How America's Top OEMs are Trying to Crush Third-Party Independent Product and Service Providers

By Jeff Klein July 24, 2012

The major original equipment manufacturers (OEMs) of America’s information and communications technology (ICT) sector have declared war. Who are the targets? It is not the usual suspects – each other, criminals or even regulators. Instead, they have taken dead aim, using a variety of weapons, at crushing the activities of:

  • Third-party maintenance providers
  • Used equipment dealers
  • Lessors
  • Companies that deal in grey (or parallel) markets

These OEM activities have escaped close scrutiny. Unfortunately, this is leading to a diminution of customer choice for IT asset managers. It affects virtually all aspects of procurement, maintenance and the ability to upgrade products and services that are so critical to the optimal operation of today’s enterprises, as well as their ability to be prepared for the future in a timely and cost-effective manner.  

In essence, by trying to curtail choice they have declared war on IT departments, and they need to be both exposed and stopped.

Under the guise of going after the counterfeiters of their products, the OEMs' have begun a counter offensive that aims to not only make counterfeiting more difficult but also threatens to curtail or even eliminate legitimate activities of third-party independents. And while going after counterfeiters is a valid objective, in this instance it is also a Trojan horse.

What follows is a description of the OEM war on third-party independents. It details the strategies and tactics being employed, including:

  1. Creating a stealth association to crush competition
  2. Attacking grey markets
  3. Getting the government to limit competition
  4. An all-out assault on the “First Sale Doctrine”
  5. Manipulating  intellectual property rights to restrict software and maintenance service 

The reason to sound the alarm now and loudly is that if the manufacturers prevail, competition will be curtailed, prices will rise, choices will be limited and free trade in America will be eroded.   

Creating a stealth association to crush competition

The first salvo of the OEM barrage began with the creation 2001 of the “The Alliance for Grey Market and Counterfeit Abatement” (AGMA) by founders 3Com, Cisco Systems, Hewlett-Packard, Nortel and Xerox. The group has grown and describes itself as: “A unique alliance of intellectual property (IP) rights holders, with members’ combined annual revenues in excess of $425 billion, who recognize that IP protection is a fundamental element of innovation and economic growth.” This is a group with a small number of members who represent overwhelming market power which makes their activities worthy of close regulatory scrutiny.  

AGMA’s stated goals are, “to protect the authorized distribution channels and intellectual property of authorized goods…” To achieve these goals, AGMA says that it engages in the following activities: 

  • Investigation of all legal avenues to deter criminal activities that feed grey market and counterfeit goods.
  • Education of the industry, customers, investors and other stakeholders.
  • Enlistment of domestic and foreign governments, state and local law enforcement in the policing of the market.

Reality, however, is that AGMA’s true goal is to squash independents and restrict competition. The organization by virtue of its very existence is in effect a wolf in sheep’s clothing. Here is why and how.

Attacking grey markets

AGMA says it will “Investigate all legal avenues to deter criminal activities that feed grey market and counterfeit goods.” This is misleading. AGMA’s tactics include surrounding every mention of the words “grey market” with words like “criminal activity,” “counterfeit” and in some cases “black market.”  

Grey market goods are created when companies who are authorized to sell goods to a particular market by an OEM breach their agreement with the OEM and sell these goods to companies who are not authorized to sell them, who in turn resell them at a discount. 

A grey market sale is a perfectly legal sale but the seller is selling outside its distribution channel. Introduction into the grey market is initiated when the OEM’s own distributor or channel partner, violates its contract with the manufacturer by selling outside its authorized channel.  There is neither illegal activity nor any copyright infringement. If properly identified to an end customers as ”grey market products” no deception has taken place. Yet, a recurring theme in AGMA literature is the painting of grey market with a counterfeiter’s brush.  Is this what AGMA means when it says, “educate the industry, customers, investors and other stakeholders”?

In fact, the manual used by states' attorney generals, US Attorneys, USM, Title 9, Criminal Resources Manual, specifically states, “There are two situations which the Congress intended to exclude from the definition of ‘counterfeit mark’.… Congress did not intend the criminal provisions to apply to marks on so called "parallel imports" or "grey market" goods, in which both the goods and the marks are genuine, but which are sold outside of the trademarks owners authorized distribution channels.”

To eliminate grey market sales, OEM’s must take responsibility for maintaining orderly markets within their distribution channels, police their reseller channels and better understand their markets, their channel partners and their incentives. But they don’t.  It’s easier to libel independent dealers that they never liked in the first place.  

Getting the Government to Limit Competition  

A major front in the attack on third-parties is to lobby government agencies to pass legislation and create acquisition rules that restrict such parties from selling to federal agencies.  As a direct result of lobbying, purchases of refurbished equipment have fallen off sharply. In 2011, under General Service Administration (GSA) Section 70 (IT products), the Federal Government spent $2,034,269,948 on new equipment while only spending only $9,114,676 on refurbished. A resounding 99.6 percent of Federal IT dollars was spent with OEMs and OEM authorized resellers.

Recently, US Customs and Border Protection (CBP) in response to more lobbying on April 24, 2012 announced publication in the Federal Register an Intellectual Property Rights Interim Final Rule (IFR) which took effect on that date. It stated that:   

 “…Pertaining to importations of merchandise bearing recorded trademarks or recorded trade names, that it may  disclose to an intellectual property rights holder, information appearing on merchandise or its retail packaging that may comprise information otherwise protected by the Trade Secrets Act, for the purpose of assisting CBP in determining whether the merchandise bears a counterfeit mark.” 

