Cisco and Arista entered into a term sheet on August 6, 2018, which upon execution will result in a measure of conclusion to four years of litigation between the two companies. As part of the settlement Arista will pay Cisco $400 million by August 20, 2018.
The joint statement, posted on Cisco’s blog by Cisco’s General Counsel Mark Chandler, is provided below.
“Cisco and Arista have come to an agreement which resolves existing litigation and demonstrates their commitment to the principles of IP protection. They have agreed that, with limited exceptions, no new litigation will be brought over patents or copyrights related to existing products, for five years. In addition, for three years, they will use an arbitration process to address any patent issues regarding new products. As part of this agreement, Arista will be making a $400 million payment to Cisco, is committed to maintaining the product modifications it made as a result of previous rulings, and will be making limited changes to further differentiate its user interfaces from Cisco’s. Arista and Cisco will continue to seek appellate court review of the scènes à faire verdict in the earlier trial regarding legal protection for user interfaces.”
The settlement comes on the day court proceedings were set to begin between Cisco and Arista in California. The August 6th court date pertained to a lawsuit brought by Arista alleging antitrust violations and unfair competition by Cisco. Or, as an excerpt of the court filing reads, “…Cisco, realizing that it is being out-competed and out-innovated by a far smaller competitor, has resorted to a scheme of anticompetitive conduct to retain its monopoly in the data center.”
Cisco, of course, has lawyers and arguments as well. For some historical context, Arista and Cisco have been litigating across multiple cases and International Trade Commission (“ITC”) disputes since 2014.
2014 is the same year Arista completed a successful IPO on the New York Stock Exchange – the Company’s shares have increased more than four-fold in price since. I’ve include below a photo from Arista’s website on the bell ringing ceremony on September 14, 2015. The participants not only include Arista’s management team, but also some familiar media technology executives.
Perhaps most notably among the Cisco vs. Arista disputes is a December 2014 complaint by Cisco to the ITC that ultimately led to the temporary important ban (in late 2017) of certain Arista products into the United States.
In a Cisco blog post dated July 21, 2017, Mr. Chandler applauded the ITC’s rejection of Arista’s legal efforts to delay the then import ban. “The International Trade Commission yesterday sent a strong message to Arista that its ‘corporate culture of copying’, as the ITC put it, must stop” wrote Chandler.
As is somewhat typical in commercial litigation, the rhetoric has been biting on both sides. In a legal update posted on its website and maintained by its legal team, Arista makes the following statement,
“Cisco’s motives for this legal assault were made public during the 2016 trial of Cisco’s copyright claims. The testimony of current and former Cisco executives, including Executive Chairman John Chambers, revealed that Cisco believed Arista was outperforming Cisco on ‘price, product, roadmap and vision’ and, in the words of one customer, Cisco was ‘on target to become irrelevant’ in the majority of data centers.”
With this past week’s agreement, these comments and others like it now reside in the past. Cisco and Arista can instead refocus energies on competing outside of the court room and in the marketplace.
Returning to the settlement itself, it is important to put the $400 million agreement in context. In its amended Q2 2018 earnings filing, Arista included a one-time operating expense charge of $405 million (addition $5 million to cover fees). The same filing details Arista’s cash balances of approximately $1.8 billion, operating cash flow for the first six months of 2018 of $326 million, and record revenue for the first half of 2018 of $992 million (a 34% increase year-over-year). Arista, of course, has access to the public equity markets where it had a market capitalization of around $20 billion as of today’s closing.
Arista’s Activities in the Media Sector
Arista is active in many technology verticals including the media sector. The below chart is taken from Arista’s Q2 2018 earnings presentation. It provides an illustration of Arista’s sales across various verticals. The chart is intended to illustrate the comparative adoption rates of industries along with the relative contribution to sales. It is neither exact nor drawn too scale (Arista adds emphasis on this point).
Media & Entertainment sits in the top part of the quadrant attributable to ‘Follower’ adopters and ‘Moderate’ purchasers. It is comforting to note Media & Entertainment is a faster adopter than several technology verticals and not surprising it lags industries such as Cloud service providers.
There are two ways to read into charts, such as the above, describing the activities of a large technology organization like Arista with operations across many verticals. One view holds that the supplier’s attention is inherently diverted away from the media sector given the other, larger verticals served. The other view holds the organization’s research and development budgets benefit from the higher sales volumes possible across other, larger verticals. In my experience, both are true, and there is a sensible middle ground of activity whereby large technology organizations provide core infrastructure functionality, askew specialized engineering specific to the media use case, and rely on specialized partners to service domain-specific requirements of media customers.
Several of Arista’s recent customer case studies in the media technology sector highlight this approach, including the recent technology deployments at the NEP Andrews Hub in Australia and UK-based Timeline Television’s UHD2 outside broadcast truck.
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