On Litigation…(Azul)

I spent much of my early legal career as a litigator. To be honest, I didn’t really enjoy it. I found that I derived more professional satisfaction from preventing issues, rather than resolving them after they had turned into conflicts. As a result, over the course of my career, I’ve developed a framework for how I view litigation. It consists of four principles:

No. 1 – You only litigate when you have an important interest to protect. Litigation is costly. Incredibly costly. But it is not the expense that is the real issue, it’s the diversion of resources. Time employees spend reviewing e-mails and documents, educating lawyers and preparing for depositions is time away from the business. That’s the real cost of litigation.

No. 2 – A non-judicial resolution is almost always preferable. When you file a complaint, you are turning over resolution of an issue to a third party – be it a judge, arbitrator or jury. To a great degree you lose control of the outcome.

No. 3 – You litigate when you have a high degree of confidence that you will prevail. Bluffing is for weekend games of Texas Hold’em . When you file suit, you need to have fully evaluated all aspects of the case to ensure that the outcome will be favorable.

No. 4 – You litigate to win. This means that your employees, board and management team fully understand and support the commitment (both financial and time) required to prevail. It also means having seasoned litigation counsel who understand your business and objectives.

We recently concluded a case that is illustrative of some of these points.

In early 2005, Azul Systems was getting quite a bit of press when it announced a Network Attached Server product based on a new technology known as “chip multi-threading”. Many industry analysts and people in the engineering community questioned how a small, young company like Azul could develop this product so quickly. So did we. And, we knew quite a bit about this area. Sun had spent almost ten years and hundreds of millions of R&D dollars developing this technology. We also wondered whether Azul’s hiring of approximately a dozen former Sun employees, many of whom worked on the same technology while at Sun, might have helped Azul succeed so quickly in their development efforts. To point number 1 above, we had a very important interest to protect – our IP, and our shareholders’ investment in creating it.

In keeping with point number 2, we met with Azul six times in 2005 and multiple times in early 2006 to discuss our concerns. As part of these meetings, we provided Azul’s management team with a detailed analysis supporting our view that its products infringed Sun patents and incorporated Sun trade secrets. At the same time, we tried to resolve the matter through negotiation. We even sought creative approaches to resolve the dispute. One of these included offering to have Azul make their designs available under a GPL license similar to what we have done with OpenSPARC.

In March, 2006, Azul filed a Declaratory Relief action against Sun. In essence, they were seeking to have a court determine that their products were not using Sun intellectual property. When the case was filed, Azul executives were quite vocal and used it as the opportunity to garner media attention. As it is our policy not to comment on pending litigation, we kept quiet. No press releases, No CEO interviews. No public statements from our attorneys. As a result, we received a fair amount of negative press coverage. However, to point number 3, we had fully researched and prepared our position and felt confident that we would be heard as part of the judicial process.

Forced by Azul to litigate, and to point number 4, we put together the resources necessary to defend against Azul’s case. We also filed a cross-complaint bringing patent infringement and trade secret misappropriation claims against Azul.

Now, after nearly fifteen months of litigation, the case has been resolved. The specific settlement terms are confidential (not uncommon in a case like this) but, they are favorable to Sun. I think it’s likely that Azul had a change of heart about the case once they viewed some particularly damaging evidence that was provided in discovery.

So why do I discuss all this? Because companies are increasingly looking to litigation to resolve intellectual property claims. But it’s important to remember that litigation is just a tool. And, as with all tools, it is effective only when used dispassionately, in the right way and for the right reasons.