CDW settles in lawsuit with rival reseller over Cisco sales

Meanwhile pending case from Cisco accuses Dexon of selling counterfeit kit

Updated CDW, the world's largest reseller, has reached a settlement with relative minnow in an antitrust case involving Cisco.

The allegations included that the network giant had coerced customers into using favored partners such as CDW and forced them to buy new equipment in order to renew maintenance contracts.

The confidential settlement agreement is between CDW and Dexon Computer, the company that brought the lawsuit. The judge issued an order [PDF] on January 9 in the Eastern District of Texas court staying all deadlines relating to CDW in the case, pending finalization of the settlement, while Dexon's claims against Cisco are set to proceed later this month.

However, the lawsuit is complicated by a pending case (20-cv-04926, PDF) filed in 2020 in which Cisco is suing Dexon, with the network giant accusing the reseller of selling counterfeit Cisco products. The current action (5:22-cv-00053), in which CDW has now settled, was a countersuit by Dexon.

Dexon's claims against Cisco

The original complaint [PDF, case number 5:22-cv-00053, for those keeping track], brought by Dexon in April 2022, had accused Cisco of abusing its market position as one of the leading providers of networking equipment. It had claimed that customers, especially small and medium businesses, were forced by Cisco into buying new equipment when the time came to renew maintenance and service packages.

Dexon's suit had alleged that in at least one case, a customer bought Ethernet switches and routers, along with a service package under a program called SmartNet. When the SmartNet package came up for renewal, it claimed, Cisco insisted that the company had to buy new switches and routers in order to be eligible for the renewal.

Another claim was that Cisco had forced customers to pay extra for networking equipment they had already purchased, through a “re-certification fee.” The network giant, the filing alleged, had threatened that it would not service the equipment unless customers made the additional payments.

Furthermore, Dexon contended that Cisco had tried to dissuade customers from buying from resellers other than those the network company favors - such as CDW - allegedly because the latter charge higher prices and are more profitable for Cisco.

Resellers that provide both Cisco products and non-Cisco kit are considered by the networking giant to be "a competitive threat to its networking equipment monopolies," Dexon asserted.

The 2022 court filing cited the case of a customer that bought Ethernet switches and routers from Dexon, but purchased a SmartNet package via one of Cisco’s preferred dealers. Dexon claimed that after providing support to the customer for several years, Cisco suddenly insisted that it purchase new switches and routers from another vendor to continue receiving the SmartNet maintenance.

Through business practices such as these, or so Dexon alleged in the suit, Cisco coerced customers not to purchase from resellers such as itself, and forced customers to pay more for products.

“Cisco has successfully employed a strategy of 'fear, uncertainty and doubt,' or 'FUD,' wrongly claiming to customers that unfavored resellers sell “bootleg”, 'unauthorized', or goods with 'malware' or 'spyware' to dissuade purchases from these resellers of other manufacturers, including Cisco’s competitors,” Dexon claimed.

The company argued in its court filing that Cisco had come to see resellers like Dexon as a threat by at least 2015. It claimed this was because it had converted some customers of Cisco equipment into purchasing products from rival network manufacturers such as Juniper.

Its now-settled claim against CDW was an accusation it conspired with Cisco to help exclude Dexon from being able to make some networking sales, with CDW being presented as the favored channel for customers to purchase through.

The company cited one example where a customer wanted to make a significant investment in Cisco routers and switches plus a SmartNet package, which would have been worth a substantial deal for Dexon.

Dexon claimed that Cisco had threatened the customer to cancel the order or it would not honor their service package. Furthermore, it said Cisco threatened to cancel other SmartNet service packages the customer had for the rest of its infrastructure.

Sales representatives of Cisco and CDW took coordinated steps to execute this plan, it was alleged, with Cisco portraying CDW as the “savior,” while “the intention and purpose of the scheme was to exclude resellers like Dexon, so that the customer would pay more for the equipment with CDW as the sole supplier,” the company stated in the 2022 action.

The effect of this conduct had been to drive supra-competitive prices (i.e. higher than would otherwise be the case), Dexon claimed. In theory, customers could purchase from other network vendors, but Cisco’s installed base is so prevalent at many customer sites that the company can make it very difficult for them to make that change, it argued.

Dexon’s latest court filing says it is seeking a court order for Cisco to terminate its alleged anticompetitive conduct, plus its costs and treble damages (including lost profits), in an amount to be determined at trial. It is understood that a jury trial is scheduled for January 22.

Cisco's case against Dexon

As we mentioned earlier, the case is complicated by the fact that there is an earlier case brought by Cisco against Dexon in July 2020, accusing the reseller of violating its intellectual property rights. Dexon countered with the current antitrust lawsuit. Cisco won a preliminary court decision [PDF] last October barring Dexon from selling counterfeit Cisco products.

In the 2020 case brought by Cisco (20-cv-04926-CRB), the networking giant claimed that Dexon had “repeatedly and systematically engaged in schemes to traffic counterfeit Cisco products” from at least July 2006 until roughly the present day.

However, the court order granting the motion disclosed Dexon’s defense: that it has never intentionally or knowingly sold any counterfeit products. Instead, the reseller asserted that Cisco has the counterfeit problem, owing to its products being manufactured overseas, and that the network company was “passing that problem off on resellers like Dexon.”

Further detail revealed by the court filing is that Cisco regarded Dexon as an unauthorized reseller, and it stated that such resellers are not permitted to sell SmartNet maintenance packages. These must instead be obtained from an authorized Cisco reseller.

However, Cisco stated that SmartNet packages may be purchased with a Cisco product obtained from a non-authorized source, if that product is inspected by Cisco to ensure it is not a counterfeit. If this does not happen, the SmartNet contract may be terminated by Cisco and voided.

According to Cisco, Dexon had engaged “rogue” Cisco partners - meaning authorized resellers - to provide SmartNet contracts to Dexon customers without any counterfeit inspection. This went awry if a customer’s product malfunctioned and it sought to have the product fixed or replaced through the SmartNet contract, or so its argument went.

Cisco claimed that this had led to “confused and disgruntled customers” being informed by the networking giant that their product was counterfeit and their SmartNet contract therefore invalid.

In the ruling granting the preliminary injunction against Dexon, San Francisco District Judge Charles Breyer said the evidence of counterfeit sales provided by Cisco had “sufficed to demonstrate a likelihood of success of the merits of its Lanham Act claim”, referring to the statute that protects trademarks in the US.

However, the ruling states that it will only apply to Cisco products that are advertised by Dexon as new. The company will also not be regarded as having violated the order, should a Cisco product it sells turn out to be counterfeit, if it used Cisco-provided tools to check the authenticity of the product.

In summary, the case filed by Cisco against Dexon is still pending, while Dexon’s countersuit is due to go to trial on January 22. In the meantime CDW has settled with Dexon out of court.

None of the parties responded to requests from The Register for comment regarding these legal actions. ®

Updated to add on February 2, 2024:

On January 27, Dexon asked the court to dismiss its court action against Cisco, with both parties covering their own costs and attorney’s fees. In a statement, Cisco informed us that: "Dexon is dismissing its antitrust allegations against Cisco and will pay a fee to resolve the counterfeit claims raised by Cisco. Dexon will also stop selling unauthorized Cisco products, change its business model, and apply to join Cisco's authorized reseller program, an important measure to preserve customer trust."

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