Hinge on Drilling-Bit Trial
Fred Barnes, president of Smith International Inc., hasn’t smiled much in public during the past month--not since the damages trial involving his Newport Beach oil services company and Hughes Tool Co. of Houston began on Jan. 2.
Instead, for four long days each week, Barnes sits somberly behind the trio of attorneys who are arguing Smith’s case before U.S. District Judge Harry L. Hupp in Los Angeles.
The reason Barnes seldom smiles is that the outcome of the case is what Richard Stone, Smith’s lead attorney, calls “a matter of life and death for the company.” Hughes, which already has proved that Smith infringed on one of its patents for a drill bit part and appropriated the technology for its own bits, is seeking $1.2 billion in damages. Smith’s current market value is only about $103 million.
Stone, who wrote in one brief that “. . . Hughes is seeking to turn a piece of rubber into the weapon with which to kill a competitor,” has set up a command post at the Biltmore Hotel. Company attorneys and a core group of Smith executives are staying in Los Angeles for the duration of the trial.
Smith’s chairman, Jerry Neely, has been conspicuously absent. But Hughes Chairman James Lesch attended the trial for two days in early January. Hughes’ attorneys, executives and witnesses are staying at the Hyatt Regency Hotel. Sources close to both companies confirmed that this case is costing each firm millions of dollars--millions that Smith, at least, can ill afford.
Courtroom observers agree that it is difficult to say which way Hupp is leaning, because he questions attorneys and witnesses for both sides with equal vigor.
Meanwhile, the damages trial--now in its fifth week--has attracted a steady audience of bankers, engineers and attorneys for other firms. Representatives of companies that hold large blocks of Smith stock, including the Oppenheimer Management Fund, with an 8.3% stake, privately express deep concern about the outcome.
After nearly 14 years of litigation, there is no question that Smith infringed on Hughes’ patent No. 928 for a rubber seal used in a rock-drilling bit; a federal appeals court settled that three years ago. What remains for Hupp to decide is just how much Smith owes Hughes.
Closing arguments in the case are expected to begin in mid-February and Hughes will argue that Smith owes it at least $1.2 billion, including virtually every penny of profit Smith earned on certain kinds of drill bits sold between 1973 and 1985.
Smith, however, insists that Hughes’ damage estimates are out of line and should not include lost profit. Smith’s damage scenarios range from $22 million to $62 million.
And some industry analysts say an award to Hughes of more than $60 million will seriously jeopardize Smith’s future as an independent company. Although its current market value is about $103 million, Smith is heavily in debt from its unsuccessful attempt two years ago to take over Gearhart Industries Inc., a Fort Worth high technology oil services concern.
Although Hughes’ attorneys declined to be interviewed, testimony from their witnesses has shown the company’s basic contention to be that Smith’s infringement on Hughes’ “O-ring” seal patent gave drilling bit sales to Smith that Hughes otherwise would have captured. That is why Hughes is seeking almost all the profit Smith earned on sales of the bits in question.
Smith attorney Stone, however, says Smith’s fate turns on whether a “vague and ambiguous” patent can be used by Hughes to “preclude competition and, by circumstance, put a major competitor out of business.”
He says a “fair decision” by the judge would be to award Hughes damages in “the low-numbers range, because that’s all it’s worth.”
A parade of accountants, statisticians and engineers, all equipped with complex charts, has trooped through the courtroom this month.
Nearly 12,000 exhibits, about 2,500 of them referring specifically to the damages trial, have been filed in court. Bookcases filled with scores of thick, loose-leaf notebooks line the courtroom, and extra file cabinets installed in court hold thousands of additional documents. A collection of new and used drilling bits, so heavy that the attorneys can barely lift them, rest on top of the bookcase behind the long table used by Hughes’ attorneys.
The one point both sides wholeheartedly agree on is that Judge Hupp is doing an extraordinary job of keeping on top of the case.
He regularly helps the lawyers find their places in the volumes of transcripts and punctuates their daily testimony with pointed and astute questions.
“Judge Hupp is hard-working, intelligent and has excellent insight into what the real questions are in this case,” said Stone. “For a case of this kind, we couldn’t ask for a better or more sophisticated judge.”
Hughes’ attorneys declined to comment on the record but privately had nothing but praise for Hupp’s handling of the lengthy bench trial.
Hughes is no stranger in court. Three generations of attorneys from the Chicago firm of Haight, Hofeldt, Davis & Jambor have been defending Hughes’ patents in a string of 22 suits filed since 1934, according to a company source. The giant oil tool firm has won a majority of the patent-infringement cases it has filed, according to Hughes attorneys. Last year, for example, Hughes won a $136-million judgment in an “O-ring” seal patent-infringement suit that it filed against Dresser Industries Inc. That judgment is being appealed by Dresser.
Until the mid-1950s, Hughes maintained a virtual monopoly on the drill-bit industry with patents for its “Tricone” bit and its intermeshing rolling cutter. These designs produced a more efficient bit and were considered landmark inventions, industry analysts said.
But when the patents on those designs expired 30 years ago, other companies, including Smith, jumped into the fray.
Today, oil field industry analysts say that Smith and Hughes are neck and neck on certain products at a time when sales competition is fierce.
Although much of the testimony in the Smith trial so far has focused on accounting procedures, Hughes attorneys have tried to paint a picture of a desperate Smith dispatching engineering “hit teams” to buy, tear apart and copy Hughes’ most popular drill bits.
” . . . Smith needed a competitive rock bit more than it needed another patent which neither it, nor anyone else, would ever use, so independent efforts were ceased, and as in the past, Smith solved the problem by copying,” Hughes said in its appeal brief to the U.S. 9th Circuit.
Stone, however, insists that “Smith did not copy the bit.” He contends that if there were any infringement on Hughes’ patented rubber “O-ring” seal, it involved only about 30,000 bits, not the 400,000 Hughes wants to be paid for.
Meanwhile, outside the courtroom, chaos in the oil industry is threatening the future of both companies.
With crude oil selling for about $18 a barrel, about half its price five years ago, the number of rigs drilling for oil has dropped from 2,302 a year ago to 1,671 this week, according to the Hughes Rig Count, a weekly newsletter considered one of the most accurate in the industry. With fewer rigs drilling, the demand for drilling equipment has plummeted.
And possibly in response to a combination of low oil prices and the damages trial, Smith’s stock fell to $4.50 a share in trading Wednesday on the New York Stock Exchange, a 52-week low and nearly $10 below the year’s high of $14.25. The steady decline of Smith’s stock in recent weeks prompted one analyst to quip that the unsmiling Barnes “is better off in court than watching the day-to-day fluctuation of oil prices.”
