LIBERTY CORNER, N.J. - Ordinarily, Lucent never misses an opportunity to flaunt its distinctive red logo.
But on a winding road in the tiny hamlet of Liberty Corner, N.J, you won't find the Lucent emblem beckoning you. You'll just see a sign listing Lucent among six companies sharing an office building.
Don't worry if you miss the structure. Lucent doesn't have anything to sell you here, unless you're a vendor seeking the privilege of paying Lucent a royalty to keep the company from suing you.
Welcome to the home of Lucent's Intellectual Property group, where scores of lawyers and engineers pore over the IT industry's product materials in search of violations of Lucent's treasure chest of Bell Labs patents. Since Lucent spun off from AT&T, the patent group has demanded royalties or other compensation from hundreds of other vendors. Some targets have been asked for up to 6% of their entire product revenue.
Lucent's aggressive tactics have resulted in epic patent lawsuits against competitors such as Cisco and Newbridge Networks. But Network World has also learned that some Lucent rivals are turning the tables, claiming in court documents that Lucent has engaged in unfair competition by trying to collect royalties on ATM, frame relay and voice-coding technologies only after they became industry standards and are widely deployed.
Lucent lawsuits demand that competitors pay not only royalties but also damages for robbing Lucent of product sales.
Court documents also reveal that Lucent attorneys have fought against demands for depositions that would force the company's executives to state exactly which of Lucent's data products have been hurt in the marketplace by competitors allegedly infringing on Lucent patents. And when those depositions have taken place, Lucent officials have had to admit they failed to implement their company's inventions for years at a time - and then have had to employ OEM agreements and acquisitions to enter key markets.
"What does Lucent own other than PBXs that has any kind of prominence in the [enterprise] market?" asks Howard Anderson, president of The Yankee Group, a consultancy in Boston. "Lucent would have liked to have been a Bay Networks, but it never was."
As a result, he says, Lucent is wielding its patent portfolio as a club while it assembles its data-network portfolio. "It regards these patents as large bargaining chips to cross-license what it doesn't have, and sometimes to mount some rather formidable barriers against competition."
Lucent officials insist they are not making royalty demands because the company's data-network product efforts are just getting underway.
But Lucent's targets are angry.
"I think this shows the mentality of how Lucent operates," says Daniel Scheinman, Cisco's vice president of legal and government affairs. "It missed the whole Internet thing, and now it's trying to apply old patents in a broad way." He calls the process a "shakedown."
Sniffing out offenders
Lucent officials acknowledge - and even boast - that they will do what it takes to protect their patent rights. The company spends 11% of its $30.1 billion annual revenue on research and development, and its U.S. patent portfolio, built on a base of Bell Labs inventions, now reaches nearly 10,000.
"We spend a fortune on technology," says Michael Greene, chief operating officer of Lucent's Intellectual Property group, which employs some 300 people. "All we are saying is: If others want to use [a patented technology], we would be pleased to allow them to use it - for a payment." [A Greene bio]
With so much at stake, Greene and his group have developed a highly choreographed method of targeting other companies, some of it modeled on legendary past patent enforcers IBM and Texas Instruments.
First, Greene's group assigns baskets of patents to individual Intellectual Property managers. These officials - and sometimes other Lucent employees outside the business unit - scour the World Wide Web, visit trade shows and seek out other forums in search of possible violations of Bell Labs technology. They funnel all that information to the so-called Patent Assertion Team, headed by corporate counsel Maurice dePicciotto, whose staff decides on the most promising opportunities for patent claims.
The target company then gets a letter asserting Lucent's patents and asking the company to agree to a license. If the target company doesn't agree, the case is turned over to a licensing team, headed by Lucent coporate counsel Donald Padilla, which then opens negotiations.
"It's not a short process," dePicciotto says.
Negotiations can drag on because Lucent won't settle for a cross-license if it's royalty-free to both sides. Lucent officials say they will only cross-license if there's a fee attached to each side's technology exchange, and Lucent's fee is larger. What if the other company comes out ahead in the cross-licensing talks?
"Horrors!" Padilla says. "Because of the significance and quality of our patent portfolio, the balance is almost always in our favor."
Some Lucent competitors say existing cross-licensing agreements are being shoved aside.
"They have notified us that they do not intend to renew certain relationships," says Fred Fromm, president of Siemens Information and Communication Networks, a big PBX vendor that's now entering the data market. Fromm says he isn't worried: "We'll discuss it with them because cross-licensing goes in two different directions."
Cross-licensing aside, big and small companies have been targeted by Lucent's patent managers, says one West Coast venture capitalist who asked not to be identified.
"I don't understand why [Lucent is] doing this," the source says. "It's stance seems to be: The first thing we're going to do is shut the world down and then come back and negotiate."
DePicciotto maintains that Lucent only approaches certain start-ups.
Other industry sources confirm that's the case.
