1997 in Review: Litigation Looms Large

Technology companies accused each other of stealing everything from software code, to employees, to market share in lawsuits this year. While patent infringement lawsuits were the most numerous, litigation against Microsoft Corp. was the most notable.

Technology companies accused each other of stealing everything from software code, to employees, to market share in lawsuits this year. While patent infringement lawsuits were the most numerous, litigation against Microsoft Corp. was the most notable.

MICROSOFT AND ANTITRUST

Two years after signing a consent decree barring Microsoft from conducting anti-competitive licensing practices, the U.S. Department of Justice (DOJ) asked a federal court in October to fine the firm US$1 million per day for violating the decree by requiring PC manufacturers licensing Windows 95 to preinstall Internet Explorer on the machines. Microsoft claims the browser is not a separate product but an evolutionary step toward integration with the operating system.

On Dec. 11, the judge refused to hold Microsoft in contempt of court and impose the fine, but did order Microsoft to stop requiring PC manufacturers to distribute Internet Explorer when they license Windows 95 and said the issue of whether Microsoft was in compliance with the consent decree remained to be decided. He appointed a Harvard professor to investigate and report back to the court by May 31. On Dec. 15, Microsoft said it is appealing that decision, arguing that the judge erred in imposing a preliminary injunction after denying the DOJ's petition to hold Microsoft in contempt. And two days later the DOJ asked the court to find Microsoft in contempt for not abiding by the judge's order.

The Texas Attorney General filed a lawsuit in November alleging that Microsoft's non-disclosure agreements (NDAs) with licensees have interfered with a state antitrust investigation. The NDAs also were at issue in the DOJ case. Meanwhile, as many as eight other state attorneys general are investigating alleged anti-competitive practices by Microsoft and the European Commission is investigating Microsoft on several areas including the Internet, services discounting and licensing activities.

Microsoft conceded defeat in one licensing case involving The Santa Cruz Operation Inc. (SCO). In October, Microsoft agreed to stop requiring SCO to include outdated Microsoft code in SCO UnixWare and OpenServer after SCO complained to the European Commission about paying Microsoft royalties.

But Microsoft didn't back down for Sun Microsystems Inc. when Sun sued Microsoft in October for breach of contract claiming its implementation of Java in Internet Explorer 4.0 was not in compliance with the Java licensing agreement. Microsoft filed a countersuit later that month charging Sun with breach of contract, alleging that Sun failed to deliver versions of Java that are compatible with earlier versions and charging Sun with unfair business practices for statements it made regarding Java incompatibility in Internet Explorer. A Feb. 27 hearing is scheduled on Sun's request that the court bar Microsoft from using the "Java compatible" logo.

Two lesser known antitrust cases involve plans for an Internet Yellow Pages and America Online Inc.'s proposed buyout of CompuServe Inc.'s online consumer service.

GTE Corp. filed a federal lawsuit in October against five regional Bell operating companies, Yahoo Inc. and Netscape Communications Corp. for allegedly conspiring to monopolize the Internet Yellow Pages market. Bell Atlantic has filed a countersuit claiming that GTE is not litigating an antitrust issue, but attempting to interfere with the telco's business.

Kesmai Corp., developer of multiplayer games for online systems including AOL, CompuServe and Prodigy Inc., sued to block AOL's acquisition of CompuServe's base of two million consumers, accusing the online provider of trying to monopolize the online game market.

In a case involving alleged unfair competition, Japan's NEC Corp. and its U.S. subsidiary HNXS Supercomputers Inc. went to the Court of International Trade in November to appeal a U.S. ruling that imposed tariffs ranging from 173 percent to 454 percent on Japanese supercomputers. The U.S. International Trade Commission ruled that NEC and Fujitsu Ltd., also of Japan, harmed the U.S. vector supercomputer industry by dumping, or selling computers below cost, in the U.S.

CONSTITUTIONAL CHALLENGES

Besides the challenges to Microsoft, 1997 saw the outcome of last year's challenges to the controversial Communications Decency Act (CDA). In June, the high court upheld a lower court ruling that the provisions of the CDA that made it a felony to transmit "indecent" or "offensive" material over the Internet were unconstitutional because they violated individuals' rights to free speech. However, the ruling did not affect a provision of the CDA, which is a part of the Telecommunications Reform Act of 1996, that made it a felony to transmit "indecent" material "with the intent to annoy." The publisher of Annoy.com, a web site that often has profanities and allows users to send anonymous e-mails, has asked a federal court to rule that the "annoy" provision be ruled unconstitutional as well.

