Contract leads to suit, countersuit

Former partners Riverstone Networks and Tellabs have filed lawsuits against each other over a broken contract that analysts believe is a symptom of the economic downturn.

“If both these companies were healthy, there would be no lawsuits,” said Matthew Robinson, director of research and technology analyst with Ferris Baker Watts. “Tellabs would have enough demand to work with Riverstone, and Riverstone would see enough business with Tellabs to work with them.”

The dispute revolves around Tellabs' agreement last November to be a non-exclusive OEM reseller of Riverstone's router-based CMTS unit and purchase $100 million worth of product in the first year of the contract.

But Tellabs claims Riverstone used information it gained through the partnership to pursue Tellabs customers and that Riverstone failed to ship an acceptable product before the April 1 deadline.

“We have to have a product that works and, in particular, works on the voice side and meets the requirements of our customers,” said a Tellabs spokesman.

“At all times, Riverstone's unstated but clearly calculated goal was to use the Strategic Alliance Agreement to gain a foothold into Tellabs' customer base and sell directly to Tellabs' customers.” — Tellabs lawsuit

“In an effort to create excuses for these breaches of the Agreement, Tellabs falsely asserted that Riverstone had in fact failed to meet its obligations under the Agreement.” — Riverstone lawsuit

A spokesman for Riverstone admits that its product has not received DOCSIS 1.1 certification, the standard for voice traffic, but said the company is working toward certification and that no CMTS router has been DOCSIS 1.1 certified to date.

Riverstone's lawsuit claims Tellabs is canceling the agreement because of poor demand for CMTS products, a contention the Tellabs spokesman denies. Riverstone is seeking almost $57 million in damages.

Given the rapid deterioration of the market, many such long-term contracts are becoming obsolete. Deals signed during boom times likely go beyond customers' current needs, and some may be altogether too much for the purchaser to bear.

Riverstone claims: Tellabs failed to purchase the minimum $100 million worth of the Riverstone router-based CMTS Tellabs violated implied good faith and fair dealing agreements by canceling the contract on specious grounds	Tellabs claims: Riverstone failed to provide an acceptable CMTS product by the April 1 deadline Riverstone's CMTS product is not field-upgradable to handle voice traffic, as the companies' contract stipulates The CMTS product is not NEBS or FCC emissions standards-compliant. Riverstone used customer information it obtained through its agreement with Tellabs to pursue the company's client base
Source: Companies

In such a situation, the buyer usually wants out. According to analysts, many contracts are written so companies do not have to fulfill the purchase agreements if business conditions change, making it easy for the buyer to cancel the deal.

If these conditions are not written into a contract, the seller will determine the course of action. Recognizing the current state of the economy, vendors usually are willing to renegotiate a deal by changing the length, overall value and delivery schedule of the contract, say analysts.

Many contracts have likely already been quietly reworked along these lines, said Michael Perica, vice president of equity research at Gruntal & Co. Choosing to renegotiate is a purely utilitarian decision: By doing so, a vendor hopes to build goodwill with a client; if a vendor refuses to negotiate, it could ruin its future relationship with the customer.

According to Perica, there are several reasons why a supplier would be willing to alienate a customer over one contract: The supplier could be desperate for the money owed, the supplier may believe it is significant enough to the customer to dictate terms of the relationship or the supplier might believe that it does not need the relationship in the future.

Also, some sellers simply have a cutthroat corporate culture that allows them to “hose” other companies, he said.

But sellers aren't the only aggressors. Buyers will sometimes use the law as a means to reach their own ends as well, Perica said.

Currently, some companies are scouring undesirable contracts, looking for insignificant violations as a means to exit an agreement, he said. While such a move could work, it could just as easily lead to the parties litigating the problem.

In either situation, filing a lawsuit is an extreme step, Robinson said.

“Suing your customer and suing your vendor generically come under the heading of an unnatural act. We're living in a period with a lot of surreal things going on.”