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Three years ago, Intergraph Corp. was on its financial knees. Annual revenue at the former Fortune 500 company had gone from more than $1 billion in 1998 to $532 million in 2001. The Huntsville, Ala.-based company had laid off nearly two-thirds of its workforce, shrinking from over 9,200 employees in 1995 to 3,800. Its once formidable computer graphics hardware systems business, which had accounted for more than half its business, was defunct. And the company was scrambling to reinvent itself as a software provider. Intergraph blames those dark days on Intel Corp. The two companies had a cozy relationship in the early 1990s, and by 1996 all of Intergraph’s hardware systems used Pentium chips. But that year Intergraph says (and Intel denies) that Intel demanded a royalty-free license to Intergraph’s Clipper chip. Intergraph no longer used the Clipper chip, but it had evidence that Intel’s billion-dollar Pentium chip infringed patents for the technology. And instead of bowing to the demands of its biggest supplier, Intergraph went to court. The litigation between the companies landed in two federal courts, swept up Dell Computer Corp., Hewlett-Packard Co., Gateway Inc., and other tech giants, and nearly destroyed Intergraph. The risk paid off. Intergraph has pulled in $865 million in cash settlements from the Clipper cases. Almost $700 million comes courtesy of Intel; the rest comes from Dell, Gateway, and HP, which settled the last Clipper-related suit in January for $141 million. The cash pay-outs dwarf sales of Intergraph’s actual products. Last year, the company, which now specializes in mapping and design software and services and employs about 3,700 people, reported about $552 million in revenue. Considering what it was worth in settlements, Intergraph bought the Clipper chip for a song. In 1987, the company paid $6.5 million to National Semiconductor Corp. for its Clipper chip division. For about six years, Intergraph manufactured the chip for use in high-end computer graphics systems used by engineers and architects in technical design, mapping, and animation. But the operation was small and expensive. In 1993, the company decided to partner with Intel, whose Pentium chip — though slower — was cheaper, and getting better. According to Intergraph, it was a “harmonious” marriage — Intel supplied Intergraph with Pentium chips, as well as technical information and advance copies of microchips, which Intergraph used to develop new products. By 1996, Intel-based systems represented 100 percent of Intergraph’s hardware sales — over $610 million — and more than half of Intergraph’s total annual revenue. The relationship turned sour in 1996 when Intel sought patent rights on the Clipper technology. Intergraph refused the request, and Intel retaliated. In August 1997, according to court documents, Intel canceled agreements with Intergraph, demanded the return of all confidential information, and stopped supplying Intergraph with technical information. “It was a scorched-earth tactic,” says Intergraph’s general counsel David Lucas. “They knew they were critically damaging our hardware business.” Without access to information on current and future Intel products, the company could only speculate on how to design new computer systems. “It was absolutely devastating,” he says. Intel spokesman Chuck Malloy says the company turned aggressive only after months of litigation threats from Intergraph. Intergraph was threatening Intel’s customers with patent litigation, Malloy says. Under those circumstances, Malloy says Intel had every right to cut off Intergraph’s access to technical information. He also says that Intel already had the rights to the Clipper chip through a cross-license with National Semiconductor. For the next six years the two companies fought each other in patent and antitrust cases in federal courts in Alabama and Texas. In April 1998, five months after Intergraph filed its first patent suit against Intel in Alabama, a federal judge enjoined Intel from withholding needed information from Intergraph. But “the damage was already done,” says Lucas. The company spent the next two years divesting its hardware group and reinventing itself as a software company, he says. The dispute caught the eye of the U.S. Federal Trade Commission. In June 1998 the FTC charged Intel, which controlled 80 percent of the microprocessor market, with abusing its monopoly power. According to the FTC, Intergraph was not the only company to suffer Intel’s wrath. Digital Equipment Corp. and Compaq Computer Corp. also lost access to needed technical information after they refused to license key patents on Intel’s terms, the FTC alleged. The suit settled on the eve of trial. Intel agreed not to withhold products or information from customers, but it did not admit or deny any guilt. Peter Detkin, a former assistant general counsel at Intel who negotiated the settlement, says