Lucent hardball. Company's aggressive patent-enforcement group files lawsuits, demands royalties
This story appeared on Network World Fusion at
nwfusion.com.
By DAVID ROHDE
Network World, 03/22/99
LIBERTY CORNER, N.J. - Ordinarily, Lucent never
misses an opportunity to flaunt its distinctive red logo.
But on a winding road in the tiny hamlet of Liberty
Corner, N.J, you won't find the Lucent emblem
beckoning you. You'll just see a sign listing Lucent
among six companies sharing an office building.
Don't worry if you miss the structure. Lucent doesn't
have anything to sell you here, unless you're a vendor
seeking the privilege of paying Lucent a royalty to
keep the company from suing you.
Welcome to the home of Lucent's Intellectual
Property group, where scores of lawyers and
engineers pore over the IT industry's product
materials in search of violations of Lucent's treasure
chest of Bell Labs patents. Since Lucent spun off from
AT&T, the patent group has demanded royalties or
other compensation from hundreds of other vendors.
Some targets have been asked for up to 6% of their
entire product revenue.
Lucent's aggressive tactics have resulted in epic patent
lawsuits against competitors such as Cisco and
Newbridge Networks. But Network World has also
learned that some Lucent rivals are turning the tables,
claiming in court documents that Lucent has engaged
in unfair competition by trying to collect royalties on
ATM, frame relay and voice-coding technologies only
after they became industry standards and are widely
deployed.
Lucent lawsuits demand that competitors pay not only
royalties but also damages for robbing Lucent of
product sales.
Court documents also reveal that Lucent attorneys
have fought against demands for depositions that
would force the company's executives to state exactly
which of Lucent's data products have been hurt in the
marketplace by competitors allegedly infringing on
Lucent patents. And when those depositions have
taken place, Lucent officials have had to admit they
failed to implement their company's inventions for
years at a time - and then have had to employ OEM
agreements and acquisitions to enter key markets.
"What does Lucent own other than PBXs that has any
kind of prominence in the [enterprise] market?" asks
Howard Anderson, president of The Yankee Group,
a consultancy in Boston. "Lucent would have liked to
have been a Bay Networks, but it never was."
As a result, he says, Lucent is wielding its patent
portfolio as a club while it assembles its data-network
portfolio. "It regards these patents as large bargaining
chips to cross-license what it doesn't have, and
sometimes to mount some rather formidable barriers
against competition."
Lucent officials insist they are not making royalty
demands because the company's data-network
product efforts are just getting underway.
But Lucent's targets are angry.
"I think this shows the mentality of how Lucent
operates," says Daniel Scheinman, Cisco's vice
president of legal and government affairs. "It missed
the whole Internet thing, and now it's trying to apply
old patents in a broad way." He calls the process a
"shakedown."
Sniffing out offenders
Lucent officials acknowledge - and even boast - that
they will do what it takes to protect their patent rights.
The company spends 11% of its $30.1 billion annual
revenue on research and development, and its U.S.
patent portfolio, built on a base of Bell Labs
inventions, now reaches nearly 10,000.
"We spend a fortune on technology,"
says Michael Greene, chief operating
officer of Lucent's Intellectual
Property group, which employs some
300 people. "All we are saying is: If
others want to use [a patented
technology], we would be pleased to
allow them to use it - for a payment."
[A Greene bio]
With so much at stake, Greene and his group have
developed a highly choreographed method of
targeting other companies, some of it modeled on
legendary past patent enforcers IBM and Texas
Instruments.
First, Greene's group assigns baskets of patents to
individual Intellectual Property managers. These
officials - and sometimes other Lucent employees
outside the business unit - scour the World Wide
Web, visit trade shows and seek out other forums in
search of possible violations of Bell Labs technology.
They funnel all that information to the so-called Patent
Assertion Team, headed by corporate counsel
Maurice dePicciotto, whose staff decides on the most
promising opportunities for patent claims.
