VANCOUVER, Wash. — The inkjet printer is the goose that lays a golden egg every year for Hewlett-Packard Co.
But there are a lot of people who want to cook that goose, and a class action lawsuit headed for trial this year in California may just be the recipe.
The state Superior Court in San Francisco has certified a class action involving plaintiffs in 19 states who allege HP has violated the California's Cartwright Antitrust Act and conspired to restrain trade in the market for cartridges of ink to keep the printers running.
The suit claims that HP is "tying" components of the inkjet print head to the ink chamber in such a way that competitors can't enter the ink supply business.
The suit also alleges that the only reason for tying those things together is to limit competition in the highly profitable supplies business, which generates nearly 10 percent of HP's total revenue and nearly 40 percent of its profits.
The suit seeks a consumer rebate for everyone who purchased an HP inkjet cartridge since 1995, or a total of about $1 billion, plus costs.
Hewlett-Packard has defended its inkjet technology and marketing practices in countless lawsuits over the past decade, but those suits were between HP and other companies in the ink and printer supply business. This is different, say attorneys and industry watchers, because it is the first class action representing consumers who allege that HP's practices are harming them.
The design of the printer and patent protection surrounding it permits HP to charge more than $30 for ink cartridges for the printers that would cost less than $10 if the market was open to competition.
"HP is conspiring against the consumer," says Ronald Jones, of Palo Alto, Calif., the original plaintiff in the case. Consumers could choose competing products with lower cost ink supplies, but at the time they purchase a printer people are largely unaware of the cost of inkjet cartridges, which continues to rise even as the cost of the printers is falling, says Jones.
In a written statement, Hewlett-Packard confirmed this is the first class action a court has agreed to hear over its inkjet technology and marketing practices and that the company believes it will prevail in court. Hewlett-Packard officials wouldn't comment on the suit beyond the statement.
The lawsuit was filed in April 1999 in California Superior Court in San Francisco, and in March 2000 the court certified the class in California and 18 other states including New York, Illinois and Alabama. HP filed an appeal, and in November the California Supreme Court upheld the lower court. The case was set for trial in December, but a flurry of procedural motions will probably push the trial into the third quarter of this year, say attorneys.
HP's success in the inkjet business is the stuff of legends in business. In the 1980s, four out of every five printers in homes and offices in America were Japanese-made dot-matrix printers.
HP didn't even enter the printer business until 1984, but by 1994 it had jumped into the lead, thanks in part to the inkjet. The novel invention prints letters and images when electrical current applied to a tiny circuit heats dots of ink to the boiling point and sends then jetting through a nozzle onto the page.
HP protected the innovation with a blizzard of patents to frustrate rivals, and today it dominates the computer printer business worldwide. Printing and imaging devices generated more than 40 percent of HP's sales in 2000, and the most profitable slice of the business is supplies.
Salomon Smith Barney analyst John Jones estimates the inkjet supplies business earns gross margins of 65 percent to 70 percent, "which is very profitable given that the company's total gross margin is 28 percent."
Jones and other analysts who follow HP consider the class action suit part of the background noise of legal actions that dog every large company. The difference is that past inkjet suits have revolved around violation of patents and trademarks but this suit focuses on trade practices alone.
The key to the action is "tying," or the practice of linking one generic aspect of a device — in this case ink — to something covered by patent — in this case the print head. Each new HP cartridge of ink also has a print head. Tests have frequently shown the print heads are capable of printing up to 12,000 pages before failing, says market analyst Jim Forrest of Lyra Research of Newton, Mass.
"Ink is not one of the claims in the patents" HP holds on inkjet technology, says Edward O'Connor, a patent attorney in Newport Beach, Calif., who has argued a number of technology patent cases.
Courts have upheld the right of individuals to refill the cartridges and the right of ink companies to sell refill kits. Businesses can even refill the cartridges as long as it doesn't involve reconstruction of the patented device. But since there is no refill cap it means using a syringe to inject the ink through a tiny hole in the print head.