Billionaire Entrepreneur Sues Own Company

Billionaire Entrepreneur Sues Own Company David Cheriton, Stanford computer science professor

SAN FRANCISCO — Sister companies Optumsoft Inc. and Arista Networks Inc., both founded and backed by Silicon Valley billionaire David Cheriton, shared software in harmony for years under a royalty-free agreement.

The 2004 deal allowed Arista, a data switch manufacturer headquartered in Santa Clara, to use an Optumsoft software system to write its own software programs. Optumsoft, billed on its website as a private company commercializing technology based on Cheriton’s research, retained ownership rights of any derivative software Arista developed from the original system.

But on Friday, a week after Arista filed for an initial public offering potentially worth $200 million, Optumsoft slapped its former collaborator with a suit alleging breach of contract and trade secret theft that could have major repercussions for Arista.

Daralyn Durie and Ragesh Tangri of Durie Tangri represent Optumsoft in the suit. “Optumsoft will be irreparably harmed if Arista’s misappropriation is allowed to continue,” the lawyers wrote in the complaint filed in Santa Clara County Superior Court.

Arista saw the suit coming and disclosed the harm it might cause in its March 28 filing with the U.S. Securities and Exchange Commission. Wilson Sonsini Goodrich & Rosati chairman Larry Sonsini and partners Raj Judge and Mark Baudler are representing Arista in its IPO.

Arista received a letter from Optumsoft in November asserting ownership of certain components of Arista’s EOS network operating system—a system incorporated into all Arista’s products, according to the filing.

Arista potentially could be forced to transfer ownership of those components and related intellectual property to Optumsoft, opening the door to Arista’s competitors to buy or license the technology.

“We intend to vigorously defend against any action brought against us by Optumsoft,” Arista’s SEC filing stated. However, it warned potential investors, “Whether or not we prevail in a lawsuit, we expect that any litigation would be expensive, time-consuming and a distraction to management in operating our business.”

A spokeswoman for Arista declined comment.

Cheriton, a computer science professor at Stanford University, launched Arista in 2004 with business partner Andreas Bechtolsheim. The longtime collaborators had also been among Google Inc.’s first outside investors and successfully cofounded other ventures, including Granite Systems Inc., which was purchased by Cisco Systems Inc. in 1996. Forbes magazine puts Cheriton’s net worth at $2.4 billion and Bechtolsheim’s at $3.6 billion.

The license agreement between Optumsoft and Arista was struck at the highest levels—Cheriton signed for Optumsoft and Bechtolsheim signed for Arista. Now there appears to be a rift.

“Arista has breached its obligations under the agreement in multiple ways,” the suit states. For example, Optumsoft alleges that Arista has distributed source code to its customers, disclosed confidential information on its website and refused to acknowledge Optumsoft’s IP rights.

Cheriton resigned from Arista’s board of directors March 1, though a trust for the benefit of his minor children remains Arista’s largest stockholder. Bechtolsheim continues as Arista’s chief development officer, director and chairman of the board.

Contact the reporter at mkendall@alm.com.

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