Emulex Dealt Blow in Fight With Digital : Judge in Patent Case Reinstates Bar to Sale of Certain Products
Emulex Corp. has been handed a major setback in its bitter trade secrets and patent infringement litigation with Digital Equipment Corp.--a setback that could cost the Costa Mesa computer parts company as much as $5 million in potential sales.
The blow came late Friday when a federal judge in New Hampshire reinstated portions of a temporary injunction issued against Emulex in the lawsuit filed 18 months ago by Digital. The disputed wording had been removed from the injunction by a federal appeals court two months ago.
The new order, issued Friday by U.S. District Judge Martin F. Loughlin in Concord, N.H., prohibits Emulex from developing or selling products that work with certain DEC technology if those products were designed by anyone using information stolen from DEC. Digital’s suit alleges that Emulex has used information improperly removed from Digital’s files by a former employee.
Wall Street reacted to news of the ruling with wildly active trading in which the price of Emulex common shares declined sharply. Emulex was the third most active over-the-counter NASDAQ issue Monday, closing at $6.50, down $2.125 per share.
No Effect on Current Products
The active trading evidently was the result of investors’ belief that the ruling will delay the shipment of a major Emulex product designed to work with Digital computers, analysts said. Digital users are Emulex’s major source of sales.
In a prepared statement, Fred B. Cox, Emulex chairman, said the temporary order will have no impact on “any of our current products or revenues” and does not prevent the company’s continuing shipment of any products now in production.
But Michael J. Lewis, the company’s chief financial officer, conceded in a later interview Monday that the ruling could affect a product Emulex had planned to start shipping this quarter. Analysts had estimated that the new data storage product would provide “somewhere between $1 million and $5 million in revenue” for the six months between now and June 30, Lewis said.
F. Grant Saviers, a Digital vice president, said the ruling “vindicates the (company’s) position” in the lawsuit.
Emulex, however, denied wrongdoing and disputed Judge Loughlin’s interpretation of the evidence. On Dec. 29, Emulex asked the trial judge to transfer the litigation to another court. No decision has been made on that motion.
While Lewis downplayed the long-term impact of the renewed injunction, he said Emulex will ask this week that the order be stayed until an appeal can be heard by the U.S. Court of Appeals for the Federal Circuit, a special patent appeal panel in Washington.
At the same time, Emulex will ask the appeals panel to overturn Loughlin’s order.
Although Emulex has been developing products that are not dependent on Digital technology, about 68% of the company’s product line is designed specifically to work with DEC’s computers, Lewis said.
Engineering Director Hired
Friday’s ruling is the latest round in a legal battle that began in July, 1985, when Digital sued Emulex, alleging that Emulex infringed on Digital patents and obtained its trade secrets by hiring Digital’s former engineering director, Charles Hess.
In April, Digital won a temporary injunction ordering Emulex to stop developing and selling certain products that can be used with Digital’s computers.
Emulex appealed the injunction to the U.S. Court of Appeals for the Federal Circuit, which lifted the preliminary order last November after finding that Loughlin had failed to follow proper procedures in granting the injunction.
Friday’s ruling by Loughlin reinstates much of the original language and castigates Emulex management for being “involved in the receipt . . . and use” of Digital’s confidential information. The judge also said Emulex officials knew that the information was improperly taken from Digital by Hess. Emulex hired Hess away from Digital in July, 1985.
The judge further found that Emulex President Steven Frankel had admitted that his company possessed information belonging to Digital and that the information helped in the design of Emulex’s new product.
