Enforcing intellectual property rights is turning out to be big business for telecom equipment companies battered by the economic downturn.

From 1991 to 2000, patent infringement lawsuits increased 111 percent, according to Patent Enforcement and Royalties Ltd. (PEARL), a consultancy that helps patent owners enforce rights given to them under patent laws. Even though the total number of patents granted has gone up 64 percent in this time period, this is still a major leap.

Nortel Networks Corp. (NYSE/Toronto: NT) is the latest company to head back to the courtroom in the hopes of winning some cash. The telecommunications equipment provider filed a patent infringement lawsuit against optical networking rival Ciena Corp. (Nasdaq: CIEN) last week in United States District Court in Texas.

In its complaint, Nortel has asked the court to require Ciena to either stop selling the gear that infringes the patents or license the technology in question.

It’s no surprise that companies would be looking to cash in on the action. Royalties from patent licensing in the U.S. have increased from $3 billion in 1980 to $110 billion in 1999. But all this litigation hasn’t come cheap. In 2000 companies spent a total of $4.2 billion on patent infringement cases, says PEARL.

Simon Leopold, an analyst with Merrill Lynch & Co. Inc. says he wouldn’t be surprised if Nortel is looking to generate some extra cash through enforcing its patents.

“Chasing down patent infringements could be a useful resource, if they have a solid case,” he says. “If they don’t, then it could be a distraction and an annoyance that wastes a lot of valuable cash.”

Specifically, the suit asserts that Ciena's CoreDirector, CoreDirector CI, MetroDirector K2, and CoreStream products infringe various Nortel Networks' patents relating to wave banding, virtual private optical networks, remote reconfiguration of optical networks, and patents essential to the Sonet standard.

In total, Nortel says that Ciena is violating eight of its patents. Two of these patents were awarded to Nortel back in 1987, while the remaining six were awarded in the past five years.

Nortel has filed lawsuits against several other companies for patent infringement in the past. In September, it settled a case out of court with Ethernet switch provider Extreme Networks Inc. (Nasdaq: EXTR) (see Nortel: No Mercy ). The two companies agreed to cross-license their technology.

Ciena has already gotten a taste of Nortel’s legal strategy as it battles a patent infringement case it inherited from its acquisition of ONI Systems Inc. In the original suit filed in District Court in California in March 2000 against ONI, Nortel alleged that the company had violated five of its patents (see Nortel Sues ONI). In April of this year, Nortel dropped four of those complaints. The remaining complaint, which also deals with wave banding, is set for trial in January. David Chamberlin, a Nortel spokesperson, emphasizes that these two suits are completely different and have nothing to do with each other.

It’s interesting that Nortel has decided to launch its lawsuit against Ciena now, considering that the CoreDirector, the most significant of all the products named in the suit, has been shipping to service providers throughout the world for the past two years. Nortel would not give any information as to the timing of the lawsuit.

"When our patents are being violated, we take legal action in order to protect our research and development investment and our shareholder value," says Chamberlin. "Based on our analysis, we believe that CoreDirector, CoreDirector CI, MetroDirector K2, and CoreStream products are within the scope of these patent claims."

Ciena declined to comment on this story, stating that the company does not discuss litigation.

Nortel introduced its optical switch, the Optera Connect HDX, last year (see Nortel's HDX is Here). But the switch has struggled to gain traction in what has become a crowded market.

Still, Merrill Lynch's Leopold says it’s too early to tell what the outcome will be.

“The experienced investor has learned to take these lawsuits with a grain of salt,” he says. “It’s definitely something you put on your list of potential risks. But these things usually drag on for some time, and they’re usually settled out of court anyway.”

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