Also challenging the Telecommunications Act was SBC Communications Inc., a regional Bell operating company (RBOCs) that has asked a federal court to overturn the portion of the Act which requires RBOCs to prove they have opened their local markets to competition before they can offer long-distance services. The U.S. Federal Communications Commission had ruled in June that SBC had not opened its local market in Oklahoma enough to offer long-distance service there.

PATENT INFRINGEMENT -- MODEMS, PHONES, CHIPS

While the cases involving Microsoft and the CDA received the most attention, the majority of the litigation in 1997 revolved around patent infringement, particularly involving modem and chip technology.

After dropping a two-year-old lawsuit with Rockwell International Corp., Motorola Inc. sued U.S. Robotics in February alleging infringement of patents regarding high-speed modem technology. U.S. Robotics, now a part of 3Com Corp., filed a counterclaim in April accusing Motorola of infringing on its patents and violating antitrust laws by abusing the international standards-setting process with regard to the International Telecommunications Union's V.34 standard.

One company that specializes in acquiring patents and then licensing them out, General Patent Corp., was particularly litigious filing lawsuits against eight modem makers. The firm claims to have sued 43 companies over a patent covering point-of-sale Internet transactions, with many settling out of court. Lawsuits over patents covering connector technology are pending against U.S. Robotics, Hayes Microcomputer Products Inc., Xircom Inc., Boca Research Inc. and New Media Corp., while General Patent said it has reached out-of-court settlements with IBM, GVC Technologies Inc. dba MaxTech Corp. and Archtek America Corp.

Two makers of handheld phones also jumped into the act. Following patent infringement lawsuits filed against each other last year, a judge in April dismissed Qualcomm Inc.'s lawsuit against L.M. Ericsson Telephone Co. for alleged unfair competition. Qualcomm claimed Ericsson had published false statements about Qualcomm's CDMA (Code Division Multiple Access) handsets, as well as filed "baseless" claims of patent infringement and violated a 1989 non-disclosure agreement.

Qualcomm's cellular-based Q Phone and its similarity to Motorola's StarTAC phone are at the heart of lawsuits between the two companies. In anticipation of a lawsuit Motorola planned to file, Qualcomm asked a court in March to find that it had not infringed Motorola patents and claimed that a broad 1990 licensing agreement precluded Motorola from asserting infringement. Motorola sued Qualcomm in April for patent infringement on CDMA technology and later added patents related to pager technology to the lawsuit. Also in April, a judge refused to bar Qualcomm from making and selling its phones and Motorola appealed the ruling. Qualcomm then sued Motorola in August for trade secret theft.

Even more numerous are patent infringement cases involving semiconductor technology. One of the more notable cases involved Intel Corp. and Digital Equipment Corp. which settled in October with Digital agreeing to sell its semiconductor manufacturing operations to Intel for $700 million. The companies also agreed to cross-licensing agreements, to supply both microprocessors and develop future systems based on Intel's 64-bit chips. Digital had sued Intel in May alleging that Intel's Pentium chips infringed on patents Digital holds on its 64-bit Alpha technology. Under a confidentiality agreement, Intel had seen Digital's technology when it was considering licensing it in 1990 and 1991, but decided not to license it.

Intel also is involved in litigation with Intergraph Corp. which sued Intel in November claiming that Intel infringed on patents and used its dominant market position to pressure Intergraph to give up valuable intellectual property rights. Intel countersued, asking the court to determine that Intergraph's patents are invalid. The patents relate to Intergraph's Clipper microprocessor which was one of the first reduced instruction set computing (RISC) chips.

Samsung Electronics Co. Ltd. and Fujitsu Microelectronics have sued each other over patent infringement related to DRAM and synchronous DRAM chips, as well as filed complaints with the International Trade Commission asking it to investigate their claims. Both have also filed lawsuits in courts in Germany, Italy and Great Britain. The Li Second Family Co. of Taiwan sued Toshiba America Electronic Components Inc. in March alleging patent infringement of technology to prevent the leakage of electrons in semiconductors. And the U.S. Supreme Court refused to consider a ruling in favor of Mitsubishi Electronics America Inc. who was sued by Wang Laboratories for patent infringement of Single In-line Memory Module (SIMM) technology.

Other chip-related patent infringement cases include Lucent Technologies Inc.'s suit against Acer Inc. in June and Cirrus Logic Inc.'s lawsuit against 02 Micro Inc.

Meanwhile, both Cyrix Corp. and Advanced Micro Devices Inc. settled lawsuits early in the year with Intel over the use of the MMX trademark for their processors that are enhanced by the MMX multimedia instruction set.

