Emulex Gets a Lift in Its Battle With Digital Over Trade Secrets

The balance in Emulex Corp.’s see-saw legal battle with Digital Equipment Corp. over trade secrets tipped yet again Tuesday, this time in favor of Emulex, the Costa Mesa computer parts maker whose future may well be determined by the outcome of the suit.

As a result of a U. S. Court of Appeals ruling, Emulex is temporarily free to resume work on a new generation of products that it has considered key to its future sales growth.

Analysts have projected that sales of the products, which work with DEC’s latest and fast-selling business computer system, could bring Emulex up to $5 million in the next six months alone.

In its ruling Tuesday, the court issued a temporary stay of a lower court’s order that had forbidden Emulex to develop or sell products that work with certain DEC technology if those products were designed by anyone using information stolen from DEC.

Digital’s original trade-secrets and patent-infringement suit charges that Emulex has used information improperly removed from Digital’s files by a former employee who was later hired by Emulex.

At this point, Emulex, which folded its poor-performing retail personal computer products division in November, is scrambling to boost sales and earnings.

In a separate announcement Tuesday, the company said that profits fell 76% in the fiscal second quarter, largely because of its sluggish Persyst personal computer line.

For the period ended Dec. 31, the company had net income of $379,000, compared to $1.6 million in the prior year. Revenue in the quarter was $25.7 million, up 1% from the $25.4 million posted the year before.

Emulex Chairman Fred B. Cox said that retail product line sales were at least $2.5 million below projections in the second quarter and generated 9% lower profits than originally estimated because prices were cut to stimulate sales and clean out the company’s inventory. Furthermore, Cox said, the company set aside $500,000 from its quarterly profits as a reserve against Persyst inventory losses.

The company said late last year that it was getting out of the retail business and aiming its products at so-called “value-added” dealers who combine computers, enhancement products and software for specific markets and users.

For the first six months of the fiscal year, the company had profits of $1.9 million, down 37% from the $3 million posted the previous year. Revenue was essentially flat. The company blamed the performance on its retail Persyst computer enhancement product line, which was dropped in December in favor of direct sales to specialized computer dealers.

However, analysts say the legal battle with Digital, which has stretched on for more than 18 months, also has hampered Emulex’s performance, particularly because the company has been forced at least twice to halt work on its most promising new product line, a series of devices that will work with DEC’s new VAX computer system.

Under the terms of the latest court ruling from Washington, Emulex can resume work on the products, pending the outcome of a hearing on its appeal of an earlier adverse ruling by a federal court in New Hampshire.