Avant, Execs Plead No Contest in Code Theft Case
Software company Avant Corp., its chief executive and six other current and former executives pleaded no contest Tuesday to criminal charges in the theft of computer code from a rival firm where Avant’s founders had worked.
Avant, based in Fremont, Calif., agreed to pay $27 million in fines to Santa Clara County. Avant could be forced to pay Cadence Design Systems Inc. much more in restitution after a hearing next month.
Five of the individuals face jail or prison terms of up to six years. Under the settlement, the seven individuals will pay the county a total of $8 million.
But Gerald Hsu, Avant’s CEO, will avoid jail time. Hsu pleaded no contest to conspiring to misappropriate trade secrets and to securities fraud.
Avant and Cadence compete in the lucrative market for software used to automate the design of semiconductor chips. San Jose-based Cadence dominated the market before Avant took off, introducing its own programs soon after its founding.
Avant had $358 million in revenue last year, and Cadence had $1.3 billion.
The surprise settlement came during jury selection for a criminal trial. The first charges were filed five years ago, and the case drew great attention in Silicon Valley because criminal prosecution of trade-secret disputes is extremely rare.
Former federal prosecutor Leo Cunningham, now of Wilson Sonsini Goodrich & Rosati in Palo Alto, said the Avant penalties will deter more egregious cases of trade-secret theft.
“People are going to take notice,” Cunningham said. “And if you are a potential investor in a technology firm, this would reaffirm your commitment to doing good due diligence on the origin of that technology.”
The jury trial was expected to last for months and involved more than a dozen top-drawer defense attorneys.
“Stealing source code is a serious criminal offense. I hope that this sends a message that if you do this kind of crime, you will be prosecuted,” said Santa Clara Deputy Dist. Atty. Julius Finkelstein.
Silicon Valley legal experts said the unusually high fine and jail terms were a resounding victory for the prosecution, which fought for years through complex issues and nasty tactical skirmishes. Avant’s attorneys had sought the removal of judges and even Finkelstein, arguing in appeals that he had been compromised by using experts paid for by Cadence.
All four of Avant’s founders worked at Cadence before starting their own firm in 1991. Three of them, along with Hsu, were among those pleading no contest. Charges were dropped against the fourth founder, Mike Tsai, who left the firm in 1995.
Avant’s early software included large chunks of Cadence code, including grammatical errors, according to prosecutors. A back-up computer tape from Cadence was found in the office of Avant founder and Vice President of Engineering Stephen Wuu, Finkelstein said. And checks from Avant executives went to a Cadence employee who quit and took copies of programs with him.
Avant used the stolen code to sell $200 million worth of programs from 1993 to 1998, prosecutors said. In addition to trade-secret theft or conspiracy charges, Avant, Hsu and four others pleaded no contest to securities fraud for failing to tell Avant investors that their company had stolen its core products.
Along with Hsu, former Avant employee Leigh Huang pleaded no contest and also will escape jail time.
Wuu will get a minimum of 16 months, and former Cadence engineer Mitch Igusa, who took the checks, could face six years. The remaining defendants could get up to a year in jail.
Trading in Avant’s stock was halted Tuesday after the settlement. Avant’s last trade was at $17.84, down 71 cents. Cadence’s stock rose 61 cents to $23.71.
“We applaud the D.A.’s tenacity and perseverance in pursuing this,” said Cadence spokesman Jim Christensen. “The importance of intellectual property and everything that surrounds it in this economy makes this a landmark case.”
In March, Avant agreed to pay $47 million to investors who sued for securities fraud. The company still faces a suit over trade-secret theft by Cadence in federal court.
“Today’s settlement removes the long-standing uncertainty surrounding the criminal case,” said Avant General Counsel Clayton Parker. “It confirms that this dispute does not involve any products currently sold by Avant.”
Though the evidence in the case was unusually strong, some observers were stunned by the harsh penalties.
Many of the biggest firms in Silicon Valley were founded by people who deserted a rival. Though courts have occasionally prevented the upstarts from selling products copied from their former employers, they have been loath to stop employees from starting over in the same business.
“[Silicon] Valley is the Valley because just the right balance has been struck,” said former prosecutor Cunningham. “It allows companies to devote resources to come up with new technology, but keeps enough freedom so that employees can leave and have a springboard to improve it. You always worry that when you start messing with that balance, you’re going to chill employee mobility.”
