Can Chiaro Stay Focused?

Chiaro tries not to let its legal scuffles with Alcatel bog it down

January 22, 2001

3 Min Read
Can Chiaro Stay Focused?

RICHARDSON, Texas -- Chiaro Networks CEO Ken Lewis, armed with his telephone and flanked by publicists, is hoping to make his firm's legal lemons into lemonade.

Optical router maker Chiaro is in the unenviable position of defending itself against two employment-related lawsuits, both filed by telecom giant Alcatel SA (NYSE: ALA: Paris: CGEP:PA). In a market where equipment startups are clinging to every last dollar of funding they have, Lewis estimates that Chiaro has already spent $4 million to defend itself and may spend as much as $10 million to fend off two suits at once.

The stakes here are particularly high, as Chiaro is working to have a product finished by this time next year (see Chiaro Networks Ltd.). When its product gets to market, Lewis says, "it will be the largest Layer 3 router in the world," in terms of capacity or number of ports. Chiaro says its product has an all-optical core with a switching fabric that switches data packets in light.

Though an electrical-to-optical conversion still happens as packets are moved from the network to the switch, Chiaro says its product's core technology allows its router to expand to a capacity that's "ten-times anything on the market today." Lewis describes the router's switching technology as "bit-rate agnostic... As line speeds go upwards of 40 gigabits per second, and they will, our switch will be fine." (See Chiaro Gets $100M for "Optical Router" .)

And while it hopes to take on Juniper Networks Inc. (Nasdaq: JNPR) and others in the core routing market next year, Chiaro is spending some of its $128 million in total funding on lawyers to keep Alcatel from shutting it down or, perhaps, collecting royalties off its future products.

In its most recent lawsuit against Chiaro, Alcatel alleges that Chiaro's investors and one of its executives recruited certain employees with the intent of getting them to spill proprietary information about Alcatel's terabit optical router (see Alcatel Sues Chiaro VP, VCs). According to Alcatel's original complaint, filed in August 2000, Center Point Venture Partners, CenterPoint managing partner Bob Paluck, and Chiaro technology VP Steven Wallach were "engaged in a civil conspiracy among themselves and with Chiaro for their own profit and gain."

In 1999 Alcatel sued Chiaro for intellectual property infringement and sought to block it from hiring any more Alcatel employees. U.S. District Judge David Folsom, however, didn't grant Alcatel's request for an injunction (see Judge Denies Alcatel Injunction). According to Folsom's ruling last spring, the fact that a person takes a similar job with a competitor doesn't make it "inevitable that he will use or disclose... trade secret information."

As all of that transpired, Chiaro sued Alcatel in order to get back some of what it's spending on legal fees. Both Chiaro and Alcatel are now deposing witnesses and waiting to slug it out in federal court this June. And when the federal trial gets underway, both Alcatel and Chiaro might also be tied up in state court over Alcatel's second lawsuit.

While it attacks Chiaro in two different legal venues, Alcatel says that its playbook hasn't changed. "We're committed to protecting the assets of our company on behalf of our shareholders and employees," says spokesman Brian Murphy.

While the state court untangles who was hired, how they were hired, and whether they disclosed trade secrets, the federal court will address the specifics of Chiaro's technology and whether Alcatel's patents were violated.

The bottom line is that, despite whatever spin it puts on the matter, Chiaro is struggling to keep its employees from being distracted as it battles a hydra-headed legal beast (see Vendor Lawsuits Get Personal ).

"If there's any good news here it's that we're well funded," Lewis says. "But we'd rather put the money somewhere else than spend it on legal fees."

-- Phil Harvey, senior editor, Light Reading

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