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Optical components

JDSU, Emcore Sue Optium

Optium is getting a little cold water sprayed on its pre-IPO party, as Emcore Corp. (Nasdaq: EMKR) and JDSU (Nasdaq: JDSU; Toronto: JDU) have hit the optical transceiver vendor with a patent infringement lawsuit.

The suit was filed Sept. 11 in U.S. District Court for the Western District of Pennsylvania. It concerns U.S. patents 6,282,003 and 6,490,071, both mellifluously titled: "Method and Apparatus for Optimizing SBS [Stimulated Brillouin Scattering] Performance in an Optical Communication System Using at Least Two Phase Modulation Tones."

In a brief court complaint, free of the hyperbole and grandstanding often found in lawsuits (darn!), Emcore and JDSU accuse Optium of violating both patents with its Prisma II 1550nm transmitters.

That Emcore and JDSU are teaming up would suggest Prisma sells primarily into the cable TV industry, as Emcore acquired JDSU's cable business in 2005. (See Emcore Buys JDSU's Cable Biz.)

The timing is interesting, given that Optium is on the verge of going public, having filed its initial S-1 form with the SEC on June 29. (See Optium Files for $100M IPO.)

Adding some intrigue to the case is the fact that several Optium executives came from JDSU. That includes CEO Eitan Gertel and senior VP of engineering Mark Colyar, both hailing from JDSU's transmission subsystems division.

Emcore and JDSU are jointly represented by the law firm of Jones Day. The lead attorney on the case did not return a call for comment.

Optium VP of marketing Tony Musto says the company has filed a response but declined to provide details about the products in question, although he did give the usual comment about the suit being without merit.

The '003 patent was granted to Uniphase Corp. on Aug. 28, 2001; Uniphase had filed for the patent in 1998, a year before its merger with JDS Fitel to form the JDSU we know and love today. The '071 patent was granted to JDSU on Dec. 3, 2002.

Optium is a notoriously quiet company. Its Web page doesn't even list products by name. But in the wake of the telecom crash, Optium managed to build a decent business out of 10-Gbit/s transceivers conforming to the 300-pin multisource agreement (MSA), the mainstream format for such devices until recently.

For its fiscal year ended July 29, Optium reported losses of $8.1 million on revenues of $69.5 million -- representing an 87.4 percent increase in revenues from the previous year. Gross margins were just 25.2 percent, though.

— Craig Matsumoto, Senior Editor, Light Reading

deauxfaux 12/5/2012 | 3:38:24 AM
re: JDSU, Emcore Sue Optium Real said: "Assuming 100% of the company value is from the alleged infringed products (which would be extremely conservative), it would be still enough to pay the damage to JDSU if JDSUGÇÖs patents indeed hold water"

Your point about valuation is a bit problematic. As a private company, the valuation of Optium at this point is nearly meaningless: there is no way of creating liquidity for Optium's shares to pay for any claims. Optium could be worth $100M to its VCs, but that doesn't mean that the VCs are going to cough up $100M in cash to pay for claims of patent infringement.

JDSU/Emcore wants cash...not a piece of Optium

Additionally, because Optium's officers were former employees of the division of JDSU which holds the patents, JDSU/Emcore will likely assert that the infringement was willful (since they knew of the patents when their own team created them at JDSU). If found guilty of willful infringement, then they will be responsible for 3X the actual damages.

The value of claims could be 4X the total sale of the infringing products... (actual + punitive damages)....payable in cash.

I think that Emcore doesn't care how it gets paid. An exclusive supply agreement from Cisco with damages from Optium would be just as good as an "all cash" settlement from Optium. This is assuming of course, that JDSU/Emcore has a valid claim.

BTW. If your child was under 18 and wrecked a car, you WOULD be responsible for damages in most states. The state requires you to give permission before your son/daughter gets a license, and forces you to incur liability to give that permission in consideration for granting a license to a minor.
whyiswhy 12/5/2012 | 3:38:25 AM
re: JDSU, Emcore Sue Optium Real:

See the posting below and learn some business law, which as Deax affirms, is as I say.

Apparently you have some skin in the game, because you seem to think there is an out or some sort of defense to the suit with Cisco involved. It's actually the opposite.