The target company then gets a letter asserting
Lucent's patents and asking the company to agree to
a license. If the target company doesn't agree, the
case is turned over to a licensing team, headed by
Lucent coporate counsel Donald Padilla, which then
opens negotiations.
"It's not a short process," dePicciotto says.
Negotiations can drag on because Lucent won't settle
for a cross-license if it's royalty-free to both sides.
Lucent officials say they will only cross-license if
there's a fee attached to each side's technology
exchange, and Lucent's fee is larger. What if the other
company comes out ahead in the cross-licensing
talks?
"Horrors!" Padilla says. "Because of the significance
and quality of our patent portfolio, the balance is
almost always in our favor."
Some Lucent competitors say existing cross-licensing
agreements are being shoved aside.
"They have notified us that they do not intend to
renew certain relationships," says Fred Fromm,
president of Siemens Information and Communication
Networks, a big PBX vendor that's now entering the
data market. Fromm says he isn't worried: "We'll
discuss it with them because cross-licensing goes in
two different directions."
Cross-licensing aside, big and small companies have
been targeted by Lucent's patent managers, says one
West Coast venture capitalist who asked not to be
identified.
"I don't understand why [Lucent is] doing this," the
source says. "It's stance seems to be: The first thing
we're going to do is shut the world down and then
come back and negotiate."
DePicciotto maintains that Lucent only approaches
certain start-ups.
Other industry sources confirm that's the case.
"[Lucent] wants to wait and see if you're successful or
not," says Gary Andresen, a former Dataquest analyst
and now vice president of marketing at StarVox, a
voice-over-IP vendor in San Jose. "Why should they
[mess] with someone who has no money?"
Besides, intellectual property is a profit source for
Lucent, says The Yankee Group's Anderson: "They
monitor these people in terms of 'How much money
did you collect for us?' "
Only the best
But sometimes Lucent can't collect any money quickly
because the target company denies it's using any Bell
Labs technology or claims that Lucent's patents don't
apply to their products. Then it's off to court. Lucent
has sued at least seven vendors, including PC makers
and internetwork and voice-processing vendors. And
at least once has Lucent been sued by a competitor
first.
When in comes to litigation, Lucent uses some of the
heaviest legal artillery available. One of its primary law
firms is Kirkland & Ellis, a 537-lawyer behemoth with
offices in New York, Chicago, Los Angeles and
Washington, D.C. But the firm is best known for
defending tobacco companies against liability claims
and for its most famous partner, Independent Counsel
Ken Starr. An online career-help service for law
students, Vault Reports, credits Kirkland & Ellis with
"a top-notch litigation department" and a "hard-ass
reputation." Lucent also employs several other law
firms, especially in Delaware and Pennsylvania, where
most of its cases are filed.
The major cases have followed a distinct pattern. In
June 1997, Lucent sued Newbridge, alleging that
Newbridge's MainStreet multiplexers and ATM
switches violated four Bell Labs patents.
Lucent alleged that the Newbridge multiplexers
included: two 1988 Lucent inventions specifying
congestion control in packet networks; a 1990 Lucent
patent specifying error-correction methods; and a
1984 patent describing Adaptive Differential Pulse
Code Modulation (ADPCM), a common method of
encoding voice into 32K bit/sec digital streams. [Read
more about ADPCM]
About a year later, Lucent sued Cisco, alleging
violations of the same four patents, plus four more.
But unlike the Newbridge case, the Cisco case spun
out of control.
First Cisco countersued, claiming that Lucent ATM
products violated recent inventions used in Cisco's
Stratacom ATM switches. [See related story]
Then Cisco filed its own suit in U.S. district court in
San Jose, claiming that Lucent was stealing some of
its LAN and network-management technology.
Finally, Lucent added a Gigabit Ethernet company it
had bought as a new plaintiff in the case. [See related
story]
Industry experts are amused and alarmed by the
escalating warfare. Their concern: The
congestion-control and voice-coding technologies
involved in the lawsuits were deployed by so many
vendors over a period when Lucent's predecessor,
AT&T, did not aggressively assert its patent rights for
ADPCM and other technologies.
