Two Big Film Makers Strive To Crush Renegade Recycler

Jazz Refills One-Use Cameras,
Underselling Fuji and Kodak
By JAMES BANDLER
Staff Reporter of THE WALL STREET JOURNAL

To understand why the world's two largest film companies want so badly to crush a tiny New Jersey discount-camera entrepreneur, take a trip to your local Wal-Mart.

At one of the giant retailer's outlets outside of Boston, three young shoppers scan the single-use camera rack, eyeing the $4.94 Kodaks and $4.88 Fujis. Then, crouching in front of the bottom rack, they snap up a brand with a white box emblazoned with the name "Jazz." The price: just $3.67.

What they don't know is that the model underselling Kodak by 26% is, in fact, a Kodak -- or was. It's an old throwaway that has been cracked open, shipped to China, loaded with cheap film and patched together with electrical tape, a controversial part of a vast world-wide recycling network.

The reloaded cameras are the creation of Jack C. Benun, a chain-smoking discount-camera king who boasts he can squeeze as many as eight lives from his competitors' so-called single-use cameras.

Forced from his chief executive job at discounter Concord Camera Corp. in the mid-1990s in a financial scandal, Mr. Benun has pulled his own career from the trash numerous times. Today he's a well-paid consultant for Jazz Photo Corp., a concern owned by his family that sells 20 million cameras a year via big retailers including Wal-Mart Stores Inc. and Staples Inc.

Fuji Photo Film Co., the world's second-largest film maker and holder of key patents for single-use cameras, has waged a relentless five-year legal campaign against reloaders such as Jazz, or "pirate camera" makers, as some Fuji executives call them.

In the latest round of the saga, in what Fuji hopes will be a death blow, a federal jury in Newark this week ordered Jazz and Mr. Benun to pay around $25 million in damages, an amount that includes lost profits and royalties.

"They will have a hard time paying it," predicts Jonathan File, general counsel for Fuji.

'Kick in the Head'

Mr. Benun allows that the decision was "a good kick in the head," but promises to appeal. "Fuji is going to have to put up a much bigger fight than this," he says. Jazz is still waiting for the judge to rule on several key issues that the company says could lessen the impact of the verdict. Meanwhile, it says business continues as usual.

The battle has made unlikely allies of Fuji and Eastman Kodak Co., which have generally been bitter enemies in the global photography wars. Kodak, which has a license from Fuji to sell disposable cameras, urged Fuji to begin the fight against the reloaders in 1997 and has provided behind-the-scenes help against Jazz since then.

Fuji has found support from another odd bedfellow -- the U.S. International Trade Commission, which is usually called on by U.S. companies to protect their domestic markets against foreign encroachers. In 1999, the agency sided with the Japanese giant's complaint against more than 20 reloaders, ruling that they violated Fuji's patents. It didn't hurt Fuji's case that all of the company's single-use cameras sold in North America are made at a factory in Greenwood, S.C. The ITC proceedings effectively drove all of the reloaders out of business -- except Jazz.

For Fuji and Kodak, the stakes are high. Disposable cameras, which enjoyed a brisk 25% average annual growth in the late 1990s and are up about 10% this year, remain a bright spot in the otherwise bleak traditional photography market. Today, disposable cameras account for 40% of world-wide film sales on a dollar basis, or around $2 billion annually, according to the U.S. Photo Marketing Association. Some 350 million of the cameras will be sold this year, around half of them in the U.S.

The reloaders, who reached peak sales of around $150 million a year in the late 1990s, have had an influence on pricing disproportionate to their size -- mainly because of their presence at Wal-Mart, where they started selling for half the price of the name brands. Largely as a result, the big film companies have introduced their own discount lines, driving the average price of a single-use camera to $5.87 today from $8.82 in the beginning of 1999, according to NPDTechworld, a market researcher in Port Washington, N.Y.

Jazz's continued strong presence in the marketplace remains a major damper for the slumping big film companies. This year, world-wide film volumes are expected to fall by 6.5%, still suffering from the drop in travel following last year's terrorist attacks.

Kodak, with $13 billion in annual sales, has been laying off thousands of workers in its hometown of Rochester, N.Y., and elsewhere, as it races to cut costs. The company announced last month that it was closing its only single-use camera factory in the U.S. and letting go of 500 workers there, citing cost advantages to moving such operations overseas.

Marketed first by Fuji in 1987, single-use cameras have exploded in popularity -- particularly among young people and low-income consumers. Today, they are the only cameras used by nearly one in 10 households. Consisting mainly of cardboard sleeves and plastic outer casings that hold the shutter, lens, viewfinder, flash and battery, the cameras are ideal for vacations, as there's little need to worry about them getting stolen or damaged.

Ease of Use

Their biggest selling point is ease of use. There's no film loading or unloading: just point, shoot and then drop off the cameras at the local photo processor. There, the cases are cracked open and film is extracted and printed.

In the late 1980s, most of the shells ended up in landfills -- a fact that gave a politically incorrect ring to the name of one of Kodak's early models, "The Fling."

A few years later, in response to the environmental movement and to cut costs, Kodak established a recycling program. This ultimately created a vast market for the used cameras. Photo processors save them up and sell them for between 20 cents and 80 cents to middlemen or to the big film companies. Kodak and Fuji now buy large quantities of discards, salvage the usable internal parts, and grind down the plastic bodies to be remolded into new ones. Kodak says 76% of its cameras come back for recycling.

But salvage entrepreneurs quickly found another use for the discards. They skipped the grinding part and just slapped new film in the old cases -- a much more cost-effective technique.