Are you the Cisco guy that thought it was a great idea to buy Optium components, or do you work at Optium and sell the stuff to Cisco?

Any indemnity which Optium offered to Cisco (or Cisco carved out in their PO T&C's) is only worth as much as Optium is worth, which in this case begs the question.

Sort of like your kid goes and runs his/her car into the neighbors house. As their parent, in most states you are liable. You get sued and lose (say). In theory your insurance company has to cover you. But what if they go bankrupt or run out of town? You still have to cough up the cash (sell the farm?), and it's your job to go find them and sue them, not your neighbors.

It's going to cost Cisco one way of another, and maybe cost them a lot.

Good luck with your career!

-Why
realoptics 12/5/2012 | 3:38:25 AM
re: JDSU, Emcore Sue Optium Why:


Deax did not just affirm you, it affirms that both what you said and I said are true! The law does say, as you suggested that Cisco might be liable, But I did mentioned that Cisco has its own protection(indemnity).

You mentioned: GÇ£Any indemnity which Optium offered to Cisco (or Cisco carved out in their PO T&C's) is only worth as much as Optium is worthGÇ¥--- which is very true, and Optium would likely be just worth as much as the value of the products they had sold. Assuming 100% of the company value is from the alleged infringed products (which would be extremely conservative), it would be still enough to pay the damage to JDSU if JDSUGÇÖs patents indeed hold water

The law is the law but you seemed still have difficulty to understand the supplier and customer relationship. For a recent example, NTP sued RIM, the Blackberry maker, got $625 million. Have you ever heard any individuals who owns a blackberry, or the Verizon/Cingular alike (who are equivalent to Cisco as to the subject we are discussing about) paid any penny to NTP?

By the way, I would not liable for anything if my kid is old enough, and had registered his/her own car, he/she can run anybody over, it is only his/her own problem. And Cisco is not the parent of Optium

DonGÇÖt be a bigot! We are simply having a casual discussion here, it at its maximum is only gossip. Why you have to always think that whoever present a different opinion than yours must have some direct interests? Is that narrow minded? Are you really playing hard balls with big boys?

Cheers, R.O
deauxfaux 12/5/2012 | 3:38:27 AM
re: JDSU, Emcore Sue Optium No one is going to sue Cisco.....period...end of story. The question is one of liability.

Technically, Why is right. If Cisco were to purchase Optium as a legal entity, the liabilities (for everything) will follow the assets used to create them. That is the Law. It could get laundered as an asset sale and maybe some of the liability question could be made murkier, but the result would be the same

But Cisco isn't going to buy Optium either.

Technically, if any company uses an product that infringes a patent, that company that bought, and is using the product can be held liable. But since no one wants their customer settling patent suits, nearly every supplier INDEMNIFIES its customers and agrees to take on the burden of defending patent infringement claims. It is in their best interest to do a good job of this since they have more to lose than a customer that can buy from several sources.

This is just about extracting dollars from Optium, and nothing else

realoptics 12/5/2012 | 3:38:27 AM
re: JDSU, Emcore Sue Optium Why:

There was absolutely no doubt that you are playing hardballs with the big boys.

But this big boy of Cisco will NOT be sued by those JDSU-Emcore alike since Cisco is their customer.

Also, your comments on:

GÇ£FYI, Cisco having bought Optium (a speculated possibility I was responding to) would absolutely inherit the lawsuit (that's the law)GÇ¥

is absolutely not correct. As this big boy Cisco would not have bought anything from whoever without a P.O that has half dozen pages of fine-prints attached with, in which the clauses clear Cisco from any legal responsibility on any possible infringements.

JDSU/Emcore can pursue in any directions they want but they do not even DARE to contemplate on asking Cisco for liability, they are pursuing Optium for the purpose of getting business from Cisco, or whoever else may buy, not trying to get any damage payment from Cisco whatsoever. JDSU may be big in the components business, but not big enough to sue their big customer as Cisco. This is not related to how strong they belive in their goddam claims in their stupid patents. As a matter of fact, JDSU would not even sue a small customer, who supposedly is the king or god to a supplier-in this case, their GÇÿballsGÇÖ are always soft, and they should be- and this is the real world that I am talking about

Cheers!

