Rights controversy is highlighted by LSI Logic lawsuit

Electronic News, March 10, 1997 by Crista Hardie

San Jose, Calif.--A trade secrets theft claim by industry leader LSI Logic against a fledgling networking chip company may look on the surface like the oft-quoted Goliath vs. David scenario. But at the heart of the suit is a question which has no clear answer: Where is the line between a company's right to protect its technology and an employee's right to pursue his own path? Silicon Valley, after all, was born of the restless spirit of invention.

LSI Logic sought an answer to the question on Feb. 27, when it sued two former employees and the company they founded--Maker Communications Equipment, Inc.--for misappropriation of trade secrets related to its ATMizer II product.

LSI also claimed unfair competition, breach of contract, interference with prospective economic advantage and several other related counts. The suit was entered in the Supreme Court for Santa Clara County, requesting injunctive relief, damages for willful violation of trade secrets and the return of patent applications or patents derived from the use of LSI proprietary information.

U.S. courts are jammed with similar cases. Ex-employees, disgruntled or merely ambitious, are hit with suits by larger companies jealously guarding their hard-won patents or technology. This often has the unfortunate side-effect of stopping a start-up.

The potential is there for the American entrepreneurial spirit to be crushed by that other all-American industry--litigation.

The stakes are high. Companies spend millions of R&D dollars every year developing new technology, and new competitors enter the market every day. Consumer insatiability for the latest innovations makes it increasingly difficult to come up with timely products that will be of interest to the market. This fact, in recent years, has resulted in more attention to the issue, more cases and more concern.

However, the laws are there to encourage new technology to be developed, experts say--not to stifle innovation--because at the end of the day, the American economy is based on the ability to build a better mousetrap.

Most IP cases don't go all the way to court. Both sides have an incentive not to litigate. Lawsuits are ugly, costly and time-consuming.

"A lawsuit will kill a start-up. Just the fact that you've been sued will keep a company from getting financing," said David Jaffer, an IP litigator with Rosenblum, Parish and Isaacs.

One way companies try to discourage trade secret misappropriation is by entering confidentiality agreements at the time an employee signs on with the company, and then enforcing them, Mr. Jaffer said.

"I haven't seen that having employees sign confidentiality agreements is deterring people from jumping out on their own. People who are prepared to take the risks will do it. Where the issue gets tricky is when you try to identify what someone acquired as general know-how in the course of their employment and what is really proprietary," Mr. Jaffer said.

LSI has charged former employees, Paul V. Bergantino and William N. Giudice, with willfully applying their knowledge of the ATMizer product in the development of a product just introduced by Maker.

Mr. Bergantino, now on the board of Maker, was the engineering architect of the ATMizer and was integral to the development of the ATMizer II, according to LSI's suit. Mr. Giudice, Maker president and CEO, was in charge of regional sales and LSI's design center in Waltham, Mass., where Maker now makes its home.

LSI's ATMizer II device is a programmable asynchronous transfer mode (ATM) network controller, which performs segmentation and reassembly (SAR) of the ATM layer functions at the SONET OC-3 rate of 155-Megabits-per-second (Mps).

The MXT3010 ATM SAR device from Maker incorporates similar features, including support for the latest ATM Forum traffic management specifications, but is designed to operate at the higher OC-12 622Mps rate. Currently, the MXT3010 is the only chip Maker markets.

"LSI has gone to court because they're unable to compete with us on good products and good services. We have the right stuff at the right time... We focus on the important companies in the equipment market and, from our engagement with these companies, we can see who's doing what--not just in terms of money, but in terms of technology," Mr. Giudice said.

Messrs. Giudice and Bergantino formed Maker in October 1994, after both voluntarily left LSI Logic. Level One Communications of Sacramento bought a minority interest in the company in June 1995. A subsequent round of financing last fall by Bessemer Venture Partners and Greylock raised $8.7 million, giving Maker the muscle to begin volume shipments of its first product.

"We have treated all LSI technology like cryptonite. We've gone out of our way not to know any specifics about LSI technology. When we started the company, Paul and I spent a fair amount of time and money with lawyers and established an agreement, not just with LSI Logic but with all of the companies our employees come from," Mr. Giudice said.