NAI Will Pay Trend $12.5 Million Resulting from Law Suit

NAI Will Pay Trend $12.5 Million Resulting from Law Suit
L. Taylor - July 5, 2000

Note: This News Analysis as originally published on July 5, 2000 contained factual errors and inaccuracies that have been corrected in this version.

Event Summary

Settling a patent dispute out of court, Network Associates agreed to pay Trend Micro $12.5 million for the cost of licensing Trend's patented technologies. Both companies claim to be the innovator of scanning for viruses in electronic mail.

It was May 13, 1997 when Trend Micro initiated litigation in a Northern California Federal District Court against Network Associates for infringing on a patent (Registration No. 5,623,600), seeking an injunction on production, sale, maintenance and support services of the products in violation as well as monetary damages. In response to the lawsuit, Network Associates filed a counter suit alleging "unfair competition and wrongful acts." Network Associates claimed that Trend's patent infringed on one of their patents (Patent Registration No. 6,029,256).

Market Impact

Trend Micro has been lagging leading market indicators, and has dropped substantially in share price since its February high even though its revenue is up 55% from last year. With revenue growth almost 670% higher than the industry average, Trend Micro is well positioned to recover their lost market cap and regain investor confidence levels.

Figure 1. Trend Micro compared to leading market indicators.

In a press release following closure of the litigation, Network Associates announced, "Trend alleges that Network Associates' "WebShield," "GroupShield," and "Gauntlet Firewall" products infringe a Trend patent that was issued on April 22, 1997" [1]. Network Associate's SEC filing stated that Trend and NAI "agreed to cross-license their anti-virus patents." In this same SEC filing, NAI stipulates, "The unaudited consolidated financial statements have been prepared by Networks Associates, Inc. without audit in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X."

In May 2000, Trend and Network Associates settled their outstanding litigation releasing their respective claims against the other based on past alleged infringements. In connection therewith, the parties agreed to cross-reference their anti-virus patents {Source: NAI 10Q, May 15, 2000}. Under the agreement, NAI will pay Trend $12.5 million within 60 days in consideration for its patent license from Trend US {Source: Trend Micro 6K, 7/6/00}.

With revenues down 34% in the last year, Network Associates cannot afford to be held hostage by expensive lawsuits that drain resources and development focus. With revenue growth 180% lower than the industry average, Network Associates needs to use all its resources to hold its market position.

Figure 2. Network Associates compared to leading market indicators.

[1] Source: Freeedgar

User Recommendations

Typically lawsuits breed more distrust, and often have ugly marketing implications. Learning to play well with others, and staying out of court, allows companies to free up more resources to devote to regaining market cap and investor confidence. While NAI did restate 1998 revenues due to SEC queries about Network Associates' acquisition-related charges, it is a company with significant financial and technical resources. Those organizations looking to acquire virus software should include NAI in its initial evaluation long list, and select the product based upon its functional and technical merits related to its competitors.

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