2005 Issue 5
Reman E-News

A Review For The Remanufacturing Community
A joint effort by The Remanufacturing Institute (TRI)
and the OEM Product-Services Institute (OPI)

Providing news for the $100B global remanufacturing community:
market trends, innovative offerings, government initiatives, acquisitions, expansions,
professional societies, trade groups, legal rulings, financial results, the environment,
productivity improvements, publications and events.

Future Events

April 23-26, 2006 - APRA Europe / Warsaw Poland. http://apra.org/eventsviewer/default.asp

October 28 - 30, 2006 - INTERNATIONAL BIG R SHOW / Riviera Hotel and Casino / Las Vegas
http://www.bigrshow.com.


Caterpillar Announced The Formation Of A New Remanufacturing Division

Steven Fisher, who was elected vice president effective Dec. 1, will lead the Remanufacturing Division. Fisher, 50, is currently president of Caterpillar Remanufacturing Services.

"The explosive growth and long-term potential for the remanufacturing business requires executive leadership," said Caterpillar Chairman and CEO Jim Owens. "Steve's strong background in accounting and cost management, and his proven experience helping grow this business through acquisitions and expanded services over the last two years, make him well suited to make this an even stronger business for Caterpillar."

Caterpillar is one of the world's largest remanufacturers, processing more than two million units annually and recycling more than 100 million pounds of remanufactured products each year. The company launched the remanufacturing business in the 1970s with engines and now offers remanufacturing services for a variety of products and components to serve Caterpillar and external clients. It’s overall sales in 2005 will surpass $33B.

"We have a unique expertise that not only contributes to a sustainable environment, but demonstrates our commitment to helping customers lower their costs," Owens said. "Because of this, we expect the remanufacturing business to continue to be one of the largest growth opportunities for Caterpillar in the future."

Fisher joined Caterpillar in 1978 as an accounting trainee, gaining experience in cost accounting and investment analysis. He was named business resource manager for the company's fuel systems facility in 1991, moving to Performance Engine Products Division in 1995. He served as a cost management and business services manager in the Corporate Services Division from 1998 to 2001, where he was instrumental in mergers and acquisitions activity and in the development of the company's internal strategic consulting business. He joined the remanufacturing group in 2001.


RoHS and WEEE: Determining the Risk of the Sale of Remanufactured Products in Europe

New environmental initiatives such as the Restriction of Hazardous Substances (RoHS) and Waste Electrical and Electronic Equipment (WEEE) directives mark a change in environmental management around the world, with Europe leading the way and the United States ceding that leadership that it held from the 1970s through 1995.

That’s according to Jean-Phillipe Brisson, an attorney at Allen & Overy specializing in environmental regulations and how they affect the global supply chain for companies. Brisson delivered his perspectives on the new requirements and some updates to them during the 2005 Global Supply Chain Conference in San Jose.

But whereas the enforcement and penalties for violations in the United States focused on fines, Europe has taken a more dire approach for companies doing business there, Brisson said. European penalties focus on a restriction of market access, potentially a much more potent remedy. Indeed, legislation in Ireland calls for penalties including product recall, liability of corporate directors and newspaper notices, among others, he said.

Brisson recounted the now famous story of Sony preparing to sell its Playstation console before Christmas in 2001. But someone provided Dutch authorities with a tip, saying that Sony’s products exceeded the allowed amount of cadmium. Authorities seized the power cord and tested it, leaving the console and the joystick unexamined. The authorities concluded that the power cord indeed exceeded accepted levels and stopped the company from selling its games. Sony missed the Christmas season and lost millions of dollars as a result.
That kind of penalty – a loss of access to a market, even for a short period of time – can put a company’s finances at risk, making RoHS and WEEE serious issues for companies that do business in Europe.

For most companies examining what compliance strategy to put in place, the first question will be how much revenue is generated by European sales. For those not doing a lot of business in Europe, the risk factor to the top line is lower. However, Brisson said, now China is looking at these types of regulations too, and most companies want to do business in that emerging market.

In addition, public U.S. companies that do business in Europe must disclose their material risk to investors in their reporting. Sarbanes-Oxley requires management to sign annual reports, so that information must be correct or executives risk liability. And the Federal Accounting Standards Board (FASB) requires that companies account for liabilities associated with their own waste.

Determining the risk presents another problem, however. With 25 countries participating, all with their own implementations, plus a number of exemptions available to companies doing business there, it’s not always clear what products are included in the RoHS ban or the WEEE reporting.

“If you think you have an exemption, you’d better make sure you have an exemption,” Brisson said, pointing to unusual items covered by the laws. “Church organs are covered by WEEE and RoHS.”

