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Arista mitigating Cisco patents in question

Developing "work arounds" should courts rule unfavorably in infringement litigation

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As litigation continues in the patent infringement case Cisco filed against Arista Networks, the defendant is developing “work arounds” for its customers should the courts rule in Cisco’s favor. Arista said during its Q3 earnings call on Nov. 5 that it has developed “design arounds” for each of the patents in question in the event of an adverse outcome.

From Marc Taxay, Arista vice president and general counsel:

I think the focus right now is to continue to defend ourselves in the case and to create a mitigation strategy in the event that there's a negative outcome… we have actually developed, to greater or lesser degrees, design arounds for each of the patents in the event that there's an adverse outcome. Some have been implemented already; others are in the process of being implemented... I would expect significant effort in the first half of next year.

Arista CEO Jayshree Ullal says customers are still buying Arista gear even with the lawsuit overhang. The company had a solid Q3 with revenue and earnings per share both up by 40%, beating Wall Street expectations.

Said Ullal in the Q3 earnings call:

The lawsuit has not had a dramatic negative impact on our sales momentum and customer revenue. That's because our customers are smart and they understand that while there's risks there's a deep appreciation for our technology advantages and also our commitment to assure continued supply through work arounds in a variety of ways. The way we have addressed it is actually how we addressed it with you all. We explain the risks, we explain our advantages, we explain the possibilities of work arounds and get them comfortable… we are putting in place contingencies for the work arounds. There's a very strong engineering focus.

One investment firm, SunTrust, reiterated a buy rating on Arista shares based in part on progress developing the patent workarounds, according to this Barron’s post. Another, Guggenheim Securities, also reiterated a buy rating on Arista, believing the outcome of the litigation won’t negatively impact the company.

In this Barron’s post, Guggenheim believes:

a full exclusion order against Arista’s products is unlikely; manufacturing and/or R&D workarounds would not be overly difficult for Arista in the event of a partial injunction; and a settlement remains the most likely outcome.

…despite the determination with which Cisco has been pursuing this case, we believe cooler heads will ultimately prevail, and that a settlement (potentially including some kind of one-time payment, licensing agreement, or retroactive royalty scheme) is in the best interest of both parties.

If a settlement is in the offing, Guggenheim does not expect it before the middle of 2016, according to the Barron’s post.

Even though mitigations are underway, Arista says it believes the patents in question are invalid and unenforceable. Cisco is OK with the workarounds as long as its IP isn't violated:

Our original goal has been to stop Arista from using Cisco’s proprietary technology in its products. We would welcome Arista to sell products that do not infringe on Cisco technology. To date, they have not done that.

Cisco Senior Vice President and General Counsel Mark Chandler posted the company's update on the litigation here. Chandler's post includes a sound bite from Arista co-founder Ken Duda apparently admitting that Arista copied the Cisco CLI.

Arista declined comment on the sound bite.

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