ONI/Nortel Lawsuit Moves to Next Level

ONI Systems Inc. (Nasdaq: ONIS) appears to be making some headway in its two-year battle to defend itself against a patent infringement lawsuit filed by Nortel Networks Corp. (NYSE/Toronto: NT).

Or is it?

On the surface, it would appear that Nortel's threat has diminished. Today, ONI announced that Nortel has dropped four of the five patent infringement claims that it filed against ONI in March 2000 (see Nortel Drops Patent Disputes With ONI). In the press release issued this morning, ONI said it will continue to fight the remaining claim.

But for ONI, the remaining patent lawsuit still poses a considerable threat. It’s unclear why Nortel decided to drop four of the five claims now (and the company would not comment on this specifically), but one thing is for sure -- the legal wranglings between the two companies are not over.

Joel Rosenblatt, a private practice patent attorney in Florida who is not involved in the lawsuit, hypothesizes that Nortel must be feeling confident about the strength of its fifth patent claim.

“The truth is it doesn’t really matter how many claims are established against a company,” he says. “The essence of the case is in the strength of any one of those claims. Hypothetically, if the Nortel patent is broad enough, it could put ONI out of business.” Nortel officials emphasize the fact that the lawsuit is still not over.

"Nortel Networks remains confident in the strength of its case," says Nortel spokesman David Chamberlin. "The action we took was to focus the case and to help bring it to a more efficient conclusion. We believe the patent which remains the subject of this lawsuit continues to reflect the core of our claim, and by winning on the remaining patent, Nortel Networks will obtain the same relief as if we had proceeded with all the matters in the original suit."

In the original filing, Nortel alleged that ONI infringed on five of its patents when it was developing its metropolitan-area DWDM transport system. The four patents that have been dropped from the lawsuit are for technology related to Sonet applications. They include patents entitled, “Ring Transmission System”; “Communications System with Protection Switching and Channel Identities”; “Communications System with Protection Switching Using Individual Selectors”; and “Protection Switching in a Multi-Channel”.

Originally, patent number 5,751,454, “Wavelength Bypassed Ring Networks,” was also included in the lawsuit, but in September 2000 patent number 6,084,694, “WDM Optical Network with Passive Pass-Through at Each Node,” was added and 5,751,454 was deleted.

The lawsuit, which has dragged on for two years, will likely end up in court some time this fall if a settlement can’t be reached before then. Nortel is seeking a judgment that declares patent infringement, stops ONI from producing products based on the patent, and compensates Nortel for damages and lost royalties.

The suit, which was filed in the Northern District of California Federal Court, San Jose Division, also alleges misappropriation of trade secrets, unlawful business practices, and unfair competition. Those claims remain part of the lawsuit.

In October 1999, Nortel also filed a lawsuit against ONI in Canada’s Superior Court in the district of Montreal. In that lawsuit Nortel sought an injunction to prevent ONI from hiring Nortel employees and its former contractors. It also sought to prevent those individuals who had been hired by ONI from Nortel from disclosing trade secrets. After successfully winning an injunction against ONI to stop hiring even more Nortel workers and contractors, the suit was eventually dropped in July of 2000, according to Nortel’s Chamberlin.

If Nortel wins the remaining patent lawsuit, it could have severe repercussions for Ciena Corp. (Nasdaq: CIEN), which agreed to acquire ONI in February (see Ciena and ONI: Wedding of the Year?). ONI vice president for marketing, Larry Loper, says this is of little concern at the moment. Not only does the company believe that it will successfully fend off the Nortel claims, but he also says both Ciena and ONI are currently being operated as separate companies until the merger is finalized.

”This really doesn’t affect Ciena right now,” says Loper. “Until the merger is complete, we’re operating as two standalone companies.”ONI was trading up $0.38 (6.16%) to $6.55 today in midday trading.

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com