"[Lucent] wants to wait and see if you're successful or not," says Gary Andresen, a former Dataquest analyst and now vice president of marketing at StarVox, a voice-over-IP vendor in San Jose. "Why should they [mess] with someone who has no money?"
Besides, intellectual property is a profit source for Lucent, says The Yankee Group's Anderson: "They monitor these people in terms of 'How much money did you collect for us?' "
Only the best
But sometimes Lucent can't collect any money quickly because the target company denies it's using any Bell Labs technology or claims that Lucent's patents don't apply to their products. Then it's off to court. Lucent has sued at least seven vendors, including PC makers and internetwork and voice-processing vendors. And at least once has Lucent been sued by a competitor first.
When in comes to litigation, Lucent uses some of the heaviest legal artillery available. One of its primary law firms is Kirkland & Ellis, a 537-lawyer behemoth with offices in New York, Chicago, Los Angeles and Washington, D.C. But the firm is best known for defending tobacco companies against liability claims and for its most famous partner, Independent Counsel Ken Starr. An online career-help service for law students, Vault Reports, credits Kirkland & Ellis with "a top-notch litigation department" and a "hard-ass reputation." Lucent also employs several other law firms, especially in Delaware and Pennsylvania, where most of its cases are filed.
The major cases have followed a distinct pattern. In June 1997, Lucent sued Newbridge, alleging that Newbridge's MainStreet multiplexers and ATM switches violated four Bell Labs patents.
Lucent alleged that the Newbridge multiplexers included: two 1988 Lucent inventions specifying congestion control in packet networks; a 1990 Lucent patent specifying error-correction methods; and a 1984 patent describing Adaptive Differential Pulse Code Modulation (ADPCM), a common method of encoding voice into 32K bit/sec digital streams. [Read more about ADPCM]
About a year later, Lucent sued Cisco, alleging violations of the same four patents, plus four more. But unlike the Newbridge case, the Cisco case spun out of control.
First Cisco countersued, claiming that Lucent ATM products violated recent inventions used in Cisco's Stratacom ATM switches. [See related story]
Then Cisco filed its own suit in U.S. district court in San Jose, claiming that Lucent was stealing some of its LAN and network-management technology. Finally, Lucent added a Gigabit Ethernet company it had bought as a new plaintiff in the case. [See related story]
Industry experts are amused and alarmed by the escalating warfare. Their concern: The congestion-control and voice-coding technologies involved in the lawsuits were deployed by so many vendors over a period when Lucent's predecessor, AT&T, did not aggressively assert its patent rights for ADPCM and other technologies.
"That's a good one," says Peter Bernstein, president of Infonautics Consulting in Ramsey, N.J. If Lucent wins that case against Newbridge, many other vendors could be targeted for possible patent problems.
"The line gets real long," he says.
Cisco's Scheinman claims that was the goal.
"Their strategy was: Assert patents against Newbridge, win against Newbridge, and then shake down the entire industry," he says. Another Lucent antagonist who asked to remain anonymous agreed: "I think that Lucent thought it was going to knock off Newbridge and then foist royalties on everybody else in the industry."
A cut of the revenue
Like Newbridge, Periphonics Corp., a Bohemia, N.Y., maker of voice-response systems, has had its share of legal conflicts with Lucent. [More details on what Periphonics makes]
According to Periphonics' court papers, Lucent in 1997 wrote to Periphonics charging that it was infringing on 10 Lucent patents. Periphonics then met several times with Lucent officials and denied the charge.
But "Lucent refused to discuss the merits of Periphonics' arguments," wrote Periphonics attorney James Mulligan. "Instead, Lucent demanded a 6% royalty on all product revenue that Periphonics earns, regardless of how it may relate to any of the 10 patents."
According to Mulligan, Lucent then warned that even if Periphonics' arguments about those patents held up, "it eventually would find [other] patents that Periphonics infringed." Finally, Lucent sued Periphonics in July 1998 in a case that's still pending.
Lucent's Greene says a demand for 6% is "on the high side" among the company's licensing negotiations. But industry insiders say that's often what's put on the table. "That's pretty typical of what I see," The Yankee Group's Anderson says. And for some companies, those demands can be scary.
"That's probably the profit of some companies, if they are lucky. Lucent is being predatory, I think," StarVox's Andresen says.
In the face of those demands, many companies are throwing in the towel.
"There are tons of companies that have been settling," says Frank Dzubeck, president of Communications Network Architects, a consultancy in Washington, D.C.
Dzubeck adds that the settlement is often for much less than the original demand.
But some firms that have settled prior to a lawsuit or just before trial have been forced to take charges against earnings or acknowledge cash payments to Lucent. Call center vendor Aspect Telecommunications took a $14 million hit. Voice-messaging vendor Centigram paid $9.2 million. Voice-response/customer-service software vendor Edify wrote off $5 million.
More settlements are almost certainly on their way, because most patents run either 17 years from the date they were approved or 20 years from the date they were submitted, even if the technology subsequently improves.
