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In a classic David vs. Goliath litigation, it was creative mediation that ended up ruling the day. On April 14, Huntsville, Ala.-based Intergraph Corp. agreed to settle a five-year-old patent infringement suit with Intel Corp. over Intel’s Pentium chip for $300 million.The case was in federal court in Alabama, but in an unusual twist, the settlement came about because of court-ordered mediation in an unrelated patent infringement case between the two parties in federal court in Texas. “Here’s the way we approached it,” recalled Chuck Mulloy, Intel’s legal affairs spokesman in Santa Clara, Calif. “It was court-ordered mediation, and the mediator put everything on the table. We couldn’t reach agreement on the Texas case, but we wanted to dispose of both cases. So we said let’s go on and adjudicate one case, and put the liquidated-damages cap on the other case.” The liquidated-damages cap is a second unusual twist in the Intergraph-Intel matter. In a move both sides called unique, the two agreed to cap the damages at $250 million in the Texas case, now set for trial in federal court in Marshall, Texas, on July 2. Intergraph General Counsel David V. Lucas said that the Alabama case had languished through five years and four appeals to the U.S. Court of Appeals for the Federal Circuit in Washington, D.C., which hears patent appeals, and there was no end in sight until the settlement. FINANCIAL BOOM Lucas called the April 14 settlement amount “very significant” for his firm, considering Intergraph had a net income of $19.9 million in 2001 on revenues of $532 million. It was the firm’s first profitable year after several years of red ink. In comparison, Intel had a net income of $1.3 billion on revenues of $26.5 billion last year. The settlement also will nearly quadruple Intergraph’s cash on hand of $110 million, Lucas said. He believes, based on research, that $300 million is the fifth-largest settlement in patent infringement history. Intel’s Mulloy said Intel had argued it had a license to the patents and admitted no wrongdoing in the settlement. The settlement, he said, fell far short of the $2.2 billion that Intergraph had sought. Intergraph was both a computer hardware and software firm in the 1990s, but Intel’s alleged patent infringement “crippled half our business and forced us precipitously close to financial ruin,” Lucas said. As a result, he said, Intergraph sold off some businesses and restructured others away from hardware to focus on software and computer services. UNDERLYING CASE While financially floundering in 1997, Intergraph brought suit against Intel in U.S. district court in Birmingham, Ala., claiming antitrust violations, patent infringement and violations of state tort and contract law ( Intergraph v. Intel, No. CV97-N-3023-NE). In 1998 the Federal Trade Commission (FTC) also charged Intel with abusing its monopoly power over Intergraph and two other computer firms. Intel settled the FTC case out of court in 1999, with Intel agreeing to halt the offending conduct but admitting no wrongdoing. U.S. District Judge Edwin Nelson in Birmingham sided with Intergraph’s monopoly claims and issued a preliminary injunction against Intel, but was overturned on appeal. He then dismissed the antitrust claim. The April 14 settlement covered the remaining patent and state law issues in the Alabama case. For its $300 million, Intel receives a retroactive license to the key patents involved in the Alabama case, as well as ownership of some unrelated patents. Mulloy said Intel took a one-time charge of $150 million, reflected in the first-quarter financial report released April 16, for the retroactive patent fees. It will amortize the remaining $150 million over the next five or six years, he added. The settlement is the result of the mediation ordered by U.S. District Judge T. John Ward in Texas. Intergraph had sued Intel in Texas on July 30, 2001, claiming Intel’s Itanium chip violated Intergraph’s parallel instruction computing patents ( Intergraph v. Intel, No. 2-01CV160). Lucas said the unique approach to both cases was actually his idea. Intergraph’s outside attorneys “were amazed at my suggestion and didn’t think Intel would go for it. They were astounded when both parties found it acceptable.” Under terms of the settlement, Intel will pay $150 million if Intergraph prevails at trial. Intel would pay another $100 million if Intel appeals and Intergraph again prevails. Intergraph also agreed in the Texas suit to drop its request for an injunction to halt sales of Intel’s Itanium chip. The agreement on damages in the Texas case, Lucas said, came because both sides faced risks. Intergraph, Lucas said, had the difficult task of trying to prove damages on Itanium chip sales that had not yet taken place. Under the settlement, now it only has to prove patent infringement to win the agreed-upon damages. The risk for Intel was the threat of an injunction looming over its just-begun marketing of the Itanium chip, Lucas said. Intel has said it is counting on the Itanium chip to allow it to expand into the most high-end, powerful computers. Asked about the terms of the Texas case, Intel’s Mulloy said only that the settlement obviously appealed to both sides. The federal mediator praised both companies, Lucas said, for coming up with a creative idea to settle such complex litigation. Today, Intergraph offers market and support software and services for local and national governments and for global industries, including process, power, public safety, utilities, communications, mapping/GIS and earth imaging. It has shown a profit in the past five quarters, including the one that ended on April 30. “We are a study in survival,” Lucas said. “Financially, we were ready to take on the Texas litigation, and Intel knew we were ready,” he added, indicating that that may have played a role in the decision to settle. Intergraph said the $300 million settlement would show up in its next quarter’s financial report. If added to net income per share, Lucas said, it would add about $6 per share. Meanwhile, Intel announced its net income per share dropped about one cent in the first quarter, to reflect the legal settlement costs.

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