By Phil Harvey, Redherring, http://www.redherring.com

SAN FRANCISCO, CA -- There's definitely something enticing about Cisco Systems (Nasdaq: CSCO)'s optical networking business. But is something shady going on there as well?

In the past year, Cisco has hired a number of employees from its competitors to work in its optical networking group. There's nothing odd about that, of course. The optical networking business is a relatively small world, and many senior engineers and managers have either worked with or for their counterparts at other firms.

However, more than 67 defections from Lucent Technologies (NYSE: LU), Alcatel (NYSE: ALA), and Fujitsu have prompted each firm to sue Cisco, accusing it of hiring specific employees with the intent of stealing trade secrets from its competitors.

IT'S RAINING RÉSUMÉSNo matter what your opinion is of Cisco, the trend is a telling one. On the one hand, it shows Cisco can successfully entice talented folks because of its market momentum and surging stock prices. Indeed, its competitors must get sick of reading the reams of press about how well Cisco treats its employees.

On the other hand, as voice and data networks converge, Cisco and its telecom equipment competitors have begun to resemble one another more closely. Perhaps Cisco has been too aggressive about trying to look like its rivals, who dominate the core of the Internet long haul and public service telephone network (PSTN) infrastructure.

Whether Cisco is scheming to take employees for their proprietary knowledge, and not just for their general talents, is an issue for the courts to decide. But while each case is going on, telling details trickle out about the competitive climate in the networking business. Indeed, competitors have a healthy sense of dread when Cisco comes to town.

THEM'S FIGHTIN' WORDSConsider a lawsuit Lucent filed on June 19, alleging that 10 of its former employees in Massachusetts are now using its trade secrets at their new jobs with Cisco. It was only in January that Cisco said it would build a 1.8 million square foot campus to house 5,000 employees on a 580-acre plot just northwest of Boston.

Cisco characterized Lucent's suit as a "desperate act by a desperate company," according to a report in The Boston Globe. "We cannot help it if Lucent is hemorrhaging," Cisco said in a statement given to the paper.

Zing! That was cute. But the fun is just beginning in that case. Cisco Watch will provide more details on the suit as they become available.

In other topically related litigation, last year Cisco settled a suit filed by Fujitsu, the Japanese company that is one of the largest employers in Richardson, Texas. The suit accused Cisco of stealing trade secrets when it hired 27 of Fujitsu's employees. Some had gone from Fujitsu to Cisco, others from Fujitsu to Monterey Networks, which Cisco acquired last year.

ALCATEL'S ANTICSFujitsu isn't the only firm to tangle with Cisco (or Monterey) in Texas. Of course, Cisco's growth in the area hasn't escaped the attention of job seekers or competitors.

Cisco's plans to build a $370 million campus in addition to the assets it acquired with Monterey will expand the company's employee ranks in the suburban Dallas area from around 900 to 5,000. Having said that, it's no surprise that Alcatel is having a legal run-in with Cisco at this very moment.

During the first week of June, Alcatel issued a press release announcing its intentions to sue Cisco for patent infringement in California, Texas, and the Netherlands. Although it publicized the suits, Alcatel has declined repeated requests for an interview.

But here's what we do know about the case: According to Texas court documents obtained by Cisco Watch, it seems Alcatel's original motive for litigation, besides holding on to key employees and protecting its intellectual property, was to try to put an up-and-coming competitor out of business.

THE PLOT TO STOP MONTEREYCisco's Joe Bass, formerly CEO of Monterey, submitted an affidavit signed on September 3 -- just days after Cisco acquired Monterey for $500 million in stock -- to a Texas district court. The document recounts a meeting on August 14, 1998, and a conversation months later between Mr. Bass, an Alcatel employee before joining Monterey, and Krish Prabhu, Alcatel's U.S. president and CEO.

"During our meeting, Mr. Prabhu threatened to spend '$50 million' to 'put a stop to Monterey,'" the affidavit states. "We don't have to win, just prevent people from working for nine critical months and [Monterey] will fail," Mr. Prabhu said, according to the affidavit.

Mr. Bass began working for Monterey just 10 days after that meeting.

Later on, though, Mr. Bass and Mr. Prabhu talked again, and this time Mr. Prabhu's tone was much different. The last part of Mr. Bass's affidavit recounts a conversation he and Mr. Prabhu had in February 1999. During that conversation, Mr. Prabhu admitted that Mr. Bass had done nothing wrong in hiring away Alcatel employees, and "that Alcatel's lawyers had sent Monterey threatening letters because that's what they do," according to the affidavit.

TRADE SECRETS OR GENERIC SOFTWARE?After suing Monterey, Alcatel asked the Texas court for a restraining order that prevented Monterey from hiring its employees. It also asked that seven specific employees have their computer hard drives preserved, presumably because those seven were actively using Alcatel's intellectual property on behalf of Cisco.

Instead of getting everything it wanted, the judge only granted that Cisco stop using some software written by one employee, Marian Trnkus.

Interestingly, the court's response to Alcatel's request refers to Mr. Trnkus's software as "generic" programs that he used to assist him in his work with Alcatel. Although most of the code did travel with Mr. Trnkus from one place to another, the State court's characterization of the software makes it seem less than life-threatening to Alcatel.

Kent Jenkins, a spokesperson for Cisco, has confirmed that even before the court granted that part of Alcatel's restraining order, Mr. Trnkus had been dismissed, and his software utility was no longer used at Cisco.

SAME BALL, DIFFERENT COURTWhat's Alcatel's next legal move? After the Trnkus discovery, a minor victory, Alcatel is now taking its patent infringement argument against Cisco to federal court. In its complaint there, Alcatel acknowledges that between the time Monterey opened its doors in July 1997 and the time Monterey was acquired by Cisco in September 1999, Alcatel lost "more than 30 of its key personnel" to Monterey.

As a side note: Alcatel shouldn't be so surprised its key personnel are so eager to leave. Since it acquired DSC Communications, another telecom equipment firm, in June 1998, the company has cut 600 jobs in the Dallas area alone.

Indeed, it remains to be seen how Cisco will fare through all its remaining employee-poaching litigation. One thing is for sure: When Cisco marches into other towns outside of Silicon Valley, competitors' employees (and then the corporate lawyers) always seem to follow.

http://www.redherring.com/insider/2000/0623/tech-ciscowatch062300.html