Archive of Costa Mesa Facing Patent Battle With Cipher : San Diego Firm Wins Suit Against Wangtek
Cipher Data Products’ triumph Monday in a two-year, patent-infringement battle over computer data storage technology gives it the upper hand in a similar legal tangle with Costa Mesa-based Archive, analysts said.
At stake could be Archive’s leadership in the $400-million market for 5.25-inch tape drives, a computer-peripheral device used for data storage. Freeman Associates, a Santa Barbara market research firm, estimates that Archive controls 25% of the market while San Diego-based Cipher controls about 15%.
On Monday, Cipher announced that Wangtek, a subsidiary of Culver City-based Rexon, had agreed to pay damages and royalties of an undisclosed sum to settle a patent-infringement suit brought by Cipher in 1986. Last month, a San Francisco federal court jury upheld Cipher’s patents and each of its eight claims, and Wangtek decided to settle rather than appeal or wait for the damages phase to begin later this year.
Similar Suit Filed Against Archive
Cipher has filed a similar suit against Archive, and a second victory would force Archive to pay royalties, which would increase its cost of manufacturing and give competitors such as Cipher an advantage, according to Bob Abraham, a Freeman Associates vice president.
But Archive officials contend that the Wangtek settlement will have little bearing on their battle because their product is designed differently.
The patent disputes center on the technology for inserting a cassette into the side of a tape drive. The tape drive is a device that converts information stored on magnetic tape into signals that can be sent to a computer. Cipher claims its rights to that technology are covered in two patents received in February and June of 1986.
Abraham said the sideloading technology is important to the 5.25-inch tape drive because the cassette does not fit into the 5.25-inch package “unless you are very clever about designing it.”
“Cipher, of course, figured out how to do that and patented it several years ago,” Abraham said. “Their claim is that anyone else who loads sideways is in violation of their patent.”
For its part, Archive argues that Cipher took a technology developed by Archive for a larger tape drive and applied it to the smaller, 5.25-inch tape drive.
Once the Wangtek suit was resolved, Cipher planned to take action against Archive and other companies that allegedly infringed on its patents, Cipher officials said Monday.
But Archive beat Cipher to the punch, filing two suits of its own on May 11. The first, filed in U.S. District Court in Santa Ana, sought to invalidate the two Cipher patents involving the tape-drive technology.
The second, filed in Los Angeles Superior Court, accused Cipher of breaching a 1981 licensing agreement that gave the San Diego firm the right to manufacture and market 8-inch tape drives using technology developed by Archive.
Cipher filed suit against Archive in federal district court in San Francisco on May 13, alleging patent infringement. Spokesman Peter McGuirk said no trial date has been set for the suit.
Don F. Sinsabaugh, a technology analyst with Swergold Chefitz & Sinsabaugh, a New York investment firm, said Cipher’s victory in the Wangtek case puts Archive at a disadvantage.
“Cipher has the upper hand,” he said. “They have a patent, and they have a test case that they’ve won.”
Scott Rowe, a technology analyst with Robertson, Colman & Stephens investment bankers in San Francisco, said that Cipher Data won a “big battle when the legal issues involved (in the patents) were upheld. It’s got to leave Cipher fairly well disposed regarding its prospects” in a possible legal battle with Archive.
‘Protect Intellectual Property’
If victorious in court, Cipher Data will not “put (Archive) out of business” or prohibit it from making the tape-drive product in dispute, McGuirk said. Cipher seeks only to “protect its intellectual property” and receive a royalty.
Archive officials were disappointed at the jury’s verdict in the Wangtek case and were surprised when Cipher and Wangtek announced Monday that they had reached an out-of-court settlement on damages.
“What one jury may find as a valid (patent) claim, another might not,” said Tag Merrick, Archive’s corporate counsel. “We think we have some additional defenses to the patent claim. We think we will be able to prevail.”
“It’s a little early to know what the financial impact will be” if Archive loses the suit, Merrick said. “Right now, we don’t see a significant financial impact on the company.”
If the San Diego company does come out on top, “it could give Cipher the impetus to recapture market share,” Sinsabaugh said. “It puts them on a more favorable financial footing.”
Although both companies are treating the legal battle as a serious matter, the outcome is “not of monumental significance,” Sinsabaugh said. “There will be a financial impact on both companies, but it’s not going to make one company skyrocket and send the other to the poorhouse.”
COMPANIES AT ODDS OVER LOADING TECHNOLOGY
The legal dispute centers on loading technology that enables the cassette of 5.25-inch computer tape drives to be side-loaded into the drives. Cipher Data Products claims its rights to that technology are covered in two patents received in 1986. At right, a tape drive made by Archive Corp.
ARCHIVE Employees 900 Headquarters Costa Mesa Products Cartridge tape drives for computer data storage. Results for most recent fiscal year Revenue *$88.8 million Net income $6.1 million Per share $0.55 52-week stock price range $12.625-$4.625 Monday’s close (national OTC) $6.25, up 12.5 cents Common shares outstanding ** 13.2 million Market valuation of common stock $82.5 million
CIPHER data products, inc. Employees 1,950 Headquarters San Diego Products Cartridge tape drives and optical disk drives for computer data storage. Results for most recent fiscal year Revenue ***$178.2 million Net income $4.3 million Per share $0.30 52-week stock price range $12.625-$3.50 Monday’s close (national OTC) $9.50, up 12.5 cents Common shares outstanding ****14.4 million Market valuation of common stock $136.8 million
* Fiscal Year ended Sept. 25, 1987 ** at March 25 ***Fiscal Year ended June 30, 1987 ****at March 31