R.O
deauxfaux 12/5/2012 | 3:38:28 AM
re: JDSU, Emcore Sue Optium Cisco has absolutely zero appetite for getting into any part of the component business.

At the end of the day (assuming Optium did infringe) Emcore will take its money any way it can; through more business, patent licensing fees, or court settlements.
whyiswhy 12/5/2012 | 3:38:28 AM
re: JDSU, Emcore Sue Optium Real:

FYI, Cisco having bought Optium (a speculated possibility I was responding to) would absolutely inherit the lawsuit (that's the law), and you-betcha JDSU and Emcore would absolutely continue to pursue it, at least to the point of settlement (that's common sense).

Why: To drop the suit would be to lose substantial business and fail to protect the IP in question, thus making it (the IP) open season for anyone to come in and use it, quite legally. Any fair settlement would have to offset that loss of business and pay for the past infringement. Thus making the purchase of Optium by Cisco in a word word: stupid.

There is no such thing as a free lunch.

BTW, I live in this (hardball with the big boys) world.

-Why
deauxfaux 12/5/2012 | 3:38:32 AM
re: JDSU, Emcore Sue Optium No one is going to sue Cisco/SA. Optium is merely going to get sued for enough of a royalty to make them uncompetitive, and for all of the damages they've caused to JDSU/Emcore.

In practical terms this is nothing but a win-win for JDSU/Emcore. Cisco can choose to give back the business to them and they win. Cisco can decide not to award them business and they take the profits out of Optium's hide.

This of course, all depends on whether or not Optium was/is infringing. But actions like this are almost never taken lightly and I've heard that JDSU/Emcore has asked for an injunction to force Optium to stop shipment. No one would take that to court without some pretty strong evidence.
realoptics 12/5/2012 | 3:38:37 AM
re: JDSU, Emcore Sue Optium On the other hand, Cisco could be coming in as the mediator, to help on negotiating a settlement; Not because Cisco is afraid of being sued, but to keep their vendor choice to be as many as possible. They could bridge a deal, Optium pays some $$, buy a licence, then Cisco share the purchase to both sides, 50%-50 or 30%-70% whatever. That is all JDSU-Emcore wanted anyway.

JDSU- Emcore must listen to their customers, otherwsie it will backfire on other and all other productline purchases.

As a typical American saying: nobody kill the goose that laying the golden egg. Question is: Is Optium laying the golden eggs, or juts another hype?

RO
realoptics 12/5/2012 | 3:38:37 AM
re: JDSU, Emcore Sue Optium Don't be naive, JDSU would never sue Cisco, due to:

1)Suppliers never sue their customers

2)Kevin Kennedy was was from Cisco

Which world you live in?
deauxfaux 12/5/2012 | 3:38:45 AM
re: JDSU, Emcore Sue Optium Perhaps I wasn't clear, as I did know that JDSU had the lions share of the SA forward path business. I wasn't sure about the timing of SA's switch to Optium. around the time of the JDSU Chalfont deal.

I also agree that EMKR will not "play nice" on this one. They've decided that they have more to win than to lose. I would also bet that the 1550 Ex-Mod patent issues are the tip of the iceberg

From what I can gather, it appears that Optium has said "damn the torpedos" and is moving forward toward their road show. While the bankers might be relenting at this point, it is hard to say whether potential investors will be willing to buy the story. At Optium's current margins, royalties and licensing fees could really affect the business.

This of course, is to say nothing of potential damages in arrears.
happy_go_lucky 12/5/2012 | 3:38:50 AM
re: JDSU, Emcore Sue Optium The way I see this is that the profitable business is the SA business for Optium, if and how the lawsuit proceeds, Optium will either be worth significantly less or slightly more then expected.

Furthermore, considering that they are price leaders, the impact of losing the SA business will really be felt in their evaluation.

IMO, On the otherhand, Cisco will be standing and waiting either it will re-negotiate with Emcore or offer more business to JDSU to ensure that they are not named in the lawsuit..

Regarding JDSU's 300 PIN business, well one word sums it up ------- who -----. The Agility buy was an oversell with regards to the transponder business, and the best folks have been let go from FL (shut down) facility...
whyiswhy 12/5/2012 | 3:38:51 AM
re: JDSU, Emcore Sue Optium I was trying to counter the idea that somehow Cisco would come in and save Optiums butt. Ain't gonna happen. If they did, they would just get sued, then where would they be?

