Legal Blunder May Be Costly to Hughes Aircraft : Could Lose $270-Million Claim; Judge in Patent Case Cites Error by Lawyers

A legal blunder in a patent infringement case brought by Hughes Aircraft against the federal government, the largest patent case in history, may end up costing the company $270 million, The Times has learned.

The blunder came to light in a ruling handed down last September by U.S. Claims Court Judge William T. Turner, who said Hughes’ lawyers had made a “unilateral mistake.” The ruling was only recently published in a patent law journal.

In addition, five knowledgeable sources--including lawyers, government officials and individuals close to Hughes--said it is widely accepted that a legal oversight caused the potential financial setback.

Hughes officials and attorneys declined to comment. John F. Walker, managing partner at Latham & Watkins, the law firm representing Hughes in the case, said his firm had not made any error.

Hughes Aircraft, a General Motors subsidiary, has been suing the federal government during the last 18 years for patent infringement on a complex device used to control orbiting satellites. Hughes is claiming $3.16 billion in damages, according to court documents.

Says U.S. Stole Design

Turner’s ruling found that Hughes had inadvertently released the government from some of its liability when the company signed a separate legal settlement with Ford Motor, which it was suing for infringement of the same patent.

The patented machine was invented in the early 1960s by Donald Williams, a young genius at Hughes who later commited suicide. Hughes claims that the government stole the design and used it on 108 satellites without any royalties being paid to Hughes.

The device allows a single small rocket motor to control the orbit of a spinning satellite by employing gyroscopic principles. Hughes has asserted that the invention enabled the creation of practical communications satellites, today a multibillion-dollar industry.

But government attorneys say that Hughes has overblown its claims “many times over” and that it does not possess a valid patent.

Nonetheless, the Los Angeles-based aerospace firm has already won two previous trials against the government, in which federal courts have found that Hughes has a valid claim to a patent on the device and that the government infringed on that patent.

Until Turner’s decision in September, which was reprinted in the U.S. Patent Quarterly, it appeared that the company was on the home stretch toward winning a giant award. The current phase of the case involves setting the penalty against the government.

Hughes is seeking a royalty of 15% of the cost of the government satellites, in addition to “delay compensation” to make up for the years that it was denied the royalties.

But Hughes’ legal position was rocked Sept. 29, when Turner threw out Hughes’ infringement claims on 13 government satellites, which were built by Ford Aerospace, a unit of Ford Motor. At least two requests for a rehearing on the ruling have been denied, but an appeal is expected.

The royalties and delay compensation on those 13 satellites represented $270 million worth of claims against the government, according to a secret court filing that Hughes made Oct. 7. Under the Justice Department’s method of valuing the satellites, however, the 13 spacecraft might be worth only $50 million.

Reported in Results

The ruling that threw out claims on the 13 satellites was based on wording contained in an out-of-court settlement with Ford. That settlement was never disclosed by either Hughes or Ford, but knowledgeable sources said Ford agreed to pay Hughes $75 million.

A Ford spokeswoman declined to comment other than to say that the money was properly reported in the auto maker’s financial results for 1987, even though it was not specifically identified in that report.

Sources close to the patent case say Ford wanted to keep the agreement secret because it was embarrassed by the large amount of the loss. At the same time, the award provided Hughes with badly needed income at a time when its operations were being hurt by other problems.

Turner, who sits on the U.S. Claims Court bench in Washington, wrote in his ruling last September that “the agreement provided for payment to Hughes by Ford of an amount which, though shielded from public disclosure, may fairly be characterized as highly significant even to large corporations in the aerospace industry.”

Used 2 Law firms

In the settlement, which was executed Sept. 10, 1987, Hughes agreed to a provision that released Ford customers from any liability for infringement. Turner quoted the secret agreement as saying, “The license granted hereunder shall extend to all customers for and users of said devices made or sold by Ford. . . . “

When the Justice Department heard about the Ford settlement, its patent attorneys immediately believed that the provision would release the government from any liability on the satellites that Ford built for the government.

And Turner ruled that the language of the agreement “could hardly be more clear cut.”

Turner went even further in his opinion, saying: “Hughes, drafter of the settlement agreement, could have avoided the current dispute merely by inserting ‘except the United States’ after the language releasing Ford customers and users of Ford products.”

The reason such language was not inserted may be related to the fact that Hughes had two different law firms pursuing its patent infringement claims.

For more than a decade, well-known patent attorney Sheldon Karon of Chicago successfully represented Hughes in its case against the government. But in the Ford settlement, Hughes’ in-house lawyers turned to Latham & Watkins of Los Angeles.

Asked why he had not handled the Ford settlement, Karon responded: “I don’t know. You would have to ask Dick Alden that.”

The reference was to Richard Alden, who was both general counsel of Hughes Aircraft and a senior parter of Latham & Watkins for many years. In 1985, he retired from the law firm but remained at Hughes, taking the additional title of vice chairman there, until his retirement last year. He could not be reached for comment.

Walker, the managing partner of Latham & Watkins, said he is not familiar with the details of the Ford settlement, but he asserted strongly that the law firm had not erred.

“If you are asking whether Latham & Watkins made a mistake,” he said, “everything I know is that we didn’t make a mistake at all in the case.”

Karon said he did not personally believe that the Ford settlement was flawed.

“I wasn’t there in the negotiation,” he remarked. “I have seen enough of these situations where hindsight is 20/20. I don’t know what kinds of things were left vague in the hopes of getting by.”

Karon asserted unsuccessfully before the Claims Court that since Hughes had never claimed any liability by the government in its suit against Ford, there could not be a release of government liability in the settlement.

Rejected Argument

Turner rejected that and other Hughes arguments. He found that Ford had fully understood what the release meant and that there had not been a “mutual mistake.”

The judge wrote: “At best, therefore, there was a unilateral mistake, which is insufficient as a matter of law to invalidate the release.”

After Turner’s ruling, Hughes made several attempts to obtain a rehearing. And still another law firm began representing Hughes. Kirkland & Ellis, a big Chicago law firm, made court filings asking for a rehearing on the matter.