Friends no more: Global Crossing claims fraud in $1 billion suit against TSSL

It's a story of stolen trade secrets, strong-arm tactics and covert negotiations with an enemy to create a dangerous renegade force.

No, it's not a James Bond screenplay; it's the $1 billion lawsuit filed last week by Global Crossing against a division of Tyco International, which agreed in February 1998 to build an undersea cable to South America for Global Crossing.

Filed in a New York district court, the suit alleges that Tyco Submarine Systems Ltd., or TSSL, violated a disclosure agreement stipulating that it contact Global Crossing if any opportunity arose for TSSL to bid on or to develop a system that would compete with any Global Crossing submarine system prior to February 2000.

In May 1999, TSSL agreed to build a similar cable - called SAM-1 - for Telefonica in return for cash considerations and an equity share in the Spanish telecom giant.

Global Crossing regarded the action as a violation of its non-compete clause and terminated a $900 million construction project with TSSL.

"We certainly never would have hired them if they would have said they were going to compete against us," said Dan Cohrs, Global Crossing's chief financial officer. "This is actually common-law fraud. They had a contractual requirement to tell us they would be competing, but they didn't."

The suit also alleges that TSSL defamed Global Crossing with a press release that "falsely" stated SAM-1 was technologically superior to the system TSSL was building for Global Crossing and would provide superior service at lower prices than any other system in South America.

More important, the lawsuit claims TSSL misused Global Crossing's market and landing-site studies for the construction of a South America Crossing (SAC) cable - a project now being built by Alcatel for Global Crossing.

Global Crossing also contends TSSL inappropriately used the studies to create the SAM-1 project for Telefonica, a company in which TSSL has equity Internet.

"It is probable that because they had proprietary information they could have moved faster to develop their systems, and that has harmed us tremendously," Cohrs said.

After TSSL entered into the Telefonica deal, Global Crossing voided its agreement with TSSL. However, Global Crossing charges that TSSL refused to return the market and landing site studies, claiming ownership.

After voiding the contract, TSSL also refused to return the $40.75 million down payment made under the contract on the SAC cable.

It is doubtful TSSL will voluntarily return Global Crossing's down payment, considering the company's prepared response to the lawsuit.

"The complaint is totally without merit," TSSL's statement reads. "We view this action as the latest attempt by Global Crossing to avoid payment of balances due as a result of work performed by TSSL....This is part of a continuing effort by Global Crossing to stifle competition in the undersea cable market. We will fight this action vigorously and pursue all available remedies."

TSSL representatives declined to speak further about the lawsuit.

"We think the suit is very unfortunate. It's the first time Global [Crossing] has filed [a lawsuit], but we really had to protect ourselves," Cohrs said.

The suit also reflects a significant deterioration in a once-successful relationship between the companies. In 1997, TSSL was awarded the contract to design and build the Atlantic Crossing (AC-1) cable for Global Crossing. AC-1 connected the U.S., the U.K., the Netherlands and Germany. In May 1998, Global Crossing began transmitting voice and data communications through AC-1.

This may not be the last lawsuit in which a company disputes intellectual property rights with a contractor, said P. William Bane, vice president of Mercer Communications. "This type of lawsuit could become more and more a prevalent situation because of the Lego-like nature of the software-intensive, next generation network."

The TSSL/Global Crossing dispute exposes the absence of a patent process for business designs, Bane said.

"Global [Crossing] came up with a basic business design that could have been patented if there had been such a thing as a business-patent pending protection, but there is not one in the business world," he said.

April 1998: Notification agreement signed between Global Crossing and TSSL

April 1999: Global Crossing and TSSL sign SAC development agreement

May 1999: Telefonica and TSSL announce joint venture to create SAM-1

June 1999: Dispute causes construction to stop on SAC project

July 1999: Global Crossing enters into contract with Alcatel to complete SAC

May 2000: Global Crossing sues TSSL