After a patent victory against Arista, Cisco is crowing about the possibility of its rival’s switches being banned from import into the United States. That scenario might not come to pass, but the Feb. 2 ruling from the U.S. International Trade Commission (ITC) is going to have repercussions for Arista regardless.
An ITC judge ruled that Arista infringed on three Cisco patents. Arista was also found to not be in violation on two other patents, so Cisco didn’t score a shutout. But one of the three is a biggie, a patent that, according to Cisco (and now the ITC), is infringed by SysDB, the state database that’s a high-profile feature of Arista’s switches.
In a worst-case scenario, the ITC could issue an injunction, banning the importation of products that run SysDB — Arista’s entire portfolio, essentially. (The switches count as imports because Arista’s supply chain is overseas.) Such an injunction would affect 70 to 80 percent of Arista’s revenues, writes Goldman Sachs analyst Simona Jankowski in a research note.
Arista could avoid an injunction by devising a software workaround. The company is pledging to have this done during the second quarter, at which point the ITC would determine whether the workaround is good enough.
An injunction doesn’t seem likely, writes Raymond James analyst Simon Leopold in his research note published after the ruling. But he notes that Arista could face financial penalties.
“Considering past cases such as Juniper vs. Palo Alto [Networks] and Brocade vs. A10, penalties could amount to hundreds of millions,” he writes. Both of those cases were settled, with Palo Alto paying $175 million to Juniper, and A10 paying $75 million to Brocade.
Leopold believes Arista has more than $600 million in cash and reserves. We won’t know for sure until Arista reports earnings on Feb. 18.
On a more immediate front, the ITC ruling presents a marketing issue for Arista. The threat of an injunction could give pause to potential customers, Jankowski writes. Moreover, continued media coverage of the case will be a negative for Arista, “as Arista is defending against more actions from Cisco than the other way around,” she notes.
And the case isn’t going away. The Feb. 2 ruling needs to be followed up by a formal ITC decision, due on June 2. Separately, the ITC is studying a second Cisco-Arista case, with a judge’s ruling due on April 26.
Investors, meanwhile, weren’t fazed by the Feb. 2 ruling — possibly because the ITC’s lawyers had hinted at it with a recommendation published in September. Arista shares rose 7 percent on Feb. 3, to $61.95.