and void under Wisconsin’s Fair Dealership Law, a declaration that Canon has not terminated R.K. Dixon as a Canon office imaging equipment retail dealer, interest, attorneys’ fees, and other costs.

Preliminary Injunction

Merizon and R.K. Dixon say that Canon’s policy of terminating a dealer acquired by a competitor is atypical and “contrary to the general practice on the industry.” The firms say, “Typically, after termination of a dealer’s relationship with a manufacturer of office imaging equipment, the manufacturer will continue to sell the former dealer parts and supplies necessary for the servicing of the customers that had purchased or leased the equipment from the former dealer.” This is in the best interest of both parties, including the manufacturer, which has a stake in the perceived quality of its equipment, opine Merizon and R.K. Dixon.

The dealers point out that their new owner, Xerox, continues to supply parts and supplies at the usual discounts to terminated dealers to service their installed base unless the dealers violate Xerox’s Business Code of Conduct. Merizon and R.K. Dixon also say that Canon has supplied parts and supplies to other terminated dealers (such as IKON) in the past and that it expects to learn in discovery that this practice was widespread at Canon.

Canon Cites Company Policy, Says Plenty of Supplies Are Available

While Canon has yet to file its official answer to the complaint, the firm’s take on some of the allegations against it are evident in its opposition to the preliminary injunction that Canon filed on June 19.

According to Canon, both the motion for the preliminary injunction and the complaint itself “rest upon an string of fallacies.” Canon explains that this is hardly a David-versus-Goliath type struggle “between a corporate behemoth and two small, family-owned businesses.” “This lawsuit,” asserts Canon, “is nothing more than an attempt by Xerox to enlist the powers of this Court to aid its competitive maneuvers against Canon USA in the robustly competitive interbrand market for business equipment.” According to Canon, Xerox intends to switch Merizon’s and R.K. Dixon’s customers over to Xerox equipment  and is looking for the courts to compel Canon to provide parts and supplies to avoid the trouble and expense of forming new relationships with other firms that can provide these supplies.

Canon says that, contrary to the plaintiffs’ claims, there are numerous independent sources from which the dealers can purchase spare parts and supplies. Canon cites third-party manufacturers such as Katun, NA Trading and Technology, and Densigraphix as examples, along with wholesalers such as Copylite Products Corporation, TSAworld, Ames Supply Company, and Precision Roller.

The firm had had Carmine Pugliese, a director of sales and marketing for Canon’s aftermarket products divisions, provide a declaration countering the plaintiffs’ assertion that many replacement parts and supplies are available only from Canon. The declaration includes a lengthy list of parts that the plaintiffs claimed could be obtained only from Canon and a corresponding list of URLs of sites where these supplies are available for purchase. According to Canon, it is thus simply not true that parts and supplies are available only from Canon.

Canon also cries foul at the plaintiffs’ claims that there is any emergency for spare parts and supplies that necessitates a preliminary injunction. The OEM says the dealers have known for months that Canon would cease to sell them spare parts and supplies after May 31, but the plaintiffs dawdled before commencing mediation with Canon (which was called for under the firms’ contracts) until two weeks before this date.

While Merizon and R.K. Dixon allege that Canon’s policy of terminating a dealer acquired by a competitor is not standard industry practice, Canon explains that it long ago decided to sever relationships with authorized retail dealers that are acquired by a competitor, as that competitor will invariably direct the dealer to concentrate on switching customers from Canon equipment to the competitor’s brand. The firm says, “Canon USA sees no business purpose in maintaining a relationship with a dealer that has no intention of continuing to comply with its contractual obligation to exert its best efforts to market Canon equipment.”

No Preliminary Injunction (for Now)

At a July 19 hearing, Judge Leonard D. Wexler decided to deny the plaintiffs’ motion for a preliminary injunction without prejudice until the parties complete mediation. If no settlement ensues from the mediation, the plaintiffs can again pursue the injunction and the court will schedule a “prompt hearing” on the matter.

So, it seems that the issue of whether or not Canon will sell Merizon and R.K. Dixon supplies and whether any discounts will be offered is now something that the dealers and the OEM will discuss to see if they can negotiate a settlement.

In the interim, the plaintiffs did get Canon to supply an extremely limited number of parts for a particular client. The impetus for this came on July 18, when Merizon moved for an order to show cause why a temporary restraining order should not be issued that would bar Canon from refusing to sell Merizon two key parts (dies used for hole punching) needed by one of its customers—a school district in Wisconsin.

Canon’s July 19 opposition to Merizon’s application for a temporary restraining order claims that Merizon’s request is really a ploy to “demonstrate that something they claim they need is not available from anyone other than Canon USA.” Canon says Merizon could subcontract with an authorized Canon dealer to sell and install these parts to the school district in question or the school district itself could contact an authorized Canon dealer for these parts. Opines Canon, “The solution to the customer’s problem is thus a telephone call away.”

However, it appears that the judge decided the school district truly needed the ability to hole-punch documents. On July 19, Judge Wexler decided to grant Merizon some limited relief. He ordered the defendants to prepare an order for him to sign, which Canon submitted on July 31.

Judge Wexler has yet to sign the order, which grants Merizon’s application for a temporary restraining order to a limited extent. Specifically, Canon is required to sell to Merizon’s counsel two each of Canon item 3028B001AA and two each of item 3028B004AA, the hole-punching parts noted above. Merizon’s attorneys must pay the regular published price for these items, which will then be supplied to the school district in Wisconsin. According to the proposed order, until mediation is completed, the plaintiffs may not file additional motions for temporary restraining orders or preliminary injunctions related to their need for other parts and supplies.

Will the Xerox-owned dealers and Canon be able to settle their differences? Time will tell.

Charles Brewer is the President and founder of Actionable Intelligence, Visit www.Action-Intell.com for more info.