| LITIGATION |
Note J – Litigation
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[1] |
In September 2011, the
Company initiated patent litigation against 16 data networking equipment manufacturers in the United States District Court for
the Eastern District of Texas, Tyler Division, for infringement of its Remote Power Patent. Named as defendants in the lawsuit,
excluding related parties, were Alcatel-Lucent USA, Inc., Allied Telesis, Inc., Avaya Inc., AXIS Communications Inc., Dell, Inc.,
GarrettCom, Inc., Hewlett-Packard Company, Huawei Technologies USA, Juniper Networks, Inx., Motorola Solutions, Inc., NEC Corporation,
Polycom Inc., Samsung Electronics Co., Ltd., ShoreTel, Inc., Sony Electronics, Inc., and Transitions Networks, Inc. Network-1 seeks
monetary damages based upon reasonable royalties. During the year
ended December 31, 2012, the Company reached settlement agreements with defendants Motorola Solutions, Inc. ("Motorola"),
Transition Networks, Inc. ("Transition Networks") and GarretCom, Inc. (“GarretCom”). In February 2013, the
Company reached settlement agreements with Allied Telesis, Inc. (“Allied Telesis”) and NEC Corporation (“NEC”).
As part of the settlements, Motorola, Transition Networks, GarretCom, Allied Telesis and NEC each entered into a non-exclusive
license agreement for the Company’s Remote Power Patent pursuant to which each such defendant agreed to license the Remote
Power Patent for its full term (which expires in March 2020) and pay a license initiation fee and quarterly or annual royalties
based on their sales of PoE products.
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|
[2] |
In July 2010, the Company settled its patent
litigation pending in the United States District Court for the Eastern District of Texas, Tyler Division, against Adtran, Inc,
Cisco Systems, Inc. and Cisco-Linksys, LLC, (collectively, “Cisco”), Enterasys Networks, Inc., Extreme Networks, Inc.,
Foundry Networks, Inc., and 3Com Corporation, Inc. As part of the settlement, Adtran, Cisco, Enterasys, Extreme Networks and Foundry
Networks each entered into a settlement agreement with the Company and entered into non-exclusive licenses for our Remote Power
Patent (the “Licensed Defendants”). Under the terms of the licenses, the Licensed Defendants paid the Company aggregate
upfront payments of approximately $32 million and also |
agreed to license the Remote Power
Patent for its full term, which expires in March 2020. In accordance with the Settlement and License Agreement, dated May 25, 2011,
which expanded upon the July 2010 agreement, Cisco is obliged to pay the Company royalties (which began in the first quarter of
2011) based on its sales of PoE products up to maximum royalty payments per year of $8 million through 2015 and $9 million per
year thereafter for the remaining term of the patent. The royalty payments are subject to certain conditions including the continued
validity of the Company’s Remote Power Patent, and the actual royalty amounts received may be less than the caps stated above,
as was the case in 2012 and 2011. Under the terms of the Agreement, if the Company grants other licenses with lower royalty rates
to third parties (as defined in the Agreement), Cisco shall be entitled to the benefit of the lower royalty rates provided it agrees
to the material terms of such other license. Under the terms of the Agreement, the Company has certain obligations to Cisco and
if it materially breaches such terms, Cisco will be entitled to stop paying royalties to the Company. This would have a material
adverse effect on the Company’s business, financial condition and results of operations.
In May 2009, the Company achieved a
settlement with Netgear, Inc. (“Netgear”), also a defendant in the above referenced litigation in Tyler, Texas which
was settled with the other defendants in July 2010. As part of the settlement and under its special licensing program, Netgear
entered into a license agreement with the Company for the Remote Power Patent effective April 1, 2009. Under the terms of
the license, Netgear licenses the Remote Power Patent from the Company for its full term (which expires in March 2020), and pays
quarterly royalties (which began as of April 1, 2009) based on its sales of Power over Ethernet products, including those Power
over Ethernet products which comply with the Institute of Electrical and Electronic Engineers 802.3af and 802.3at Standards. Licensed
products include Netgear’s Power over Ethernet enabled switches and wireless access points. The royalty rates
included in the license are 1.7% of the sales price of Power Sourcing Equipment, which includes Ethernet switches, and 2% of the
sales price of Powered Devices, which includes wireless access points. The royalty rates are subject to adjustment,
under certain circumstances, if the Company grants a license to other licensees with lower royalty rates and Netgear is able to
and agrees to assume all material terms and conditions of such other license. In addition, Netgear made a payment of $350,000 to
the Company with respect to the settlement.
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[3] |
On
July 20,
2012,
an
unknown
third
party
filed
with
the
United
States
Patent
and
Trademark
Office
(USPTO)
a
request
for
an
Ex
Parte
Reexamination,
requesting
that
our
Remote
Power
Patent
be
reexamined
by
the
USPTO.
The
request
for
reexamination
was
stayed
on
December 21,
2012
pending
the
termination
or
completion
of
the
Inter
Partes
Review
proceedings
described
in
Note
J[4]
below.
The
initial
grant
of
the
reexamination
by
USPTO
is
not
unusual
as
the
majority
of
such
applications
are
initially
granted
by
USPTO.
While
the
Company
believes
that
the
reexamination
proceeding
will
further
validate
and
strengthen
the
Remote
Power
Patent,
should
the
USPTO
reach
a
final
determination
that
the
Remote
Power
Patent
is
invalid
(unless
overturned
by
the
Board
of
Patent
Appeals
and
Interference
or
the
United
States
Court
of
Appeals
for
the
Federal
Circuit),
such
a
determination
would
have
a
material
adverse
effect
on
the
Company
as
its
entire
current
revenue
stream
is
dependent
upon
the
continued
validity
of
our
Remote
Power
Patent. |
|
[4] |
There have been two Inter Partes
Review petitions filed in the USPTO pertaining to the Company’s Remote Power Patent. On
December 5, 2012, Avaya Inc. filed a petition to institute an Inter Partes Review of the Remote Power Patent. On
December 19, 2012, Sony Corporation of America, Axis Communications AB, and Axis Communications, Inc. filed a separate
petition to also institute an Inter Partes Review of the Remote Power Patent. Petitioners in each Inter Partes
Review seek to cancel certain claims of the Remote Power Patent as unpatentable. The USPTO has not yet made a determination of
whether a trial will proceed in either Inter Partes
Review proceeding. In the event that the USPTO reaches a final
determination in the Inter Partes
Review proceedings that certain of our claims related to the Remote Power Patent are
unpatentable such a determination would have a material adverse effect on our business, financial condition and results of
operations. |
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