All Smiles at Avant! : Firm claims one victory against Cadence

Electronic News, Sept 13, 1999 by Jerry Ascierto, Jeff Dorsch

San Jose--A ruling by a federal judge could have wide-reaching implications for the upcoming civil trial in Cadence Design Systems Inc.'s lawsuit against Avant! Corp., filed in December 1995.

Avant! last week claimed to have won the latest round in its long-running legal battle with Cadence, which has alleged that former employees of Cadence, who went to work for an Avant! predecessor company, stole source code for Cadence software products for use in competing tools. However, Cadence and analysts downplayed the ruling, noting that a parallel criminal case against Avant! and some of its executives still is unfolding.

U.S. District Court Judge Ronald M. Whyte on Wednesday ruled that Cadence's trade secret claim in the upcoming civil trial against Avant! is barred by a release signed by Cadence in 1994.

"Cadence did release any trade secret claim it had based upon Avant!'s alleged use of Cadence's Design Framework II source code prior to the date of the release and continuing thereafter," Whyte found.

The civil court also ruled that the release, inked when Gerald Hsu, Avant!'s chief executive officer, left Cadence in 1994, bars all Cadence copyright claims arising before the date of the release, but allowed Cadence to proceed with copyright claims rising after the date of the release.

Avant!'s stock surged Thursday on news of the ruling, shooting up 61 percent to close at $23.81. Volume was extremely heavy, with 8.36 million shares trading hands that day, compared with an average daily volume of 198,000 shares in the last month. Avant!'s stock retreated slightly on Friday.

"This is a significant legal victory for Avant!," said David Stanley, Fremont, Calif.-based Avant!'s general counsel. "With its trade secret claim gone for this trial, Cadence is no longer eligible to receive punitive damages even if it prevails on its remaining copyright claim."

While those in the Cadence camp denied that this ruling would have any implications on the upcoming criminal trial, slated to begin on Nov. 15, the ruling looks to nullify the billion-dollar-plus civil settlement Cadence was hoping for. The ruling also bodes poorly for the Santa Clara County district attorney's office, whose burden of proof will be much higher in a criminal trial.

"The ruling should not impact the criminal case at all," asserted Deputy District Attorney Julius Finklestein. "The ruling did not find that a theft had not occurred or that unauthorized use of trade secrets had not occurred. A civil settlement agreement does not absolve someone from criminal charges.

"What if O.J. had won his civil suit? Do you think people would've forgotten about the criminal charges? We think we have a very strong case. And there are victims here beyond Cadence who have been harmed by this alleged theft, namely many of the people investing in Avant!," he continued.

Smith McKeithen, senior vice president and general counsel for Cadence, agreed with Finkelstein's assessment.

"What Avant! asked for was that Cadence's copyright and trade secret theory of the case be eliminated because of this 1994 release," McKeithen said. "Avant! got half of what it asked for, and we're going to appeal that half. The ruling arises out of a release that was basically a promise not to sue Avant! on things that had occurred prior to June 6, 1994.

"That promise not to sue has no effect whatsoever on whether or not somebody can be convicted of a crime," McKeithen added.

Despite the good news, Avant! isn't home free yet. The court's ruling that the 1994 release only bars Cadence's copyright claims arising before the date of the legal release makes it likely that Avant! will not prevail on the copyright claim concerning Avant!'s discontinued ArcCell product, Avant! stated. The ruling also increases the likelihood that Cadence will prevail on its copyright claim concerning Avant!'s Aquarius product; Avant! believes it has additional meritorious defenses with respect to the discontinued Aquarius line.

"This is just one step in a process," said Jennifer Smith, a senior software analyst for Dain Rauscher Wessels, a division of Dain Rauscher Inc., in San Francisco. At the same time, she called it a definite win for Avant!

She also noted that at least one of Judge Whyte's rulings in the civil case between Avant! and Cadence has been overturned on appeal, so this is not the last word on what will and what won't be litigated in the civil trial. She speculated that the civil case, now set for trial in October, will likely be postponed again, so Cadence can appeal this ruling and to allow the criminal case, which will be tried in Santa Clara County Superior Court, to take precedence.

Gary Smith, the senior electronic design automation (EDA) analyst for Dataquest Inc., San Jose, said that if this ruling stands, one of Cadence's goals in bringing the lawsuit and abetting the D.A.'s office in filing criminal charges -- putting Avant! out of business through heavy financial penalties and putting Avant! executives in prison -- won't be possible, which may help explain Avant! investors' exuberance last week.