Cisco grey crackdown kills KX Network Solutions
Dealer warns rivals they could be next, as cease-and-desist letter from Cisco forces it out of business with debts of £1.6m
Secondary-source kit dealer KX Network Solutions has collapsed under the weight of a patent infringement wrangle with Cisco, leaving debts of about £1.6m.
In a development that echoes M-Tech's recent landmark court defeat by Oracle, KX entered voluntary liquidation last week after receiving a cease-and-desist letter from Cisco.
The letter, which has been seen by ChannelWeb, ordered the Hoddesdon-based firm to stop infringing trademark law by importing kit from the US and China for resale in the European Economic Area (EEA).
Dated 13 July, the missive offered KX the chance to co-operate, rather than go to court, but even in this event KX faced paying out huge sums to reimburse Cisco's legal costs and to compensate it for infringements over the past six years.
After consulting its lawyers, KX informed creditors on 15 August that it had no option but to enter voluntary liquidation, an act that was performed by Begbies Traynor on 4 September.
ChannelWeb understands that KX left debts of about £1.6m, with one trade creditor in for £70,000. UK-based traders Itelligentsia and London Network Systems are known to have been hit for about £30,000 and £26,000 respectively, although these amounts could rise. Network Hardware Resale and Reuse Recycle IT were among the other smaller creditors.
Talking anonymously to ChannelWeb, several creditors expressed concerns that KX used the Cisco imbroglio as a smokescreen to fold the business, which had been losing £40,00 a month in the months leading up to its liquidation.
They also raised questions over links between KX and IWantTheBestDeal.com, a Cisco trader run by former KX boss Alastair Head.
Additionally, several voiced anger that KX continued to rack up debts with them well after it received Cisco's cease-and-desist letter and therefore presumably knew the writing was on the wall.
You can't fight something you can't win
However, talking to ChannelWeb, Head stressed KX had no option but to shut up shop.
"You can't fight something you can't win," he said.
"That company was the love of our lives for 15 years. We never would have let it go without the cease-and-desist order," he added, emphasising that he had injected £120,000 of his own money into KX earlier in the year.
Head admitted that KX continued to buy stock after 13 July. "At this stage we were taking legal advice and were still seeing how the land lies with Cisco," he explained.
And he claimed that IWantTheBestDeal.com could not be regarded as a phoenix because it has been running for 11 years, has been trading successfully for one year, and has a different business model from KX.
KX had stock worth about £329,000 but the liquidator, Begbies Traynor, revalued it at £5,000 because it felt it could not resell the Cisco kit. Contrary to the suspicions of some creditors, Head said KX's stock was "of no interest to me whatsoever."
"The liquidator felt it was unsalable because of the cease-and-desist order," he said.
"If a creditor is annoyed about this, they need to take it up with Begbies."
Head terminated his appointment as a director of IWantTheBestDeal.com on Wednesday. On the same day, his wife, Elizabeth Head, was appointed as a director.
Head said: "I resigned because people blamed me in the industry [because they thought] I put the firm down on purpose. People do not want to deal with me."
Grey clampdown
Traders importing kit into the EU from the US and Asia were dealt a blow in June when Oracle scored a decisive Supreme Court victory in its patent infringement battle against UK trader M-Tech.
KX said that M-Tech's case confirmed a legal precendent that "both new and used products purchased from low cost jurisdictions outside the EU and imported for resale within the EU are infringing the manufacturer's trademark".
Head said Cisco's pursuit of KX could have profound implications for the wider EU grey market channel.
"Cisco wanted to make an example of someone and they picked us," he said. "Most of the brokers I have spoken to believe what happened to us was some kind of fantasy and do not believe it will happen to them. But they are living in cloud cuckoo land."
However, director of Itelligentsia Dave Parish disagreed, claiming that most European traders operating outside Cisco's official channel do not source stock from outside the EEA.
He backed Cisco's apparent clampdown on parallel imports.
"I am quite happy about anything that restricts import into the UK of cheap Chinese stock," he said. "There is no reason why it should not be entirely possible to run a profitable business that relies solely on trade of Cisco hardware that is sourced and sold in the EU."
In its last full accounts, for the year to 31 October 2010, KX banked a profit of £109,000 on revenue that fell 29 per cent to £9.67m. Back in 2003, Head himself appeared in the Sunday Times Rich List with an estimated £30m fortune.
Partners Mary Currie-Smith and John Lowe of Begbies Traynor were appointed as liquidators of KX on 29 August.
In a statement sent to ChannelWeb, Currie-Smith said: "Our first priority is to secure the assets of the company for the benefit of the creditors and we are currently working through this process."
Although Begbies could not comment further, ChannelWeb understands that KX owed HMRC about £60,000 and employees about £100,000.
The liquidators hope to raise about £550,000 through property sales, although most creditors are resigned to recovering none of their debts.
Cisco had not responded at the time of publication.