Legal Affairs: TRADE SECRETS
A NEST OF SOFTWARE SPIES?
The Avant! trade-theft suit could begin to rein in Silicon Valley's freewheeling ways
Cadence Design Systems CEO Joseph B. Costello traces his crusade against rival software maker Avant! Corp. to the day in 1994 when Vice-President Gerald "Gerry" C. Hsu resigned. Four top employees had left to create Avant! three years before, so Costello wondered if Hsu planned to cross enemy lines, too. According to Costello, Hsu claimed merely to be taking time off at the beach--but was stone silent when asked if Avant! fit into his future plans. A few days later, Costello's suspicions proved correct when Hsu answered the phone at Avant! offices in Sunnyvale, Calif. "So is this the beach, Gerry?" Costello asked. Hsu declined to comment on the conversation.
Thus began what prosecutors now say was the most blatant case of trade-secret theft in the history of Silicon Valley. On Apr. 11, Hsu and six other former Cadence officials were indicted on breathtaking charges: They allegedly had used stolen software to build a company with a market value that at one time exceeded $1 billion. The news sent Avant! stock down nearly 60% immediately after the arrests, to 913/16, though it has since bounced back up to 163/4. The defendants, who have all pleaded not guilty, each face up to seven years in prison and civil lawsuits.
"OVER THE EDGE." The tale that prosecutors tell is a sobering illustration of how far some executives will apparently go to gain a competitive edge. Many people are saying it also shows how little respect is accorded to other people's intellectual property these days in Silicon Valley, where the temptation to cut corners to get a product to market is acute. With engineers changing jobs like shirts, it's easy to look the other way when a new employee borrows ideas from a previous employer. And with Internet links and laptops, such heists are only a mouse-click away. "There's no clear border between right and wrong out here, and everyone goes a little over the edge at times," says Vincent F. Sollitto, CEO of San Jose-based Photon Dynamics Inc., a Cadence customer. "If Joe is right, this would make an example of someone who went over and didn't come back."
The Cadence story, if true, is also an object lesson in the difficulties software companies face trying to protect their intellectual assets. While trade-secret theft is rising by all accounts, busting the pilferers is expensive and time-consuming. It took pit-bull persistence by Costello, lucky breaks, and $10 million worth of lawyers and private investigators to get the case to this point. What's more, litigation is considered bad form in Silicon Valley, where the honorable way to win market share is through innovation. During the fight, Costello was lambasted in the media as a bully and his board, customers, and friends urged him to give up the chase. Says Costello: "When it's a solid-steel case, you have to do something about it. But there's so many things moving against you. It's uphill all the way."
Naturally, Avant! (pronounced Ah-VON-tee) sees things differently. Lawyers for the company insist it never received stolen software code and point out that the company even removed some suspicious code from its products to be sure it was clean. In written comments to BUSINESS WEEK, Avant! CEO Hsu suggests the conflict is more about personalities than felonies. "[Costello] seems intent on attacking me personally--particularly in the press. I can understand why he would prefer to talk about me instead of Cadence's...software products: Avant!'s are vastly superior to Cadence's tools, and chipmakers are voting with their pocketbooks," says Hsu.
Avant! backers claim Costello's crusade is little more than a dangerous vendetta against a small, nimble rival. If he succeeds, they say, it could have serious implications for startups, the lifeblood of Silicon Valley. In fact, Avant! claims Cadence is the one fighting dirty. It has countered Cadence's civil suit and seeks hundreds of millions of dollars to compensate for the company's swooning stock price. Among other things, Avant! claims Cadence employees have shorted Avant! stock and spread negative rumors to drive it out of business. Costello says these are diversionary tactics to take the focus off the evidence.
Santa Clara (Calif.) county prosecutors, who have heard both sides of the tale, believe Cadence's version. According to those prosecutors and court documents filed by Cadence in connection with its civil suit, this is no mere case of an employee grabbing a diskette or two on the way out the door. Rather, they allege that Hsu and the other indicted Avant! executives are guilty of a multiyear conspiracy to steal the "source code" to key Cadence "place-and-route" programs, used by microchip designers to arrange circuits on a slice of silicon. "We don't file unless there's a high sleaze factor," says District Attorney Julius Finkelstein. "We want people actually walking out the door with property, and that's what we got."
Ordinarily, place-and-route programs take years to develop. Not at Avant!. By stealing from Cadence on three separate occasions, prosecutors allege, Avant! was able to bring products to market with implausible speed. In the process, its sales soared from $39 million in 1994 to $106 million in 1996. In all, Costello figures Cadence has lost as much as $100 million in sales to Avant!.
According to Finkelstein, Avant! (then called ArcSys Inc.) from its very inception was built on stolen code. Avant! denies the charge. Finkelstein points to an electronic log found during a joint FBI and police raid on Avant!'s offices in December, 1995, that suggests Avant! founder Stephen Tzyh-Lih Wuu spent his final weeks as a Cadence research and development manager in 1991 copying a basic place-and-route program called Symbad. That, court documents say, is how Avant! was able to launch its first place-and-route offering, called ArcCell, in just two years--vs. the six years it took Cadence to finish Symbad. Wuu says the 47,000 lines of code mentioned in his log were original work that he completed in 19 days. But Cadence disputes this claim, arguing that 100 lines is a normal day's work.