PATENT INFRINGEMENT -- ANTI-VIRUS AND OTHER SOFTWARE

Another market that saw plenty of patent infringement allegations was the anti-virus software area. Symantec Corp. and McAfee Associates Inc., which became Network Associates after merging with Network General Dec. 1, have been the most vocal. Trend Micro Inc. has joined the fray suing both Symantec and McAfee, as well as Integralis Inc.

A federal judge in October ordered McAfee to remove lines of code from its PC Medic and VirusScan products. Symantec sued McAfee claiming McAfee had pirated code from its Norton CrashGuard PC software. McAfee filed a $1 billion defamation lawsuit against Symantec in August alleging Symantec released statements claiming that McAfee had admitted to using Symantec's code.

In its lawsuits, Trend Micro accuses Symantec, McAfee and Integralis of infringing on its software that detects viruses carried over the Internet, e-mail and groupware.

Other patent infringement lawsuits include multimedia and operating system software. For instance, a court in Delaware found in September that Adobe Systems Inc.'s Photoshop graphics software did not infringe on patents held by Quantel Inc. of the U.K. in a lawsuit filed last year. CompuServe ended a lawsuit filed against it by Elk Industries Inc. by agreeing to license Elk's audio storage and distribution technologies. DataPoint Corp. filed two lawsuits against Intel over videoconferencing multispeed networking technologies. And IBM quietly settled out-of-court a lawsuit filed in 1994 by Data General Corp. who claimed that IBM's AS/400 and S/390 systems infringed on Data General technology.

DISK DRIVES

Several patent infringement cases involved disk drives. As part of a lawsuit Iomega Corp. filed, a judge barred Nomai S.A. and its U.S. subsidiary, Nomus Inc., from claiming in advertising and on packages and labels that their XHD cartridges are compatible with Iomega's Zip drives or disks. Iomega also has sued Nomai in France, Germany, the U.K., where Iomega says similar injunctions have been granted. Iomega claims Nomai cartridges can cause Zip drives to lose data.

And litigation over alleged faulty disk drives was settled this year between Seagate Technology Inc. and U.K. computer maker Amslit Ltd., formerly known as Amstrad PLC. Amstrad sued Seagate and its Singaporean subsidiary in 1992 claiming the firms had sold it faulty disk drives in 1988 and 1989, causing thousands of its PC2386 flagship desktop PCs to malfunction. Seagate was ordered to pay Amstrad $93.8 million. In November, the companies announced they would drop all litigation.

RECRUITMENT RIVALRIES

Several prominent companies have headed to court over rival companies' recruitment of employees. After much sparring through the news media, Informix Software Inc. dropped a lawsuit it filed in January against Oracle Corp. that accused Oracle of stealing trade secrets when it hired 13 former Informix engineers. Borland International Inc. and mega-rival Microsoft agreed in May to settle a lawsuit Borland brought against Microsoft in May. The lawsuit accused Microsoft of unfairly hiring at least 34 of Borland's top software architects, engineers and marketing managers. The firms did not disclose details of the settlement.

A group of engineers from Novell Inc. didn't have to be recruited -- they left to start their own company, prompting Novell to sue them. Novell charged several of its former employees, who had worked on Novell's Wolf Mountain clustering software before starting Wolf Mountain Group, with intellectual property infringement, trademark infringement, misappropriation of trade secrets, breach of contract and breach of fiduciary duty. In May a judge issued a restraining order barring Wolf Mountain Group -- which had to change its name to Timpanogas Research Group Inc.-- from competing with Novell's clustering technology. Meanwhile, TRG founder Jeff Merkey filed a sexual harassment case against Novell employee Denice Gibson.

USER LAWSUITS

AOL has done a public relations about-face from a year ago when it was besieged with complaints about its switch to an unlimited hours monthly fee that led to perpetual busy signals for users. Under a deal reached with attorneys general in 36 states in February, AOL will refund fees for users who had difficulty getting online in December 1996 and January 1997. AOL settled a class-action lawsuit in April by agreeing to offer refunds to users who had access troubles in February and March, as well. And in October, AOL filed two lawsuits against companies for sending unwanted bulk e-mailings to AOL members. The defendants are Prime Data Worldnet Systems Inc. and Over the Air Equipment Inc., which a federal court has asked to stop sending its e-mail ads for, ironically, spamming software.

In April, Dell Computer Corp. preliminarily agreed to settle lawsuits over computer screen sizes and recycled parts by offering discounts of up to $35 on peripherals. Dell was one of dozens of computer makers sued in 1995 for labeling screen sizes according to cathode ray tube size (CRT) as opposed to the area users can see when the CRT is in its plastic casing. The company also was among a group sued over the way they reused computer parts from returned computers in new systems. Dell said it had agreed to change its screen labeling and reused parts practices before the lawsuits were filed.