This has the effect of allowing the CBP to hold equipment until the OEM decides if it is counterfeit. It further allows the government to pass information about the equipment to the intellectual property rights (IPR) holder that is otherwise protected by the Trade Secrets Act without permission of the owner, a judge, or tangible evidence that counterfeiting has occurred.

To make matters worse, the new National Defense Authorization ACT redefines “used misrepresented as new as “counterfeit”.  A rather austere interpretation in light of AGMA’s labeling of grey market goods "as 'counterfeit'".

Independents have also been finding a note to vendors, under Department of the Navy Solicitation Number M6785411Q4287 and Defense Information Systems Agency Solicitation Number DCIMC16909, as statement to the following:

In order to minimize the risk of the government purchasing counterfeit products…Vendor shall certify that it is a Manufacturer Authorized Partner as of the date of the submission of their offer, and that it has the certification/specialization level required by the Manufacturer to support both the product sale and product pricing…”

Mandating “manufacturer authorized” reduces competition and raises costs but there is no proof that it curbs counterfeiting abuses. What it does do is cause higher prices and preclude legitimate independents from bidding on government projects.

Assault on the “First Sale Doctrine”

Another tactic being employed is the attempt to re-write the “First Sale Doctrine” (FSD). The FSD in copyright law permits the owner of lawfully purchased copyrighted work to resell it without limitation imposed by the copyright holder. In other words, if you bought a product, even if it is copyrighted you own it and have the unlimited right to resell it to whomever you chose. The first sale doctrine has its origin in a 1908 Supreme Court decision later incorporated in the “Copyright Act of 1909”. To most Americans engaging in trade is a “natural liberty” to do with one’s own property as one sees fit.  

However, vagaries of the Copyright Act have allowed OEMs to open this front in the war on independents. Section 602 of the Copyright Act states that goods manufactured outside the U.S. and imported into the U.S. can only be imported with the consent of the copyright holder. This is at odds with the FSD in Section 109, which grants the first buyer unlimited rights to resell. In two cases (John Wiley & Sons v. Supap Kirtsaeng and Omega v Costco) lower courts have ruled, and appellate courts have affirmed, that Section 602 of the Copyright Act prevails over the FSD.  In practical terms this means the sale of goods originally sold overseas that are imported back into the US can be restricted by the copyright holder if the copyright holder does not grant permission. If Section 602 is upheld, manufacturers will have greater incentive to move manufacturing offshore to the detriment of American workers and the US Economy.

It is no wonder that OEMs have lined up in favor of the restrictions to the FSD. This is because it gives them greater control on pricing and thwarts competition from goods they initially sold overseas. It should come as no surprise that independents and consumer advocates have lined up in favor of competitive free markets and the FSD.    

 John Wiley & Sons v Kirtsaeng is in front of the US Supreme Court. It will be decided in its next session. It is one to watch because while it thus far has not drawn much media attention, it represents a significant test of free enterprise in U.S. history.  

Manipulate intellectual property rights to limit software and maintenance support  

As a rule OEM’s make it difficult for independents to resell used equipment:

  • Many do not sell software unless it is bundled with hardware
  • Many refuse to sell software updates for machines not sold through the OEM channel
  • Many do not provide provenance for equipment or equipment history to independents trying to establish if equipment is counterfeit
  • Many refuse to separate maintenance and firmware bundles from hardware purchases

Still others issue fictitious list prices. These can be a much as 200 to 300 percent higher than what they will charge a good customer, i.e., they can offer the perception of huge discounts to end customers while asking independents to pay much higher list prices for the same product or part.

Conclusions

In a perfect world the following would apply:

  • FSD would be preserved
  • Manufacturers would be prohibited from restricting access to software and firmware updates
  • Government agencies would accept bids from all sources and allow choice in service providers
  • Manufacturers would stop their grey market bashing and clean up their own distribution channels
  • The US Customs would be prevented from seizing legitimate goods imported by legitimate resellers

Reality is that we live in an imperfect world. These outcomes are not likely.  

OEMs and AGMA are far too vested in quashing independents and destroying third-party markets. There is a big payoff in eliminating competition from such entities. This is big and serious business. It is estimated that such competition represent as much as 10 percent of yearly sales.  

As successive restrictions are enacted more independent companies fold, others contract, still others find new business to pursue. Invariably prices rise. In the end the free markets are drastically reduced.  

The solution is simple. Corporate IT buyers must join with their independent suppliers to demand that manufacturers:

  1. Stop their attacks on independents.
  2. Call on the U.S. Department of Justice to commence hearings to determine if AGMA is in violation of anti-trust laws.  

Without coordinated action, competition will continue to be curtailed, prices will rise, choices will be limited and free trade in America will be a little less free.  


About the Author
Jeff Klein is the president and Founder of KCI, Inc. an independent strategic supplier of maintenance, engineering and hardware to some of the largest financial
institutions, manufacturing concerns and government agencies. Established in 1982, KCI, Inc. sells and supports switching and storage products.

Mr. Klein is a former director and vice president of the ASCDI, the Association of Service Dealers International, a 380-member trade association, where he received numerous awards including one for lifetime accomplishments in computer services, leasing and used equipment. He is a former director of ECLAT, the European Computer Lessors and Traders. He holds a Master of Science in Management from NYU – Polytechnic and a Bachelor of Engineering from CCNY.




Edited by Braden Becker

President & Founder

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