By Mark A.W. Smith

Amongst the many legal, regulatory risk and issues facing water purification dealers and manufacturers in today’s market, two are reaching critical mass. Dealers and installers are facing municipal and county bans on water softening equipment in residential environments, while manufacturers and engineers are facing stiff global competition, often including the illegitimate vending of their proprietary products.

It’s not about you…
The quality of municipal water has been less than stellar in many parts of the country for decades—too hard, high in iron, strange in taste or odor—but you knew that already, it’s why you have a water treatment business. Residential water softeners allow homeowners to have water soft enough to bathe in, drink, launder with and wash the car and the dishes—all without ending up with deposits, stains or scale on their stuff and themselves. RO units allow the homeowner to drink water free of the many impurities their municipal water system leaves in. However, this valuable and important service is rapidly bringing you (the water purification industry) and your customers into conflict with the very cities and towns whose water quality problems created the need for your industry in the first place.

Thousands of cities and towns throughout America face millions of dollars in construction costs to upgrade their water treatment facilities to current standards. It’s not optional; they have to come into compliance with federal water quality regulations. In many states, including Arizona and California, tax increases and bond issues to pay for those upgrades require voter approval. Many of those bond issues have been voted down. A number of water authorities have arrived at a new approach to the problem: if they can’t get the funds to remove impurities from the water, they can reduce the impurities of the water coming into their system in the first place.

One city in California seeks to ban new water softeners and to tax existing softeners that are not removed, with fees punitive enough to compel removal by most residents. Other cities seek to regulate the amount of salt a residence may discharge, essentially banning water softeners without specifically saying so.

The industry’s responses have been varied yet predictable. Associations have sent lobbyists to negotiate with local politicians and regulators; dealers have attended public meetings and protested. In the best tradition of American capitalism some dealers have added new services, like carting away saline-laden discharge water from softener tanks or selling portable, removable tanks. The problem with the lobbying and protests is that they have enjoyed little or no success; the problem with the new services is that they increase costs and distress for your customer, ultimately reducing sales.

All of these solutions ignore one essential truth: it’s not about you (the dealer), it’s about the homeowner. These regulations may limit your business, they also, arguably, violate homeowners’ constitutional rights.

Home water softeners are hardly the only, or even the major, source of salt in municipal sewer systems. Agriculture produces much more, so does industry. Of course both agriculture and industry are powerful constituencies. Water treatment dealers tend to be small businesses without much political influence and individual homeowners have even less influence. This is why all of the salt bans or water softener bans discussed, proposed or enacted to date apply only to residential water softeners. And that creates a problem for the erstwhile regulators.

The U.S. Constitution’s 14th Amendment, the equal protection clause
The 14th Amendment requires that all Americans be treated equally under the law. In the case of salt discharge regulations this clearly isn’t happening—favored classes, such as farmers and manufacturers, are permitted to discharge far higher levels of salt into the system than the disfavored class, homeowners.

The case of RAILWAY EXPRESS V. NEW YORK SUPREME COURT 336 U.S. 106 JANUARY 31, 1949 is instructive. Railway Express increased its income by renting out the sides of its trucks for advertisements. The City of New York passed a regulation that banned advertising on the sides of trucks, except for ads that advertised the business of the owner of the truck. The court ruled that it was impermissible to treat the classes of truck owners differently; if it was permissible to advertise at all on the side of a truck, then it must be permissible to do so for hire.

So how does this affect the residential water softening industry? If municipalities allow some classes of landowners to discharge salt into the municipal system, but forbids others, then the one being denied the right to do so has an excellent argument that his 14th Amendment rights have been violated.

In places where an outright ban on residential water softeners is proposed two other constitutional arguments arise. The Constitution forbids government from passing an ex post facto law, which means that government cannot make something illegal after the fact. If it was legal for the homeowner to buy and use a water softener yesterday, government can’t make it illegal to use it today (even if it does forbid homeowners from buying a new one today). Of course, from the industry’s point of view, these arguments are a double-edged sword, since it leaves government the option of banning the softener by writing a check.

So what do you do with this information? You hold some powerful cards, if you are willing to play them. You know your customers, you know the ones who are happy with their equipment and who rely on the clean, soft, safe water it provides. Your customer may not have the funds to fight city hall, or the appetite to do so. You and your trade associations, on the other hand, do. Identify a group of your customers who are unwilling to give up the benefits of softened water, hire a lawyer and represent them at your expense, as preserving your rights.

The benefits of this approach are many. Aggrieved homeowners are far more attractive in the press, allowing you to win the PR battle. You will probably only have to do this once, since local government has little desire to appear to be the bad guy opposed to its own residents’ interests, particularly if they have to do so in public. Finally, you will protect your business by putting your industry on the same footing as other interests. This may not end all future regulatory threats, but at least you’ll be on equal footing with the other saline dischargers in your market.

Becoming the unpaid R&D department for India
Outsourcing, trade imbalance and industries moving overseas are all themes we, as Americans, are dealing with in our newly globalized economy. Over the past 30 years much of the developing world has surged forward in education and infrastructure. In India, China, Taiwan and the Philippines a motivated, educated workforce is ready to work in newly built factories and offices to provide goods and services at a far lower cost then similar workers in the United States. Your call to customer service or to make a hotel reservation may well have been handled by a call center representative in India. Your computer may be Intel inside, but most of the parts were made in Taiwan. Most of the clothes sold by major retailers such as Walmart or Target were made in China and other nations in the far east.

The water industry is not immune to these market forces. Products’ manufactured parts are pouring into this country, displacing the products of the American companies that invented them. The disparity in wages, taxes and operating costs between India and the U.S. is such that an Indian-based company can produce products there and ship them here and still undercut American product manufacturers by hundreds of dollars.

Part of the cost savings arises from the fact that many of these overseas companies are not funding the cost of research and development. Patent and intellectual property laws are weak in places like China and India and the few protections those countries have on the books are rarely enforced, especially if the offending party is a local company. Because of this, many manufacturers believe that they have few options but to grin and bear it.

Under U.S. law the situation isn’t that bleak. The Lanham Act (U.S. Code Title 15, Chapter 22), which governs intellectual property rights, allows for relief against anyone in the chain of infringement. This means that you don’t have to go to India or China and seek redress, you can sue the customer who bought the offending product and make it their problem to get redress from the foreign seller.

While suing your customer (or former customer) may seem extreme there are a number of advantages. First, if you do nothing you have lost the customer anyway. Second, very few such cases go to trial, so you have an excellent chance to win back a customer and stop the bleeding by bargaining away the treble damages under the act in return for a small onetime payment and the guarantee of a sizable share of their future purchases. Finally, enough of these suits will almost certainly bring the foreign offender to the table, giving you a chance to work out a licensing agreement or other royalty scheme.

Your lawyer can advise you on the steps required to perfect a claim. It is important to be aware that U.S. law permits action on more than just patents; you can sue to protect any intellectual property from trade marks to business secrets.

Global trade and competition is here to stay and it puts many American businesses at risk, but it is a risk that can be managed.

About the author
Mark A.W. Smith is a Mediator and insurance expert in Tucson, Arizona. He specializes in dispute resolution for trade contractors and commercial disputes. Smith also consults to industry on risk management, commercial insurance and regulatory strategy issues. He can be reached at msmith@smithclaims.com.

 

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