JDSU or Emcore might buy them, but as you point out, at a very low price. It's not as if they need the capacity or the technology or the customer.

Optium is finished. Not gonna IPO, that's for sure.

JMHO

-Why
^Eagle^ 12/5/2012 | 3:38:53 AM
re: JDSU, Emcore Sue Optium deauxfaux,

I agree with your overall post, with one exception. Emcore has a LOT of business with SA.

Prior to the buyout of JDSU CATV business by Emcore, SA had two primary suppliers of certain key optical line cards: Emcore and JDSU. the business was a sideline for JDSU while at Emcore it was core to their business. Emcore did a nice job of consolidation by buying the division from JDSU. Eliminated a key competitor and aggregated share.

However, while they were busy buying division from JDSU, Optium was working on closing business with SA. Optium offered some good value to SA with next generation cards / modules and addressed some issues that Emcore was slow to deal with (Emcore did not feel they had to as they were lead supplier and felt they had time). Optium stepped in and offered both a solution and a good price point.

This indeed hurt Emcore by any measurement... especially as the SA account was a big cash cow for them.

It will be interesting if Cisco wants two suppliers (Optium and Emcore) or if Cisco is willing to let Emcore pound Optium and hence eventually cause Cisco to pay more for the modules they need.

I don't think Emcore wants to play nice on this one.

Cisco however has strong reasons to try to get this to go away. If Emcore wins and Optium drops out of this business, Cisco is who gets nailed as Emcore will have significant pricing power once again.

It is good for cisco to have two suppliers and one of them being aggressive like Optium. Keeps price pressure on and also helps drive both companies to keep innovating.

Cisco also needs Optium in the game for non SA business. Optium's aggression has kept price pressure on other suppliers of 300 pin telecom transponders. Lower prices for 300pin modules is critical to Cisco as Cisco does not roll any of it's own line cards using discretes. Other telecom companies have a mix of off the shelf 300 pin modules and home grown line cards. Cisco is vulnerable here as all they do is 300 pin.

Finally, this is not only about the CATV stuff (although the lawsuit is abotu the CATV portion). If JDSU can put the squeeze on Optium, they have a better chance of winning generic 300pin business with their newly acquired Agility txponder. So far JDSU has suprisingly not been a leader in 300pin MSA modules. They have been getting bested by Optium, Opnext, Intel, and several others. IF they can hurt Optium via the CATV lawsuit, then they can create some FUD regards Optium, that might give them a chance to win some 300 pin deals.

It will be an interesting dog fight.

sailboat
Stevery 12/5/2012 | 3:38:53 AM
re: JDSU, Emcore Sue Optium Cisco is on slippery ground.

??

They probably are trying to force a sale, the lawsuit lowers the price. Then the question is then quid pro quo for the lowered sale price.



whyiswhy 12/5/2012 | 3:38:53 AM
re: JDSU, Emcore Sue Optium Cisco is on slippery ground. They dealt with Optium knowing full well they were likely violating the patent. They are damned lucky they are not named in the suit...yet. Although its a stretch, Cisco could be forced to replace fielded Optium hardware with either JDSU or Emcore hardware.

JMHO

-Why
deauxfaux 12/5/2012 | 3:38:58 AM
re: JDSU, Emcore Sue Optium I've got to agree with you. It seems crazy that anyone would want to buy a piece of the 10G 300 Pin business....especially when Optium purchases all of its key components.

VCs must feel like they have to exit
Stevery 12/5/2012 | 3:38:58 AM
re: JDSU, Emcore Sue Optium I'm amazed that there's been no comments on what I thought would be the bigger issue:

Who would buy the IPO? 10G MSAs are perceived as high-growth low-competition high-margin?

Huh?