Prosecutors claim that in 1994, Avant! persuaded former Cadence engineer Mitsuru "Mitch" Igusa to commit the second theft. This time the target was allegedly a key enhancement to place-and-route software--a so-called area-based program that lets the computer do more of the grunt work in chip design. While Igusa never took a job at Avant!, prosecutors allege that indicted Avant! executive Shiaoli Huang paid him at least $15,000 for stealing Cadence code. The money allegedly came from a shell company Huang was administering called the Saurus Fund, which was set up by some of the indicted executives purportedly to fund future startups. Igusa now faces six felony counts for theft, stemming from a raid on his home in November, 1995, in which police found a hard drive full of Cadence source code, much of it stripped of the company's copyright notices.
MIRACLE GROW. Avant! says that the money it gave Igusa was for a potential startup project, and that the company never received stolen code from Igusa. For his part, Igusa has pled not guilty and could not be reached for comment. But once again, the speed with which the company released an area-based place-and-route program strikes at least one competitor as suspicious. About a year before Avant! released the product, Hsu allegedly approached rival Silicon Valley Research Inc. about a merger to bring in such technology--and was turned down. One Silicon Valley Research manager was shocked when Avant! later released the software: "They miraculously developed it overnight." Avant! Chief Financial Officer John Huyett declined to comment directly on the company's dealings with Silicon Valley Research but said that "Hsu has talked to just about everyone with something to offer in our industry."
The third theft allegedly occurred in January, 1995. According to prosecutors, on his next-to-last day at Cadence before leaving for Avant!, engineer Chih-Liang "Eric" Cheng copied a program he had written over the previous two years onto a file he named "byebye" and stored it on a backup tape. Called V-Size, the program lets designers figure how big a chip must be to handle a given number of circuits. While Avant! never marketed the product, it had planned to do so in 1996, according to documents seized by the FBI, which has been working with Santa Clara county prosecutors since 1994. Avant! denies any wrongdoing, and Cheng declined to comment.
LUCKY BREAK. In retrospect, Costello finds it shocking how little loyalty his former employees appear to have had to the company. "The same people came into my house three times and stole some of my most valuable belongings. It's not right, and we can't live this way," he says.
By his own admission, Costello learned of the alleged thefts remarkably slowly. Originally, he wasn't alarmed when Avant!'s founders and other employees refused to sign forms promising to respect Cadence's trade secrets. But he reconsidered after a surprising discovery in August, 1995. A Cadence engineer was on a routine visit to a customer when he happened to look at some of their Avant! software. He spotted a tiny flaw he had unintentionally written into a Cadence product years before--a misaligned edge of a rarely used screen that made it appear fuzzy. To confirm the engineer's hunch, Costello asked a customer to compare the two products. The results: 4,000 identical lines of code and even identical grammatical mistakes. Avant! denies that any theft took place.
Now armed with what he considered conclusive evidence that Avant! had ripped off Cadence code, Costello declared war. But even as his legal case was jelling, he found little support in tight-knit Silicon Valley. Industry reporters and customers alike accused him of using the courts to beat up on a feisty rival. A customer at chipmaker S3 Corp. sent him a heated E-mail message saying "this posturing in the courts is a waste of everyone's time," Costello recalls. Wall Street analysts urged him to stop mentioning the affair at financial meetings--it was detracting from their Avant! stock sales pitches. Through it all, customers continued to snap up Avant! software--usually without even investigating Costello's charges. "The thing that's mind-boggling is how people tried to dismiss it," says Costello. "It's like, `So, they stole some things."'
As the heat rose against Cadence in mid-1996, even personal friends and backers questioned Costello's judgment. Nervous about the expense and bad publicity, many members of Cadence's board began to reconsider their support of the lawsuit. Says one Cadence manager: "Our board just didn't want to go to the mat." Friends and trusted advisers at Motorola Inc. and Siemens wrote off the issue, predicting that "you'll end up settling," Costello says. And as former Cadence colleague Prabhu Goel planned to sell his company, Frontline Design Automation Inc., to Avant! in late 1996, Costello couldn't even get Goel on the phone to discuss the ethical implications. Goel says he had made a "judgment call" that Hsu was innocent and didn't want to do anything that could scotch the deal.
Others questioned Costello's motives. After all, Avant! was winning away key customers, and Costello, a slick marketer, wasn't above playing dirty pool to hurt his rival's reputation, they said. Before the indictment, "I thought this could have been without cause--just two companies and two men fighting with each other," admits Walden C. Rhines, CEO of Mentor Graphics Corp. in Wilsonville, Ore.
Now the indictments have given Costello at least partial vindication. But the story is hardly over. On Apr. 30, a determined Hsu vowed at an industry conference to "take the offensive" against Cadence with an aggressive marketing and advertising campaign. "We are not going to stop until we win completely," said Hsu.
Hsu went on to project that Avant! would quadruple in size by 2000. But for that to happen, he's going to have to keep himself and his executive team out of jail. Win or lose, Avant!'s tangle with Cadence has been a wake-up call to the rest of Silicon Valley.By Peter Burrows in San Mateo, Calif.Return to top