Optumsoft, a stealth software company founded by Arista co-founder and Stanford professor David Cheriton is suing Arista for breach of contract, misappropriation of trade secrets and declaratory relief involving what is essentially the essence of Arista’s product line: the Extensible Operating System (EOS) on its switches. Optumsoft filed its complaint in Santa Clara County, Calif., superior court on April 4, the week after Arista filed its $200 million initial public offering.
Arista foreshadowed the conflict in its S-1 IPO filing with the SEC. At that time, a complaint had not been filed by Optumsoft against Arista.
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At issue is technology Arista licensed royalty-free from Optumsoft for EOS called TACC – Types, Attributes and Constraints Compiler. TACC is a platform for developing modular or distributed applications or systems, a key functionality Arista markets as a differentiator for EOS.
In its suit, Optumsoft claims ownership of “improvements, corrections or modifications to” TACC, as well as any “derivative works thereof, made by or for” Arista involving TACC, such as EOS.
TACC includes a system database (SysDB) and agents for copying, collecting and distributing system state. TACC is intended to enable efficient development of high performance distributed applications with fewer lines of code, fewer bugs and faster time-to-market – all attributes of EOS of which, Arista says, SysDB is the core.
But in a countersuit filed April 14 in the same Santa Clara County court, Arista claims it developed SysDB for EOS and did not license it from Optumsoft. All Arista licensed was the software development tools in TACC to build EOS internally, including SysDB. “Optumsoft now claims rights in elements of a software package developed by Arista called ‘SysDB,’ which is part of EOS,” the Arista countersuit states. “This claim is directly refuted by Cheriton’s pre-litigation conduct showing Optumsoft’s awareness that Arista owns SysDB.”
As an example, the countersuit describes a 2008 interaction between Cheriton and Arista in which Cheriton encouraged Arista to license SysDB to a third-party company called Aster Data, while Optumsoft separately licensed TACC to Aster Data at about the same time.
“Optumsoft would not have asked Arista to license SysDB to Aster Data in 2008 unless Optumsoft believed that Arista, and not Optumsoft, owned SysDB,” the Arista countersuit states. “Indeed, under Optumsoft’s current theory that Optumsoft owns SysDB under the terms of the 2004 Agreement, Optumsoft’s license to Aster Data of the TACC tool would have already encompassed SysDB, making a second license from Arista redundant (and ineffective).”
Arista says Optumsoft is a failing company trying to capitalize on the financial success of another just as it is about to raise additional capital through a public offering.
“This case involves an all too common scenario: a successful company about to go public (Arista) sued by a failing company seeking a Hail Mary to rescue it (Optumsoft),” the countersuit states. “The failing company fabricates a claim to own the successful company’s intellectual property, in the hope of disrupting the IPO and securing some payoff in the process.
“(U)nder Optumsoft’s theory, there are effectively no limits to what Optumsoft can claim to own,” the countersuit states. “No company would ever license a development tool to write software if use of the tool would transfer to the toolmaker ownership of the company’s software. But that is the absurd deal Optumsoft now claims Arista struck.
“Arista brings this Cross-Complaint to defeat Optumsoft’s fabricated claims and to obtain from the Court a declaration of what Optumsoft has itself acknowledged again and again –that Arista owns the EOS software that it created.”
But should Arista lose this case, the results could be catastrophic for the high flying data center switching company which doubled earnings every year between 2010 and 2013, and almost doubled revenue between 2012 and 2013. If it were determined that Optumsoft owned components of EOS, Arista would be required to transfer ownership of those components and any related intellectual property to Optumsoft, the company stated in its S-1.
Optumsoft could then make them available to Arista competitors, stripping Arista of its differentiation in a hotly competitive market where to date it’s been very successful.
Alternatively, a big payout to Optumsoft to resolve the dispute could impact Arista’s consecutive profitability profile and revenue stream, observers note, making the company’s IPO a potentially unappealing investment.