Optical/IP Networks

Component Lawsuit: What's It Mean?

A lawsuit filed jointly by Stanford University and Litton Systems Inc. against a number of optical networking components and systems vendors added to a general bout of panic in the optical networking market today. But analysts say early scrutiny shows the overall effect may be slight.

"We think the impact will probably be minimal, even trivial," says Seth Spalding, director at Epoch Partners, an investment bank. And his fellow Epoch director, Mark Langley, agrees: "We're encouraging investors to look at ongoing business prospects, rather than focusing on the litigation. This won't slow down the industry or the companies involved."

Although the lawsuit certainly did nothing to lessen a broad stock-market tumble in the sector, it is hard to say whether there was any correlation. For example, JDS Uniphase Inc. (Nasdaq: JDSU) and Nortel Networks Corp. (NYSE/Toronto: NT), two companies directly affected by the lawsuit, lost 5 percent and 6 percent of their value, respectively, while ONI Systems Inc. (Nasdaq: ONIS) and Sycamore Networks Inc. (Nasdaq: SCMR), smaller systems startups that are less directly affected and not named in the suit, each had lost about 12 percent of their share value in trading late this afternoon.

The complaint, filed October 3 in California, alleges that the following companies violated U.S. Patent 4,859,016, owned by Stanford and licensed exclusively to Litton:

Litton and Stanford say these vendors are unlawfully using a fiber-optic amplifier based on technology developed in the late 1980s by Stanford researchers Herbert J. Shaw and Michel J.F. Digonnet.

"Without this pioneering invention, fiber optic communication would not exist in the form we know today," the complaint reads. Specifics of the type of amplifier involved are tough to discern on initial reading, as the language is couched in legalese and arcane technical terms. But it looks like erbium doped fiber amplifiers used in DWDM (dense wavelength-division multiplexing) are primarily implicated.

The litigants are seeking compensation in the form of damages and royalties. They also request an injunction to stop each of the defendants from further infringement of the patent.

Epoch Partners doesn't foresee an injunction, in light of the fact that the litigants are seeking royalties. They also don't think any monetary outlay by the defendants would adversely affect equipment pricing. "Components of any kind usually represent about 20 percent of the cost of a network device," says Spalding. If royalties of 2 percent are awarded to Litton, he figures they couldn't add more than 0.4 percent to the overall cost of any device.

Still, it's not clear how the litigation could affect the manufacturing plans of companies like Corning and JDSU, which already are suffering from capacity constraints and shortages in their supply chains (see Components Shortage Delays Deliveries). If raw materials suppliers and other manufacturing partners get skittish, it could mean further delays for OEM customers.

The lawsuit raises other worries, too. Carriers, for instance, may be concerned about having purchased questionable DWDM gear. After all, in some patent litigation, such as that involving machine vision, litigants have been known to seek compensation from customers who chose to buy products that were allegedly manufactured illegally. But Epoch is reassuring on this score. "I think it's clear Litton is after the manufacturers, not the customers," Langley says.

Nevertheless, such worries may have fed the near panic in the overall sector, where most optical components and systems companies lost between 5 percent and 15 percent of their value.

How could this have happened? It's not clear. Nearly all defendants listed in the suit seem to have known the patent existed and registered at least some of their inventions appropriately. "If you search the patent name [see U.S. Patent and Trademark Office Online], twenty-seven associated patents come up. The holders include many of the defendants mentioned in the suit," says Langley.

It looks like a case of patent interpretation -- one that will probably take a while to resolve.

Some sources question the validity of the litigation. "I don't see how you could wait for eleven years before pursuing something like this," says Christopher Nicoll, director at Current Analysis. "I mean, an optical amplifer is a pretty straightforward device. It doesn't take a long time to figure out that someone's stolen your patent."

Nicoll thinks that while the financial impact on the industry will probably be "reasonable," the lawsuit may trigger an upsurge in alternative methods of amplification, such as Raman amplifiers, which already are being used by some vendors (see Going Long On Light).

Other sources note that Stanford isn't the only outfit with an amplifier patent. David Payne, for instance, is widely credited with having invented the world's first erbium doped fiber amplifier while a researcher at Southampton University in 1987.

This is clearly a case where lines aren't clear and a court ruling could be useful. "The wording of this patent is very broad and vague," said one industry observer, who requested anonymity. "I don't think this is going to be over anytime soon."

-- Mary Jander, senior editor, Light Reading http://www.lightreading.com

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