Intel’s position was validated by the FTC’s order, which basically held that Intel had the right to withhold technical information in some circumstances. The FTC’s nine-month foray into the dispute did little to help Intergraph, which was still bogged down in court in Alabama. “We had a reluctant judge,” says George Schwab, the Townsend and Townsend and Crew partner who represented Intergraph. (Intel was represented by Gibson Dunn & Crutcher and Howrey & Simon, now Howrey Simon Arnold & White.) Schwab says the judge took the first opportunity he could find to dismiss the case, accepting Intel’s argument that it had a license to the Clipper technology through National Semiconductor. In April 2001, the U.S. Court of Appeals for the Federal Circuit reversed. The case went back to the district court. Three months later, Intergraph sued Intel again. This time in federal court in Texas, Intergraph claimed that Intel’s new Itanium chip infringed on its patented parallel instruction computing, an offshoot of the Clipper technology. The Eastern District of Texas is known as a plaintiff-friendly venue, with judges who like complex patent cases and move them along relatively quickly, says Schwab. True to form, within nine months, the Texas court ordered mediation of both cases. Intergraph general counsel Lucas and chief executive James Taylor headed into settlement talks with Intel general counsel Timothy Dunlop and director of patents Thomas Reynolds. Oddly enough, the mediation talks ordered by the Texas judge led to a settlement in the Alabama case. In April 2002, that case ended when Intel paid $300 million for a Clipper license. The talks also laid out ground rules for the Texas case, establishing a range of damages, from zero if Intel won, $150 million for an Intergraph trial win, to $250 million if Intergraph won on appeal. The settlement “allowed the parties, who were essentially at an impasse, to proceed with the case,” says Schwab. “It was a very creative, very unusual settlement.” In October 2002, Intergraph won the bench trial in the Eastern District, Judge T. John Ward ruled that Intel did infringe. And, in accordance with the settlement, Intergraph was awarded $150 million in damages, and Intel settled the case. With a finding of infringement in its favor, Intergraph immediately started reviewing hundreds of products for potential violations, buying personal computers and having them analyzed by in-house engineers. “Due diligence is key,” says Lucas. “We’d do a very extensive prelitigation analysis of each potentially infringing device and possible damages before we even step into the litigation forum.” Intergraph sued HP, Dell, and Gateway in December 2002 in the Eastern District of Texas. (It hired Minneapolis’ Robins, Kaplan, Miller & Ciresi to handle the case.) Dell brought Intel into the lawsuit as a third-party indemnifier. To get rid of the Dell suit in March 2004, Intel wound up forking over another $75 million to Intergraph. In exchange Intergraph agreed not to sue any Intel customer over products including an Intel microprocessor, chipset and motherboard. Two months later, Gateway settled for $10 million plus royalties. In other settlements, Intergraph netted $10 million from IBM Corp., $18 million from Texas Instruments Incorporated, $10 million from Advanced Micro Devices, and a one percent royalty license from Fujitsu Ltd. for processors used in electronic devices such as cell phones and digital cameras. HP held out. The company, represented by Morgan Chu, a partner at Los Angeles-based Irell & Manella, filed an array of countersuits in California, Delaware, Texas, and even Germany, claiming that Intergraph infringed HP’s patents. “It was an attempt to exert pressure,” says Stephen Akerley, a partner in the Silicon Valley office of McDermott Will & Emery who defended the countersuits for Intergraph and also handled Intergraph’s defense against Intel while he was at Townsend. “They didn’t have a whole lot of merit and we could simply nullify the effects of each of them,” he says. Still, McDermott couldn’t slow down the Munich case. Akerley says he thinks HP brought the case in Germany because of its “extraordinarily fast docket — HP wanted to get to trial before Intergraph.” In one sense the strategy worked: The German case went to trial in November 2004 — before the HP trial in Texas, which was scheduled for April. In another sense, it backfired: the German court dismissed HP’s case in January 2005. Akerley says that the German defeat, coupled with an upcoming trial in Texas, prompted HP to settle two weeks later for $141 million. (HP declined to comment.) Lucas says Intergraph is done litigating over the Clipper chip — for now. The company can focus on what it actually does for a living — develop mapping software for businesses and government. With $865 million in its war chest, it can afford to take a litigation break.

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