I would've guessed that they would have tried to go the M&A exit, and the IPO was a threat to increase the price of the deal. If so, the threat backfired.

canadian_bacon 12/5/2012 | 3:38:59 AM
re: JDSU, Emcore Sue Optium I think that S-A(Cisco) won't sit idly by and wait for this to play out in court. I think S-A has known about the pending litigation for quite some time now so they are likely going to develop(or has already developed) their own technology in-house. They may also seek another vendor that isn't violating the JDSU/Emcore patents.
happy_go_lucky 12/5/2012 | 3:39:00 AM
re: JDSU, Emcore Sue Optium I agree on your statement, but however I would like to add that the loss or impact of the lawsuit on Optium will be hard felt because in general the cable tv business historically has had better margins, and given the 300 pin business market and low margins, I think that if Optium has to pay up they may feel the pain and their GM may drop even further down, or worst if the SA business is shut down, the GMs could be affected
deauxfaux 12/5/2012 | 3:39:02 AM
re: JDSU, Emcore Sue Optium "Since this really covers one customer's business, S-A (Cisco) will compel them to make nice"

Compelling takes time...and has its limits. Time is something that Optium doesn't have on its side if it wants to go public any time soon. Given Optium's less than stellar Gross Margins, it would be hard to make the argument that this lawsuit is "not material." Furthermore, I don't think that Emcore has much business with SA so their "downside" in any negotiation is limited. Getting "west coast Cisco" to lean on Emcore's transceiver business because of an SA problem seems unlikely.

Although 300 pin transponders dominate Optium's sales, my guess is that most of the contribution margin comes from CATV. Emcore is certainly going to want the business from SA/Cisco AND the lost profit from the business that they took.

"The bad blood here makes Bosnia look like a group hug."

Agreed....Emcore has decided that they can live with the fallout at SA. This will have more hitting than the super bowl
Idontknowwhatiknow 12/5/2012 | 3:39:05 AM
re: JDSU, Emcore Sue Optium The Prisma II Platform is the Scientific-
Atlanta (now Cisco Brand). A key Account for JDSU (Post Bubble it was in their top 5)was S-A to which JDSU had a very nice OEM business for complete line cards (Every component guy's dream). The mangement at Optium developed that business and the patent as well, so they kind of thought it was theirs, well sort of.

One of the reasons Emcore bought the business from JDSU was the strength of the S-A business. When the dust settled from the transaction, lo and behold, the business had been snatched by Optium and Emcore was left holding the bag.

Since this really covers one customer's business, S-A (Cisco) will compel them to make nice. This is a small part of Optium's business and important to Emcore, so look to see Optium throw in the towel and go back after it post IPO.

The bad blood here makes Bosnia look like a group hug.

If anyting, it will be entertaining.
happy_go_lucky 12/5/2012 | 3:39:06 AM
re: JDSU, Emcore Sue Optium Interesting. Yes, it would seem to be the right thing to do. As with what does Optium have to offer, my thoughts are little if anything, especially with Emcore in the picture and lost business opportunities...

I think Optium's IPO will be affected (delayed/or restructured) with a lot of cash going to JDSU/EMcore...
deauxfaux 12/5/2012 | 3:39:07 AM
re: JDSU, Emcore Sue Optium I checked Optium's latest S-1/A and they did add a section to their risk factors stating that this was not "material." Seems pretty optimistic to me considering all of the cross contamination from JDSU at Optium. Treble damages is a real possibility if they are found to infringe.

As for timing. Sun Tzu said 'confront your enemy with the tip of your sword in his face."

X-licensing certainly is common.... however a quick check at USPTO shows that Optium doesn't have very much to license back.

It will be interesting to see what the underwriter's counsel has to say about all of this as they are the final word.
Pete Baldwin 12/5/2012 | 3:39:07 AM
re: JDSU, Emcore Sue Optium Yes, the timing does seem to suggest that's what's going on. We'll see how much affect it all has.

You know, chip rivals routinely sue each other and eventually end up doing cross-licensing agreements (didn't Intel/AMD and Xilinx/Altera both end that way? I'm forced to admit my memory is rusty there)

Maybe the same kind of thing will end up happening here.
whyiswhy 12/5/2012 | 3:39:08 AM
re: JDSU, Emcore Sue Optium Long? Not at all.

You don't sue a poor man, even if he is stealing from you.

You let him get to the brink of being rich, then turn him upside down and shake.

Same work, better payoff, no customer complaints, etc.

-Why
happy_go_lucky 12/5/2012 | 3:39:09 AM
re: JDSU, Emcore Sue Optium Wow that took very long...thought it would have happened 5 years ago.....
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