But WEEE does not apply to car radios because automobiles are exempt. Even though stand-alone radios are not exempt, car radios are considered to be part of the car, according to Brisson.

Another update came in August 2005, providing companies with the information they needed on the maximum concentration value of the regulated materials under RoHS.

For lead, mercury, hexavalent chromium, PBB and PBDE the requirement is 0.1 percent by weight in homogeneous materials and 0.01 percent for cadmium. Homogeneous material is defined as a unit that cannot be mechanically disjointed in single materials, Brisson said.
Another confusing element of the WEEE requirements is who is the party responsible. While the directive definition spelled out that the requirements applied to the products’ producers – OEMs -- the question loomed of whether or not distributors would bear some responsibility, as well.

A commission letter issued in June 2005 constituted a big change for how that was interpreted, said Brisson. The letter stated that member states may impose liability on the party responsible for bringing the products into a member state.

“That’s the most significant change in the last three years,” Brisson said.
But even though the commission has issued guidance such as that letter, initiatives are still implemented differently in different member states, with some putting forth more stringent requirements than others.

“We’ve had several clients whose applications were rejected in Ireland,” Brisson said. “You need a local distributor to do business there.”

Under WEEE, companies must register with each one of 25 states and put producer numbers on shipments.
Under RoHS, most countries are going with a “presumption of compliance” at this time, “but I would not be surprised if a few countries did something different,” said Brisson. For example, Ireland is not adopting a presumption of compliance but instead is requiring a self-declaration.
The variations in implementation of both RoHS and WEEE point to a need for careful analysis of a company’s exposure in each country. Brisson recommends 11 steps companies should follow in each member state where their products are sold, including measures such as getting copies of the applicable law, registering, and complying with financial obligations.

And although some RoHS exemptions are already in place, there are others that are still pending, and some of those are unlikely to be in place in time for the compliance deadline.
Among those pending were 23 new possible exemptions, according to Brisson, and the EC was accepting comments on them up until the end of October. Responses to the comments were to be posted on the Web.

“I don’t believe any of these will be adopted before July 1, 2006 so it’s a risk to depend on them,” Brisson said.

To avoid the problems that Sony encountered, Brisson recommends evaluating the risk level of supply chain partners by looking at two factors – the supplier’s reputation and financial strength and the nature and type of the part. If it’s a part that is considered problematic and it’s coming from a two-month old Chinese company, Brisson would recommend more testing and auditing to make sure the parts aren’t putting the company at risk. At the other end of the spectrum, a non-problematic part supplied by an established company would pose very little risk.

Another risk factor is the accessibility of the part. For example, a cable, steel plate or plastic cover would be very accessible to any enforcement official looking to test for compliance. However, a connector pin would pose more of a challenge to access and therefore to test making it less of a risky part.

Still another risk factor is the end market. Consumer products carry a higher enforcement risk than industrial parts due to their wide accessibility.

To mitigate the risk, Brisson recommends getting materials declarations annually, requesting products be marked, performing analysis and testing and getting a technical dossier.
“A producer may avoid liability by showing it ‘took all reasonable steps and exercised due diligence to avoid’ placing on the market non-compliant products,” Brisson said.

Excerpted from an article by Jessica Davis of the Electronic News


Financial Reporting of Remanufactured Products Used in Like-Kind Exchange Transactions

Note that the American Institute of Certified Public Accountants (AICPA) requires that all remanufactured components that are used in exchange transactions, being it supplier-forward or customer-forward, must be classified on the balance sheet as a long-term asset. Thus the assets are depreciated and only their net value is reflected upon the balance sheet as the taxable value for state/local tax fees. If the component has any software embedded, many state do not tax the value of the software.


Who Owns a Core: It May Be The Supplier If They State It On Their Packaging

A recent decision in the Ninth Circuit Court of Appeals reinforced the right of companies, in this case Lexmark International, the printer maker, to legally limit what customers can do with a patented product, given that the company spells out conditions and restrictions on a package label known as a box-top license.

Clickable license agreements are common practice in software, where the buyer agrees not to tamper with the code or copy the program. But slapping post-sale regulations on patented goods could deny buyers the ability to make modifications or remanufacture the products as well. Box-top licenses could also theoretically hinder third parties from offering replacement parts or supplies for fear of a patent-infringement lawsuit (meaning, for example, that a lighter might have to be refueled only with the manufacturer's brand of butane).

In the lawsuit, the Arizona Cartridge Remanufacturers Association, a trade group of companies that sell refilled printer cartridges, claimed that Lexmark was engaging in unfair and deceptive business practices by promising price discounts on its laser cartridges if the customer promised to return the empty cartridge (the “core” to Lexmark.

