Hughes Wins $230 Million From Smith in Patent Case
In a shattering blow for Smith International Inc., a federal judge Friday ordered Smith to pay Hughes Tool Co. an estimated $230 million to settle a 14-year-old patent-infringement battle.
The award, which caps a complex and bitter battle between the two rivals, is believed to be among the largest awarded in any U.S. patent-infringement case, according to lawyers from both sides.
The ruling is expected to be appealed by both companies.
Although Houston-based Hughes had sought $1.2 billion from the Newport Beach oil-services company, including virtually every penny of profit it earned on certain kinds of drill bits sold between 1973 and 1985, the $230 million awarded Friday by U.S. District Judge Harry L. Hupp still totaled nearly four times what Smith had hoped to pay.
The $230-million judgment is more than half of Smith’s shareholder equity of $399.2 million as of last June, the latest date for which figures are available. Until the ruling, many oil industry analysts said that anything much higher than $60 million would seriously jeopardize Smith’s future as an independent company.
Smith Chairman Jerry Neely and President Fred Barnes appeared shocked at the amount of the award. Immediately after the ruling, the Smith entourage left the Los Angeles courtroom for its “command post” at the Biltmore Hotel to discuss the action.
“We don’t even know what it means yet. We’ll have to go back and analyze it,” Neely said as he was leaving the courthouse. Neely declined comment regarding a possible appeal or what the ruling means to Smith’s future.
Though a victory of sorts for Hughes, company officials and lawyers expressed dismay, saying that the award was much smaller than what the company had asked for.
“I personally am very disappointed,” said Rolf Stadheim, one of Hughes’ attorneys.
“I’m not ever disappointed. If that’s what his decision is, we’ll live with it,” said a visibly irritated James Lesch, Hughes’ chairman. However, the ruling will be discussed at the next Hughes board meeting, possibly at a special session, he said.
In the wake of Friday’s ruling, Smith common stock hit a new low of $3 a share on the New York Stock Exchange, down $1.375, or 31% of its value, to become the Big Board’s biggest loser of the day. The stock traded as high as $14.25 in the last year, and during the peak of the oil boom at the turn of the decade, it traded as high as $70.25.
Hughes closed at $11 a share on the New York Stock Exchange, unchanged for the day on volume of 180,000 shares.
“Considering the state of the oil industry, Smith’s debt picture and cash-flow projections for the next three years, I wouldn’t be surprised to see them elect to go into bankruptcy,” said Jeff Freedman, an analyst with the New York investment firm of Smith Barney, Harris Upham.
“If they decide to go through the appeal process, the cost of litigation in management terms is probably not worth it. They might just say: ‘The hell with it, let’s go into liquidation.’ I would say that’s a viable management option.”
Although some analysts suggest that Smith units could be shaved off to pay Hughes, the two companies compete in an industry that is already depressed, and extreme bitterness exists between the two rivals, rendering such an accommodation less likely, said Herbert Hart, an analyst for the San Francisco investment firm of S. G. Warburg, Rowe & Pitman, Akroyd Inc.
“For one thing, Hughes has all the capacity it needs anyway. And there is such ill feeling between the two groups of individuals involved,” Hart pointed out.
Smith employs 2,403 people worldwide, including 1,750 in Irvine, making Smith one of Orange County’s largest employers. The company’s present employee base is down 47% from the 4,623 workers it employed in 1981. On Feb. 5, the company said it would lay off an undisclosed number of workers and make a 20% cut in production.
At Smith’s Newport Beach facility, disappointed employees expressed mixed emotions Friday. Some were sad, but most said they were relieved to learn that a decision had been reached. Many, like machinist Robert Cone, said the wait had been frustrating.
“It’s been like sitting on death row waiting to know whether the ax is going to fall,” Cone said, adding that the company’s uncertainty had prompted employees to put off vacations and major decisions like buying homes.
“For some time now, I’ve been wanting to start my own air-conditioning business. I guess I’ll do that,” Cone said.
Supervisors notified employees either individually or in groups. And a bulletin was posted in the company’s guard house.
A company “rap” session is scheduled Monday, where each department and its supervisor are expected to discuss the judge’s decision jointly with the company’s president, its board and other administrators.
“It’s good news to me,” said one man who was leaving the plant and requested anonymity. “I got laid off in November. This company deserves what it’s getting.”
Three years ago, a federal appeals court ruled that Smith had infringed on a Hughes patent for a rubber seal used in rock drilling bits and the hearing on the amount of damages began on Jan. 2.
Ironically, the patent in question expired Aug. 20, 1985.
Although Hupp said it would take about a week to draft his ruling, he orally held Smith liable for a 10% royalty equal to about $130 million. Interest on that amount was set at a AAA bond rate going back to 1972. Hupp said Hughes deserved the estimated $100 million in interest as fair payment “for Smith’s use of Hughes’ money for all those years.”
However, Hupp didn’t award damages, holding that there was no bad faith or willful infringement on Smith’s part. He also rejected Hughes’ demand that Smith pay its attorneys’ fees. Although it is unknown how much Hughes has spent in legal fees, Smith retained eight law firms to defend itself at an estimated cost of about $1 million a month, sources close to the company said.
The damages are far more than the $136-million judgment Hughes won last year in a similar patent infringement suit it filed against Dresser Industries Inc. of Dallas. That judgment is being appealed by Dresser.
Smith attorneys insisted throughout the trial that damage estimates furnished by Hughes were exaggerated and ought not to include lost profit. Smith’s damage estimates ranged from $22 million to $62 million. The company took a $27.8-million reserve in the third quarter of last year in anticipation of the award.
As previously reported, Smith posted a net loss of $58.3 million during the nine months ended Sept. 30, compared with net income of $7.5 million the year before. Sales during the nine-month period dropped to $524.9 million from $545.2 million.
