Arista got smacked yesterday in a ruling by the International Trade Commission (ITC), which issued a final determination that bans the importing of Arista switching products that infringe on three Cisco patents. The judge made the initial infringement ruling in February, but yesterday’s ruling imposed the bans.
The ITC’s final ruling bans Arista from importing any of the infringing switching technology and its components into the United States. It also blocks Arista from building infringing products in the U.S. that are comprised of any imported components. The import bans go into effect August 23, 2016.
The SysDB technology is particularly concerning for Arista because as much as 80 percent of its products may run SysDB, according to a February research note from Goldman Sachs analyst Simona Jankowski. SysDB creates the foundation of Arista’s EOS operating system.
Arista’s stock is down about 8 percent today, following the ruling.
In May, Arista said it was hiring a contractor to operate a manufacturing facility in the United States. Arista’s CEO Jayshree Ullal acknowledged at the time that the Cisco lawsuits factored into the decision. The U.S. facility might be a hedge against the injunction against the importing of Arista’s products, which cut the company off from its overseas contract manufacturers, Foxconn and Jabil Circuit.
However, in a corporate blog posting, Cisco general counsel Mark Chandler scoffs at Arista’s “attempt to evade the ITC orders by hiring a contract manufacturer to build in the U.S.” He writes that not only would the attempt violate the ITC orders, but it places the manufacturer at risk of being enjoined into the lawsuit.
In a statement yesterday, Arista said it has released a new version of its EOS software containing “design-arounds” that it believes address the ITC’s findings with respect to the features implicated in the ITC’s ruling. Arista intends to seek appropriate regulatory approvals for these design-arounds.
However, in a research note today, Goldman Sachs’ Jankowski says Arista’s workaround submissions to the ITC could take up to a year to review.
“We would view the acceptance of Arista’s workarounds as the best case outcome for Arista from this lawsuit at this point,” writes Jankowski. “Even then, we expect the litigation overhang to persist, given the multiple lawsuits ahead.”
Reaction to Import Bans
Predictably, Cisco immediately crowed about the ITC orders, and Arista downplayed them.
“This marks the end of Arista’s ability to mislead its shareholders and customers about the infringing nature of their products,” writes Cisco’s Chandler.
In its statement, Arista noted that the ITC concluded Arista did not violate two of the five patents in Cisco’s suit. “Despite Cisco’s rhetoric claiming that the lawsuits are a defensive move to protect its intellectual property, these actions are clearly part of a broader effort to use litigation to preserve Cisco’s market position,” wrote Arista General Counsel Marc Taxay.
Yesterday’s ruling is the first of two patent lawsuits filed by Cisco with the ITC. The second is scheduled for initial determination in August. And a District Court copyright infringement case filed by Cisco is set for trial in November.