Smith Sets Aside Fund for Patent Suit Liability

Times Staff Writer

Smith International Inc. said Friday that it has set aside a $22.8-million reserve fund to cover possible damages in a 13-year-old patent infringement lawsuit filed by Hughes Tool Co.

The lengthy and complicated case revolves around Smith's use of a patented part of a rock drilling bit designed by Hughes. Smith and Houston-based Hughes are fierce competitors in the worldwide drill bit market.

Officials at Smith, an ailing Newport Beach-based oil-services company, said the reserve will be considered an "unusual charge" and reduce earnings by $1 per share in the second quarter ended June 30. Smith, which lost $10.3 million on revenues of $175 million in the first quarter ended March 31, previously announced that it does not expect to be profitable until the end of this year.

Smith's attorneys prepared four scenarios for the suit, estimating damages to Hughes ranging from $22.8 million to $62 million, according to documents filed Friday with a federal district court in Los Angeles. However, Hughes is asking the federal court for about $1.2 billion in damages, including interest. The extent of the patent infringement and the amount of damages will be determined in a trial scheduled to begin next Jan. 2.

Smith based its damage estimates on the sale of 460,640 rock bits it sold between 1971 and the end of 1984. The bit sales generated about $1.3 billion in net revenues. The federal court has ruled that Smith infringed on the Hughes patent.

"The company is unable to predict the ultimate outcome of the litigation or the amount of damages that will be imposed on the company," Smith said in a statement. Smith said the ultimate liability may exceed its reserve by an undetermined amount "which could be material to the company's financial position."

Smith spokeswoman Val Maxey said Hughes has calculated damages based on several factors, including royalties and lost profits. Smith's damage estimates are so much lower because Smith's attorneys did not include lost profits in preparing its damage estimates for the court, she said.

Meanwhile, Smith has been streamlining its operations to reduce costs in the wake of a prolonged slump in oil-drilling equipment sales and services. In recent weeks, several top level Smith executives have resigned and three new vice presidents were appointed.

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