Lexmark's packaging for laser cartridges sold under this system (called the Lexmark Cartridge Rebate, or the Pre-bate program) includes a label on the outside of the box stating: "Opening this package or using the patented cartridge inside confirms your acceptance of the following license agreement." Cartridges that are not part of the Pre-bate program and not subject to the restriction are available to customers as well, but without the discount. At the time of the case, Lexmark estimated that cartridge returns had increased 300 percent since the Pre-bate program began.

Lawyers for the remanufacturers' association argued that Lexmark deceptively suggested that the notice on the outside of the package created an enforceable agreement with consumers to return the used cartridges, and that the promise of a price discount was false because Lexmark could not control prices charged by retailers. Lexmark also uses an electronic chip on the cartridges to communicate with the printer, which refuses to operate with cartridges that lack the chip; the association cited that as an unfair business practice.

The court ruled in Lexmark's favor on Aug. 30, 2005 citing the previous case of Mallinckrodt Inc. v. Medipart Inc., a 1992 Circuit Court decision in a medical equipment case that allowed patent owners to limit the use of their products after sale. The court also concluded that Lexmark's pricing claims were accurate and that ACRA failed to establish that Lexmark's cartridge chip amounted to unfair competition.

Some frugal printer owners wondered if the decision would make it illegal to refill their inkjet cartridges at home, a concern that a Lexmark spokesman dismissed.

"Lexmark's cartridge-return program deals exclusively with laser printer toner cartridges. It does not involve any inkjet products," said Tim Fitzpatrick, the vice president of corporate communications for Lexmark, who said that the program almost entirely involved business customers. "The court's decision was very specifically about this program," he said.

Fred von Lohmann, a senior attorney with the Electronic Frontier Foundation and author of a 2004 amicus brief supporting ACRA, said he was more concerned about future implications of the decision.

"This certainly sent a very strong message to patent holders generally, and Lexmark in particular, that you can use these labels in order to restrict what your customers can do with the product after they buy it," he said.

Mr. von Lohmann gave several hypothetical examples of how box-top licenses could be used, including automobile manufacturers who might put a label on a new car stating that by opening the door for the first time, the new owner agreed to use only the manufacturer's replacement parts and to avoid modifying the car. "Owners of patents would love to be able to control what you can do with a product after you buy it," he said. "That's new. The rule for most of a century has been, ‘You buy it, you own it.' "

Lexmark was recently involved in another lawsuit against a North Carolina-based company, Static Control Components. In the case, Lexmark sued under provisions in the Digital Millennium Copyright Act to keep Static Control from reverse-engineering Lexmark's cartridge chips so that remanufactured cartridges from other vendors would work in Lexmark printers. Static Control ultimately won the copyright fight after the United States Supreme Court declined Lexmark's petition in June 2005.

Ronald S. Katz, a lawyer for Manatt, Phelps & Phillips, which represented ACRA in the suit, said that while the continuation of Lexmark's return program would not put companies that reclaim and refill laser printer cartridges out of business, "it basically makes it harder for them to compete." The trade association, he added, is not pursuing the case further.

Although legal analysts who followed both lawsuits expressed concerns that Lexmark was trying to create a cartridge monopoly for its printers, the ruling in the Static Control case does allow that company to keep making chips that communicate with Lexmark's printers.

"This is about customer choice," said Mr. Fitzpatrick of Lexmark. "The court has ruled in favor of customer choice." A footnote in the court's written opinion stated that the decision would not preclude a consumer from raising challenges to the box-top contract.

In his supporting brief, Mr. von Lohmann argued that the decision in the medical equipment case, which was cited in the Lexmark case, was wrongly decided. "The courts started saying, 'Well, you bought it, you own it - unless they put a condition on it that you agreed to when you bought it,' " said Mr. von Lohmann.

He cited the 1873 case of Adams v. Burke, in which a coffin-lid manufacturer attempted to restrict where its patented product could be used. "The courts correctly said that's ridiculous," Mr. von Lohmann said. "When you buy a coffin, you can plant the guy wherever you want. It's none of the patent owners' business once you bought that coffin and where you put it in the ground."

But would the coffin case have come out differently if the manufacturer had put a label on the outside? "That's the concern," he said.

Excerpted from an article by J. D. Biersdorfer


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Final Note
We encourage you to forward this newsletter to friends in the remanufacturing community. It is our intent to carry news on all industry sectors. If you have news to share or comments, please contact the Reman E-News editor:
 

Ron Giuntini

rgiuntini@oemservices.org
570.523.0992

Ron Giuntini, Executive Director
PO Box 48
Lewisburg, PA 17837
rgiuntini@reman.org
570.523.0992

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