Reloading was a gritty business that seemed tailor-made for Mr. Benun. The son of Jewish immigrants from Palestine and Egypt, Mr. Benun never went to college, getting an early start instead in the photography business. He began his career selling second-hand cameras door-to-door in New York City at the age of 16.

In 1971, Mr. Benun and the company he co-founded opened what he says was the first camera factory in Taiwan. With a license from Kodak, the company cranked out inexpensive 110 millimeter cameras. After a brief retirement, he launched Concord Camera, a discount maker of traditional cameras, which he eventually took public.

Controversy dogged Mr. Benun. In 1991, his former chief financial officer accused him of embezzling $150,000. According to a civil complaint filed by the Securities and Exchange Commission, the purported scheme worked like this: Mr. Benun got Concord's Hong Kong unit to pay a bonus check to a worker. He then asked the worker to endorse the check to him, which he then allegedly funneled back to himself through two other individuals. Later, according to the SEC, he misled the board by claiming the money was paid to the employee as an incentive bonus.

In 1994, Mr. Benun settled with the SEC, neither admitting nor denying wrongdoing. As part of the settlement, he agreed to reimburse Concord and abide by a lifetime ban from ever serving as an officer or director of a public company. Fired by Concord, he nonetheless was able to leave with a million shares of company stock. "I don't think the punishment fits the crime -- if there was a crime," says Mr. Benun.

Mr. Benun quickly got back on his feet. He started Jazz in 1995. The company later obtained the exclusive rights to sell cameras under the vaunted, if stodgy, Bell & Howell name. Children's Television Workshop granted Jazz a 10% royalty for every camera it could sell with the Sesame Street name. More recently, the company landed a promotional deal with Coca-Cola Co. Many of the cameras sold through promotions are reloaded, but the consumer doesn't necessarily notice, since Jazz slips on colorful sleeves that hide the unsightly tape.

By last year the company was selling 20 million single-use cameras a year, giving it an 8%-10% market share. Revenue hit $70 million in 2001, with net income of $1.2 million.

It wasn't long before Jazz caught the eye of Kodak. Kodak, which pays Fuji a licensing fee of around a penny per camera, now sells more than two of every three single-use cameras bought in the U.S. But in the late 1990s, officials noticed Jazz cameras appearing on Wal-Mart shelves and selling for about half the price of Kodak's models.

In May of 1997, Kodak contacted Fuji with its concerns about the growth of reloaded single-use cameras and requested that Fuji "take some measure against it," according to testimony in the New Jersey case by Kunio Kikuchi, a member of Fuji Japan's intellectual-property division. He also testified that Fuji was already considering action. Two months after the Kodak request, Fuji decided to take its patent case against the reloaders to the ITC. Kodak declined to comment on the matter.

As evidence in support of Fuji, Kodak provided the ITC with a lengthy report attacking the quality of the reloaded cameras, including those sold by Jazz. The alleged problems included foreign material such as hair mucking up prints.

'Real Tragedy'

Daniel Palumbo, president of Kodak's consumer-imaging division, describes Jazz as a "manufacturer of defective cameras," foisting damaged goods on unwitting consumers. "It's a real tragedy," he says. Mr. Benun retorts that if Jazz's products were so terrible, consumers wouldn't keep buying them.

But the main issues before the ITC concerned patents -- specifically, whether the reloading process constituted "reconstruction," which would amount to patent infringement, or "repair," which would not.

Jazz likens the camera-reloading process to the refurbishment of say, a clutch or carburetor -- activities that wouldn't be viewed by the courts as infringement, even if performed on a commercial-scale assembly line. But Fuji says the process is more akin to full-blown reconstruction, and it says its single-use cameras were never intended to be fixed.

Fuji lawyers say no one but Jazz knows exactly what goes on in the reloading factories, which are owned by independent contractors. Fuji lawyers say Jazz refused to let them visit its contract factories. Jazz Chairman Roger Lorenzini testified in the federal trial in New Jersey that Jazz tried to persuade the contractors to allow Fuji access to its factories, but that "they were very afraid" Fuji might sue them.

In February 1999, an administrative judge with the ITC sided with Fuji, ruling that the reloading process didn't constitute repair, and therefore violated Fuji's patents. In June of that year, the commission effectively banned the importation of all reloaded cameras.

But jubilant Fuji executives and lawyers barely had time to celebrate when Jazz was granted a stay in the ruling pending a review by the U.S. Court of Appeals for the federal circuit. The stay enabled Jazz to keep importing cameras while companies that failed to apply for it could not. Just one other reloading company applied for the stay, but has since dropped out of the market. As a result Jazz owns the reloading market. "We killed off their competition for them," gripes Matthew Siegal, a Fuji lawyer.

In August 2001, the appeals court issued its ruling. The good news for Jazz was that the judges agreed that the film-reloading process might constitute repair and didn't necessarily infringe on Fuji's patents. The bad news: Jazz was permitted to use only camera shells that were first sold in the U.S. on the grounds that patent rights for them had been exhausted. Camera shells from countries where the patents still hadn't expired were off limits. For Jazz, which was buying many of its shells in Asia, this was a problem. Fuji, meanwhile, was buying up shells in the U.S. for plastic recycling, driving up the price and making them uneconomical for Jazz to buy. An ITC enforcement proceeding is now under way to determine, among other things, whether Jazz and Mr. Benun have been improperly importing shells that were first sold abroad.

Mr. Benun says he isn't doing anything wrong but doubts he'll get a fair hearing from the ITC. "What the ITC administrative judge has done is just shocking," he says. "It's not a court of law. It's more like a kangaroo court."

Write to James Bandler at james.bandler@wsj.com