Cipher Data Gets Boost in Patent Fight : Settlement Gives S.D. Firm Edge With Rival
Cipher Data Products’ resounding triumph in a settlement announced Monday in its two-year patent infringement battle with Wangtek gives it the upper hand in a similar legal tangle with Archive, a Costa Mesa-based rival in a $400-million segment of the computer tape-drive market, analysts said Monday.
At stake could be Archive’s leadership in 5.25-inch tape drives, a computer peripheral device used for data storage. Freeman Associates, a Santa Barbara-based market research firm, estimates that Archive controls 25% of the market, and that Wangtek and Cipher follow with 20% and 15% market shares.
A Cipher victory would force Archive to pay royalties, increasing its cost of manufacturing and giving competitors such as Cipher an advantage, said Bob Abraham, a Freeman Associates vice president.
The dispute centers around loading technology that enables the cassette of the tape drives to be side-loaded into the drives. 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 media 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 insists that Cipher derived the technology included in the patents by leasing technology from Archive in the early 1980s.
In July 1986, Cipher filed suit against Wangtek, a subsidiary of Culver City-based Rexon, in San Francisco federal court alleging patent infringement. The suit was filed after licensing talks between the two companies broke down.
On May 26, the San Francisco federal court jury found in favor of Cipher, upholding the patents and each of Cipher’s eight claims. Rather than appeal or wait for the award phase of the trial to begin later this year, Wangtek decided instead to settle, paying Cipher a “seven figure settlement of damages, reimbursement of all Cipher Data legal costs and expenses, and an unspecificed royalty payment pursuant to a license agreement.”
Cipher said it will also receive royalty payments on Wangtek sales of the products in question dating back to February, 1986.
In a prepared statement, Wangtek parent Rexon described the settlement as “amicable” but did not disclose precise settlement amounts.
“The validity of our patents has now been upheld and recognized,” Cipher chairman Gary Liebl said in a statement Monday. “We are firmly committed to vigorously protecting our rights under them.”
Cipher had planned all along to set its legal sites on Archive and “a number” of other companies allegedly infringing on its patents once the Wangtek suit was resolved, 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 a suit of its own 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 but that deposition-taking will begin shortly.
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.” He speculates that Archive will settle the case by acknowledging the validity of the Cipher patents before the case goes to court.
Scott Rowe, a technology analyst with Robertson, Colman & Stephens investment bankers in San Francisco, said 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.
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.
Cipher said Monday that sales of its 5.25-inch tape drive products currently account for about 25% of its overall revenue, which totaled $178.2 million in fiscal 1987.
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.
“The problem with the Wangtek settlement is that they (Wangtek) don’t have the opportunity to go through the appeals process to overturn the jury verdict,” said Tag Merrick, Archive’s corporate counsel.
Archive contends that the Wangtek case will have little effect on its court fight because its tape drive products are designed differently from Wangtek’s products.
“What one jury may find as a valid (patent) claim, another might not,” said Merrick. “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.
Employees: Archive Corp.: 900 Cipher Data Products: 1,950
Headquarters: Archive Corp.: Costa Mesa Cipher Data Products: San Diego
Products: Archive Corp.: Cartridge tape drives for computer data storage. Cipher Data Products: Cartridge tape drives and optical disk drives for computer data storage.
RESULTS FOR MOST RECENT FISCAL YEAR:
Revenue: Archive Corp.: *$88.8 million Cipher Data Products: ***$178.2 million
Net income: Archive Corp.: $6.1 million Cipher Data Products: $4.3 million
Per share: Archive Corp.: $0.55 Cipher Data Products: $0.30
52-week stock price range: Archive Corp.: $12.625-$4.625 Cipher Data Products: $12.625-$3.50
Monday’s close (national OTC): Archive Corp.: $6.25, up 12.5 cents Cipher Data Products: $9.50, up 12.5 cents
Common shares outstanding: Archive Corp.: **13.2 million Cipher Data Products: ****14.4 million
Market valuation of common stock: Archive Corp.: $82.5 million Cipher Data Products: $136.8 million * Fiscal Year ended Sept. 25, 1987
** at March 25
*** Fiscal Year ended June 30, 1987
**** at March 31