"If I invent a pencil and get a patent on it for 17 or 20 years, and you come along and invent an eraser, you can get a patent on the pencil and eraser," Lucent's Padilla says. "But you still can't make the pencil without coming to me."
Some experts say it isn't that simple. Lucent's claim of ownership for ADPCM is actually incorporated in the International Telecommunication Union's (ITU) G.726 voice-compression and encoding standard, says Brough Turner, senior vice president for technology at Natural Microsystems, a Framingham, Mass., maker of Digital Signal Processor chipsets and computer-telephony software.
And at least 11 parties, including Lucent, claim ownership to some part of follow-on standards that improve voice compression, he says.
"We don't want to have anyone coming to us with a patent from 1982 that just sat around and they never did anything with it," Andresen adds. "If it was so good, why didn't you take the technology and use it yourself?"
Now you tell us
Some of Lucent's antagonists raise other questions about standards. For example, the two congestion-control patents that Lucent claims Newbridge and Cisco are violating were awarded in September 1988. They have proven key to the development of ATM and frame relay in the 1990s.
But it was not until September 1996 that Lucent officially disclosed to the ATM Forum that it held these two patents. In letters available on the ATM Forum's Web site, Lucent said it was not prepared to waive its rights to these patents, adding that they related to two ATM Forum standards: User-Network Interface 3.1 and Traffic Management 4.0.
The problem: Both these standards were already finalized - UNI 3.1 in 1994 and TM 4.0 in 1996. [See what ATM patents Lucent - and other companies - claim]
And other companies have generally posted patent assertions while standards were still being considered.
"That's a no-no as far as I'm concerned on Lucent's part," says Mary Petrosky, an independent technology analyst in San Mateo, Calif. Asserting patents so late in the game "is a hardball method for one vendor to distract a competitor, to slow down a vendor or just suck money out of them through the legal fees," she says.
Cisco and Newbridge lawyers also cite a May 1996 antitrust consent decree between the Federal Trade Commission and Dell regarding a standard called VL-Bus. The FTC charged that Dell began asserting a 1991 patent on that technology only after the PC industry had shipped 1.4 million units using the approved VL-Bus specification.
The FTC ruled that Dell "unreasonably restrained competition" by forcing rival manufacturers to "delay their use of the design standard until the patent issue was clarified." [Read more about the VL-Bus ruling]
Now Newbridge lawyers are leveling the same accusation against Lucent. In court papers, they say Lucent misused the procedures of not only the ATM Forum but also the Frame Relay Forum, ITU and American National Standards Institute.
Lucent "abused the standard-setting process by failing to disclose Lucent's alleged proprietary position on a proposed or adopted standard," and then "tried to extract anticompetitive royalties from those relying on the standards."
Lucent officials heatedly deny the charge. Lucent's Greene says that long before September 1996, the company told the ATM Forum and other groups that as a general practice Lucent would be happy to license any of its patents, even if the company did not specify which ones could affect which standards.
"We've got 10,000 patents," says Greene, visibly annoyed. "I'm not going to spend my time determining the five of them that might affect a standard. Why should I do that? If it develops that we have patents that affect that standard, we'll license it on fair and reasonable terms."
What's more, in the Dell case, the FTC claimed Dell specifically denied that it had patents affecting the VL-Bus standard just as it was being approved. "[Any decision] turns in large part on intentional activities of the patent owner," Lucent's Padilla says.
"To hide it and then come out later and assert that is not something that we would ever do," he insists.
Newbridge lawyers claim that Lucent has been less than forthcoming with one key piece of information: how much revenue the company would have really lost due to patent infringement.
"We have a right to know what Lucent and AT&T produced at the time of these alleged inventions," Newbridge lawyer Ed Foote said at a pretrial hearing.
"What is the factual basis for their infringement case? What are the products that they manufacture that supposedly incorporate this technology?"
Lucent lawyers have even blocked testimony by Lucent's data-product chief to answer these questions.
Portions of depositions made publicly available show other Lucent officials struggling with this issue. In one deposition, Foote asked Lucent official Kenneth Clark what products AT&T or Lucent had produced since 1984 that perform ATM switching.
Clark said the first product he could think of was Globeview 2000, an ATM core switch that first made money in 1993. Clark also mentioned the PacketStar ATM core switch, which was introduced more recently.
"And then we have a few products since 1996 that we have OEM'd that have ATM capability," Clark added.
These depositions have become so sensitive that at one point in open court an argument broke out in which Lucent's lawyer called Newbridge's lawyer a liar. (The judge attributed the argument to stress between the parties because the stakes are high). [See related story]
Perhaps that's one thing on which everyone agrees. Lucent officials say they have 120 to 150 patent cases right now, while Cisco's Scheinman accuses them of "moving ahead rapidly and blindly to what they think is some sort of revenue pot."
In the struggle for dominance of the network world, there's no sign that Lucent is going to give up its claims that it invented much of what users employ today - whether or not it sports the Lucent logo.