"That's a good one," says Peter Bernstein, president
of Infonautics Consulting in Ramsey, N.J. If Lucent
wins that case against Newbridge, many other
vendors could be targeted for possible patent
problems.
"The line gets real long," he says.
Cisco's Scheinman claims that was the goal.
"Their strategy was: Assert patents against
Newbridge, win against Newbridge, and then shake
down the entire industry," he says. Another Lucent
antagonist who asked to remain anonymous agreed: "I
think that Lucent thought it was going to knock off
Newbridge and then foist royalties on everybody else
in the industry."
A cut of the revenue
Like Newbridge, Periphonics Corp., a Bohemia,
N.Y., maker of voice-response systems, has had its
share of legal conflicts with Lucent. [More details on
what Periphonics makes]
According to Periphonics' court papers, Lucent in
1997 wrote to Periphonics charging that it was
infringing on 10 Lucent patents. Periphonics then met
several times with Lucent officials and denied the
charge.
But "Lucent refused to discuss the merits of
Periphonics' arguments," wrote Periphonics attorney
James Mulligan. "Instead, Lucent demanded a 6%
royalty on all product revenue that Periphonics earns,
regardless of how it may relate to any of the 10
patents."
According to Mulligan, Lucent then warned that even
if Periphonics' arguments about those patents held up,
"it eventually would find [other] patents that
Periphonics infringed." Finally, Lucent sued
Periphonics in July 1998 in a case that's still pending.
Lucent's Greene says a demand for 6% is "on the high
side" among the company's licensing negotiations. But
industry insiders say that's often what's put on the
table. "That's pretty typical of what I see," The
Yankee Group's Anderson says. And for some
companies, those demands can be scary.
"That's probably the profit of some companies, if they
are lucky. Lucent is being predatory, I think,"
StarVox's Andresen says.
In the face of those demands, many companies are
throwing in the towel.
"There are tons of companies that have been settling,"
says Frank Dzubeck, president of Communications
Network Architects, a consultancy in Washington,
D.C.
Dzubeck adds that the settlement is often for much
less than the original demand.
But some firms that have settled prior to a lawsuit or
just before trial have been forced to take charges
against earnings or acknowledge cash payments to
Lucent. Call center vendor Aspect
Telecommunications took a $14 million hit.
Voice-messaging vendor Centigram paid $9.2 million.
Voice-response/customer-service software vendor
Edify wrote off $5 million.
More settlements are almost certainly on their way,
because most patents run either 17 years from the
date they were approved or 20 years from the date
they were submitted, even if the technology
subsequently improves.
"If I invent a pencil and get a patent on it for 17 or 20
years, and you come along and invent an eraser, you
can get a patent on the pencil and eraser," Lucent's
Padilla says. "But you still can't make the pencil
without coming to me."
Some experts say it isn't that simple. Lucent's claim of
ownership for ADPCM is actually incorporated in the
International Telecommunication Union's (ITU) G.726
voice-compression and encoding standard, says
Brough Turner, senior vice president for technology at
Natural Microsystems, a Framingham, Mass., maker
of Digital Signal Processor chipsets and
computer-telephony software.
And at least 11 parties, including Lucent, claim
ownership to some part of follow-on standards that
improve voice compression, he says.
"We don't want to have anyone coming to us with a
patent from 1982 that just sat around and they never
did anything with it," Andresen adds. "If it was so
good, why didn't you take the technology and use it
yourself?"
Now you tell us
Some of Lucent's antagonists raise other questions
about standards. For example, the two
congestion-control patents that Lucent claims
Newbridge and Cisco are violating were awarded in
September 1988. They have proven key to the
development of ATM and frame relay in the 1990s.
But it was not until September 1996 that Lucent
officially disclosed to the ATM Forum that it held
these two patents. In letters available on the ATM
Forum's Web site, Lucent said it was not prepared to
waive its rights to these patents, adding that they
related to two ATM Forum standards: User-Network
Interface 3.1 and Traffic Management 4.0.
