Crossroads, Dot Hill Ponder Patents

A recently settled lawsuit between Crossroads Systems and Dot Hill reveals how intellectual property can act as a spur or a detriment to storage suppliers.

To recap: On June 28, Crossroads declared victory in its lawsuit against Dot Hill and Infortrend, which supplies RAID controllers to Dot Hill. (See Dot Hill Settles.) Terms of the settlement include a $10.5 million payout to Crossroads for alleged damages, $3.35 million of which will come from Dot Hill and $7.15 million from Infortrend.

Additionally, Dot Hill will pay royalty fees in the amount of 2.5 percent of net sales on RAID products sold in the U.S. that are based on Crossroads' "access controls" patents. Infortrend will pay most of the royalty fees for Dot Hill's RAID products based on Infortrend controllers, with Dot Hill responsible for 0.8125 percent of the 2.5 percent fee.

Crossroads is in the process of getting its patents accepted in Europe. Once accepted it can charge Dot Hill and others for products sold outside the U.S.

The litigation has been an ongoing trial to Dot Hill, which has had other issues to face as well. (See CEO's Over Dot Hill and Dot Hill Faces Suit .) But it has apparently encouraged Dot Hill to speed development or procurement of an alternative controller technology, according to company spokesperson Erin Lutz. What's more, the vendor today announced that it's been awarded its own patent for "controller data sharing," which it will not promote as a licensable technique. (See Dot Hill Wins Patent.)"Dot Hill is focused on selling storage systems and controllers, not licensing specific technology," says Lutz.

In contrast, Crossroads is high on its victory over Dot Hill and is intent on promoting what CEO Rob Sims calls an ongoing "intellectual property campaign" industry-wide. "We are continuing this campaign and feel we are in a stronger position relative to the value of our intellectual property with this... litigation behind us," Sims said on a conference call with financial analysts yesterday afternoon.

Sims asserts that his firm's "access controls" patents apply to any company making RAID arrays or SAN devices that provide selective access among hosts in Fibre Channel and/or SCSI SANs.

If, for instance, a SAN system can automatically restrict access to specific servers or switches, the supplier can expect a call from Crossroads' lawyers.

Besides Dot Hill, Crossroads has licensing agreements with Hitachi, ADIC, Falconstor, and Nexsan, Sims said, as well as others he can't mention. Company literature also points to arrangements with Sun, Quantum, and HP.The deals haven't really helped Crossroads' bottom line. (See Crossroads Posts Q2.) For the second quarter of 2006, Crossroads declared $2.6 million in revenue, a 58 percent sequential decrease, which management attributed to reduced royalty fees from Sun, HP, and Quantum.

Crossroads made about $13 million on its intellectual property this quarter, Sims said, of which it will net about $7.9 million, since the rest must go to the lawyers.

The IP campaign won't affect Crossroads' planned release of new products within the next few weeks in the area of what it terms "business information assurance." Crossroads has shifted its focus from storage bridging to BIA to keep pace with storage trends. Now, in addition to its storage routers, the company offers security appliances and business continuity "suites" of hardware, software, and services.

At least one industry analyst believes the Crossroads/Dot Hill dispute is negative for both firms. "In general, litigation is not the way to prosperity," said the analyst, who asked not to be named. "A royalty model is not a bad thing if it's fair and equitable and not a way of cashing in on others' work. If Crossroads' patents are so good and so strong, why aren't they selling more?"

But a Wall Street analyst, who also asked not to be named, disagrees with this assessment. "Every company has an obligation to protect its intellectual property. Crossroads has defended its patent several times before. Obviously it would not feel as contrived to gouge companies for easy money if Crossroads was more of a storage force than they are currently are. But it is still their right to get paid for what it is that they invented and own."Dot Hill and Crossroads Systems, which both deal with systems OEMs, are taking different approaches to their use of patented technology. It remains to be seen if either path will help solidify the companies' respective financial positions.

Mary Jander, Site Editor, Byte and Switch

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