Intel agreed in July to give $50 rebates to purchasers of particular machines in 1995 and 1996 as part of a settlement of a class-action lawsuit that accused Intel of overstating the performance of some of its Pentium processors.

One user dared to take on Microsoft, but unsuccessfully. A judge ruled in favor of the software giant in a lawsuit filed by Anthony Lefco, of New York City, whose 1995 lawsuit claimed that he had to buy new components after trying to install Windows 95 on his PC.

MERGERS AND SHAREHOLDERS

Shareholders also took companies to issue over plans to merge with other companies, particularly when they thought the selling price was too low.

Two lawsuits seeking class-action status and money were filed against MCI Communications Corp. over its revised merger plans with British Telecommunications PLC. The lawsuits were filed after BT reduced the amount it would pay from $21 billion to $17 billion for the 80 percent of MCI it doesn't already own. MCI shareholders had approved the deal at the higher figure. But BT reduced the amount after MCI reported in July that it would lose in the fiscal year about $800 million, twice what had been expected. BT backed out of the proposed deal in November and sold its 20 percent stake in MCI to WorldCom Inc., for $7 billion. WorldCom beat out both BT and GTE in the competition to buy MCI, paying $36 billion in stock and cash. GTE had offered $28 billion in cash.

Shareholders also sued over merger plans between Cyrix Corp. and National Semiconductor Corp. and Amdahl Corp. and Fujitsu.

Cyrix was accused of breaching fiduciary duties by agreeing to be acquired by National Semiconductor in a stock swap valued at about $550 million, and National Semiconductor was accused of aiding and abetting Cyrix' breach. The lawsuit is pending despite Cyrix shareholders approving the merger Nov. 17.

The Amdahl-Fujitsu lawsuit also is pending despite the completion of Fujitsu's acquisition of Amdahl September for $850 million. The lawsuit filed in August on behalf of Amdahl shareholders claims that the selling price was unfairly low.

Meanwhile, shareholders dropped two lawsuits against Citrix Systems Inc. that had accused the company of violating federal securities laws by neglecting to warn investors that its licensing deal with Microsoft was in jeopardy. Citrix stock fell after the company reported that Microsoft might develop its own remote access software for Windows NT rather than continue licensing WinFrame from Citrix. But Microsoft announced in May that it would continue licensing Citrix' software.

.WEB, YEAR 2000 AND LARRY'S ORACLE?

The Internet Society's International Ad Hoc Committee's (IAHC) plans to add seven new top-level domain names to the Internet's domain naming scheme, including .web, also stirred some controversy with enterprising firms that had already been doling out inevitable suffixes. Image Online Design Inc. sued to stop the IAHC plan, claiming it had been assigning .web for over a year. The company dropped its lawsuit, but says it will refile it if the IAHC does not recognize it as the administrator of the .web registry. However, Don Heath, IAHC Chairman and president and CEO of the Internet Society, said the Image Online Design would have to apply to become one of the many registrars if it wants to deal in domains legally.

The owners of a market in Warren, Michigan, have filed what is believed to be one of an anticipated flood of 2000-related lawsuits. Produce Palace International sued Tec-America Corp. and All American Cash Register Inc. in August claiming the companies sold a defective computer system whose cash registers froze when trying to process credit cards with 2000 expiration dates. The lawsuit seeks $100,000 in damages and tens of thousands of dollars for lost business.

In another millenial lawsuit, computer maker Atlaz International Ltd. filed a class-action lawsuit against SBT Accounting Systems Inc. for allegedly failing to provide free year 2000 upgrade support for its database accounting Pro Series software sold before March 1997 that does not recognize dates after 2000. SBT said it had planned, before the lawsuit was filed, to offer a free upgrade in January 1998 for all users of the software. Atlaz' lawsuit, alleging breach of warranty and fraud, came one week after SBT sued Atlaz for breach of a reseller licensing agreement.

One of the more interesting cases involved Oracle CEO Larry Ellison and a former employee who claimed she was fired after refusing to have sex Ellison following one of their dates. Ellison agreed to pay Adelyn Lee $100,000 to settle a 1993 civil lawsuit alleging wrongful termination. However, a jury convicted her in January of faking an e-mail she had used as evidence in the lawsuit. Lee claimed the e-mail was sent by her boss to Ellison saying he had fired her "per your request." Her boss denied writing it. The 33-year-old former administrative assistant faces a possible four years in jail when she is sentenced Feb. 27.

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