The problem: Both these standards were already
finalized - UNI 3.1 in 1994 and TM 4.0 in 1996.
[See what ATM patents Lucent - and other
companies - claim]
And other companies have generally posted patent
assertions while standards were still being considered.
"That's a no-no as far as I'm concerned on Lucent's
part," says Mary Petrosky, an independent
technology analyst in San Mateo, Calif. Asserting
patents so late in the game "is a hardball method for
one vendor to distract a competitor, to slow down a
vendor or just suck money out of them through the
legal fees," she says.
Cisco and Newbridge lawyers also cite a May 1996
antitrust consent decree between the Federal Trade
Commission and Dell regarding a standard called
VL-Bus. The FTC charged that Dell began asserting
a 1991 patent on that technology only after the PC
industry had shipped 1.4 million units using the
approved VL-Bus specification.
The FTC ruled that Dell "unreasonably restrained
competition" by forcing rival manufacturers to "delay
their use of the design standard until the patent issue
was clarified." [Read more about the VL-Bus ruling]
Now Newbridge lawyers are leveling the same
accusation against Lucent. In court papers, they say
Lucent misused the procedures of not only the ATM
Forum but also the Frame Relay Forum, ITU and
American National Standards Institute.
Lucent "abused the standard-setting process by failing
to disclose Lucent's alleged proprietary position on a
proposed or adopted standard," and then "tried to
extract anticompetitive royalties from those relying on
the standards."
Lucent officials heatedly deny the charge. Lucent's
Greene says that long before September 1996, the
company told the ATM Forum and other groups that
as a general practice Lucent would be happy to
license any of its patents, even if the company did not
specify which ones could affect which standards.
"We've got 10,000 patents," says Greene, visibly
annoyed. "I'm not going to spend my time determining
the five of them that might affect a standard. Why
should I do that? If it develops that we have patents
that affect that standard, we'll license it on fair and
reasonable terms."
What's more, in the Dell case, the FTC claimed Dell
specifically denied that it had patents affecting the
VL-Bus standard just as it was being approved.
"[Any decision] turns in large part on intentional
activities of the patent owner," Lucent's Padilla says.
"To hide it and then come out later and assert that is
not something that we would ever do," he insists.
Newbridge lawyers claim that Lucent has been less
than forthcoming with one key piece of information:
how much revenue the company would have really
lost due to patent infringement.
"We have a right to know what Lucent and AT&T
produced at the time of these alleged inventions,"
Newbridge lawyer Ed Foote said at a pretrial hearing.
"What is the factual basis for their infringement case?
What are the products that they manufacture that
supposedly incorporate this technology?"
Lucent lawyers have even blocked testimony by
Lucent's data-product chief to answer these
questions.
Portions of depositions made publicly available show
other Lucent officials struggling with this issue. In one
deposition, Foote asked Lucent official Kenneth
Clark what products AT&T or Lucent had produced
since 1984 that perform ATM switching.
Clark said the first product he could think of was
Globeview 2000, an ATM core switch that first made
money in 1993. Clark also mentioned the PacketStar
ATM core switch, which was introduced more
recently.
"And then we have a few products since 1996 that
we have OEM'd that have ATM capability," Clark
added.
These depositions have become so sensitive that at
one point in open court an argument broke out in
which Lucent's lawyer called Newbridge's lawyer a
liar. (The judge attributed the argument to stress
between the parties because the stakes are high).
[See related story]
Perhaps that's one thing on which everyone agrees.
Lucent officials say they have 120 to 150 patent cases
right now, while Cisco's Scheinman accuses them of
"moving ahead rapidly and blindly to what they think
is some sort of revenue pot."
In the struggle for dominance of the network world,
there's no sign that Lucent is going to give up its
claims that it invented much of what users employ
today - whether or not it sports the Lucent logo.
All contents of Network World Fusion are copyright 1995-1999 by Network World, Inc., Framingham, MA
01701.
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