On Monday, August 6th, Santa Clara, CA-based computer networking Arista Networks filed a Form 8-K with the U.S. Securities and Exchange Commission (SEC) announcing the firm had entered into an agreement with San Jose, CA-based networking rival Cisco Systems that dismisses all pending litigation between the two firms in both U.S. district courts and at the U.S. International Trade Commission (ITC). Under the terms of the agreement, Arista will pay Cisco $400 million this month in return for Cisco dropping all patent infringement claims which it has filed against Arista.
In addition to Cisco dropping its patent infringement claims, Arista also agreed to drop all antitrust claims which it has filed against its rival. The mutual releases also extend to all customers, contract manufacturers and partners of both networking companies. Cisco and Arista also agreed to a five-year stand-down period during which either side will refrain from filing infringement claims on any utility patents against features currently implemented in products or services sold by the other party. For new and modified features incorporated into products or services, the parties agreed to a three-year dispute resolution process to handle infringement allegations on those features. Finally, Arista agreed to make certain modifications to its command line interface (CLI).
The same day that Arista filed the Form 8-K regarding this binding agreement, proceedings were held before U.S. District Judge Beth Labson Freeman of the Northern District of California which resulted in a court order vacating all trial dates; a jury trial in that case was set to commence that day. In the Form 8-K, Arista notes that it will revise its second quarter financial results to record a legal settlement charge of $405 million, including both legal fees associated with the settlement and a reduction of $99 million to its provision for income taxes. This results in a revised net loss of $155.3 million for Arista in the second quarter. Arista will also record a $405 million increase in total current liabilities, an $85 million increase in prepaid expenses and other current assets, and a $14 million increase in deferred tax assets.
The legal battle between Cisco and Arista, which included copyright infringement claims along with the patent claims, took a couple of interesting twists in December of 2016 when the Northern California judge threw out a $335 million damages award against Arista on Cisco’s copyright infringement claims while an initial determination filed by the ITC found that Arista’s products infringed upon a pair of patents asserted by Cisco. During the summer of 2017, the Patent Trial and Appeal Board (PTAB) invalidated both of the Cisco patents asserted at the ITC, giving Arista the opportunity to overturn an exclusion order barring them from importing infringing networking products.
Despite agreeing to pay hundreds of millions of dollars and the negative revisions to Arista’s recent earnings report, the news of the settlement agreement sent Arista shares up by more than 5 percent on same-day trading, closing the day at a price of $271.33 per share. Cisco stock rose slightly, by a little more than 1 percent to close at $43.30 per share.
The legal squabble between these two firms was interesting given the personal relationships between executives at both Cisco and Arista, which was founded by former Cisco executives Andy Bechtolsheim and David Cheriton. Arista CEO Jayshree Ullal was also a former Cisco employee and served with the company for 15 years. These individuals were all reportedly close to former Cisco CEO John Chambers, under whose regime Cisco pursued its expansive legal battle against Arista. In legal filings, Arista had accused Cisco of allowing rivals to use interface technology it had developed and then filing suit against those entities for copyright infringement after businesses had come to rely on those technologies. For its part, Cisco had publicly called Arista’s networking redesigns for working around the ITC’s exclusion order a “sham” and accused the company of building its business on the back of Cisco’s own research and development.