The IBM suit from WSJ.
December 23, 1999
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IBM Sues EMC, Citing Violation
Of Patent Accord and Transfer
By MARK MAREMONT
Staff Reporter of THE WALL STREET JOURNAL
International Business Machines Corp. has filed a lawsuit against rival EMC Corp., alleging the maker of data-storage equipment violated a patent agreement and committed fraud by secretly transferring disputed patents to a shell company.
EMC, based in Hopkinton, Mass., called the lawsuit "frivolous" and said it had fully complied with the agreement at the heart of the dispute.
The suit, filed late last week in U.S. District Court in Worcester, Mass., involves a long-running patent fight between IBM and Data General Corp., which EMC acquired in October for about $1.2 billion. In two separate lawsuits, the oldest dating to 1994, Data General had claimed that IBM's widely sold AS/400 computers violated several of its patents.
In March 1999, EMC reached a patent cross-licensing agreement with IBM, a common practice in the technology industry. According to the suit, IBM was entitled to license any EMC patents, including those subsequently "obtained through corporate mergers and acquisitions." If EMC acquired more than 25% of another company, it also was obliged to "use reasonable efforts" to assist IBM in any patent disputes with that company.
The IBM action claims that EMC knew the Data General suits would be "extinguished" by the agreement. But instead, the suit alleges, EMC "conspired" with Data General and two of its now-departed executives to keep the suits alive by transferring ownership of 10 patents, including the disputed ones, to a newly formed Delaware corporation, DG Patent Holdings LLC.
EMC and the other defendants valued the transferred patents at more than $1 billion, the suit claims, nearly as much as the entire price EMC paid for all of Data General. DG Patent Holdings is 50% owned by EMC and 50% owned by a charitable foundation, the suit added; it didn't name the foundation.
An EMC spokesman said the foundation was established "for the benefit of certain Massachusetts charities."
The patent transfer was completed on Oct. 6, just one day before Data General shareholders voted to approve its purchase by EMC, according to the complaint. But information about the transfer was "fraudulently withheld" from Data General shareholders, the IBM complaint added, and was withheld from the Armonk, N.Y., company until early November to keep it from trying to block the arrangement.
Among other things, the lawsuit charges the defendants with breach of contract and tortious interference of contract, and seeks to require EMC to grant the patent licenses and halt the patent litigation. Besides EMC, the defendants include Ronald Skates, Data General's former chairman and chief executive, and Jacob Frank, its former general counsel. Neither could be reached for comment.
An EMC spokesman, Mark Fredrickson, said the IBM complaint was based on a "selective recitation of bits and pieces" of the EMC-IBM licensing agreement, and said EMC expects to file a legal response Thursday.
'Just the Latest Tactic'
Mr. Fredrickson said EMC believes the lawsuit is "just the latest tactic by IBM to prevent this case being heard on its merits. IBM is trying to obscure the accountability for its infringement of Data General's patents because of the magnitude of its AS/400 business." EMC estimates that IBM has spent more than $80 million defending the patent suits, for which no trial date has been set.
Mr. Fredrickson also said that his company's patent agreement with IBM specifically permits the parties to establish 50%-owned patent licensing entities such as DG Patent Holdings, and governs how such entities should be treated. Indeed, Mr. Fredrickson said IBM itself had established at least one partly owned patent-holding entity to withhold some of its intellectual property from cross-licensing deals, and EMC was not given rights to those patents.
In addition, Mr. Fredrickson said IBM's complaint "ignores or misreads" the license agreement, which "under no circumstances" permits IBM "to avoid its liability and payment of damages for past infringement of Data General's patents."
The EMC spokesman said the transfer of the patents to the Delaware company was not disclosed to Data General shareholders because "it was deemed not to be a material event."
Halt to Complaint Sought
EMC also will seek to have the IBM complaint halted, Mr. Fredrickson added, because the licensing agreement calls for a series of dispute-resolution measures to be followed before litigation.
An IBM spokesman said the lawsuit speaks for itself. In the complaint, IBM calls the dispute-resolution provision "inapplicable" and "futile" because EMC has "willfully sought to put itself in an adverse relationship with IBM."
Don Young, a computer analyst at PaineWebber, said, "There is a clear case to support Data General's claims that IBM infringed on it." The big question, he said, is what that might be worth. Mr. Young said IBM clearly thought the case was worth less than $1 billion, "or they would have bought DG."
Write to Mark Maremont at mark.maremont@wsj.com
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