Hughes Tool Puts Price on Smith Lawsuit

Hughes Tool Co. is seeking minimum damages of $722 million plus interest from Smith International in a 13-year-old patent infringement lawsuit.

The damage claim represents more than half of what Smith earned from selling drill bits using a seal patented by Hughes and is almost as large as the troubled Newport Beach oil-services company’s 1984 revenue of $747 million.

“It’s the first time they (Hughes) have made a specific dollar amount claim,” Smith Vice President Paul Russell said Wednesday. Smith, which revealed the figure in its annual report, is fighting the suit in Los Angeles federal court. A trial on the damage portion of the lawsuit filed by Houston-based Hughes is scheduled to begin in January.

Russell downplayed the significance of the dollar amount, saying that, in most lawsuits, “you throw everything you can up against the wall and see what sticks.”

Don King, a spokesman for Hughes Tool, said in a phone interview that Hughes would not comment on any dollar amount related to the pending litigation or on any aspect of the case.

“The dollar amount is pretty much what I expected Hughes to ask for,” said one oil-services industry analyst who requested that he not be identified. “But the investment community is very well aware of the seriousness of the Hughes matter.”

According to Smith’s annual report, the company manufactured or sold about 475,000 drill bits containing the patented seal assembly between 1972 and 1984. Those sales represented about $1.3 billion in net revenue to Smith. The contested part, called an O-ring seal, is covered by a patent due to expire Aug. 20.

Smith, which lost $68 million last year, has been reeling under a worldwide slump in the oil-services industry. Depressed oil and gas prices have hurt the market for the drilling equipment and services that companies such as Smith sell.

The Hughes patent suit has been hanging over Smith for more than a decade. After a U.S. District Court ruling last March that an alternative seal that Smith designed for its drill bits also infringed on the Hughes patent, Smith spent millions developing a new seal.

Last year, Smith’s auditors issued a qualified opinion of the company’s financial statements, saying that any award could have a “material adverse effect” on Smith. Russell said the auditors’ opinion will remain qualified.

In 1979, a U.S. District Court held that the Hughes patent was invalid, but Hughes appealed the ruling and, in January, 1982, the U.S. 9th Circuit Court of Appeals reversed the judgment and sent the case back to District Court for further action. After several complicated legal maneuvers, a federal appeals court ruled in December, 1983, that Smith’s seal design infringed the Hughes patent.