Net2Phone, ADIR Sue Cisco Over Trade Secrets

Voice over IP company Net2Phone and its software subsidiary ADIR Technologies, Inc. filed suit against networking giant Cisco Systems Tuesday, claiming the hardware company stole trade secrets and negotiated in bad faith.

The joint complaint, filed in the US District Court in New Jersey, seeks both compensatory and punitive damages for “misappropriation of trade secrets, fraud, unfair competition, breach of contract and breach of fiduciary duties.”

The lawsuit charges that Cisco “seriously misrepresented the basis on which the entire Net2Phone-ADIR-Cisco relationship was founded.”

The complaint against the San Jose, Calif.-based Cisco is related to a strategic alliance that Net2Phone and Cisco struck up in 2000 in order to develop products that would make Net2Phone’s telephony software compatible with Cisco’s hardware products. The goal was to produce a highly marketable system for voice-over Internet protocol communication products.

According to the lawsuit, “Cisco would rely solely on Net2Phone to provide VoIP software to Cisco. In turn, Cisco, would contribute significant technical resources, financial support and marketing skills to assist in the development of a jointly marketable VoIP software product.”

The goal was to sharpen Cisco’s competitive edge in the hardware business with the latest Internet technologies. In return for Cisco’s financial support, Net2Phone created the ADIR subsidiary, “into which it transferred a suite of valuable VoIP network management software, much of which was to become known as ‘Voxis.'” Cisco also took part in the $25 million investment in the ADIR subsidiary.

However, “contrary to its earlier representations to Net2Phone in mid-2000, Cisco was not looking to Net2Phone/ADIR as its sole developer of VoIP technology and was secretly developing its own technology. Unbeknownst to Net2Phone and ADIR, and deliberately concealed by Cisco, Cisco had at least one other competing software product in development,” according to the lawsuit filed by the law firm Skaddon, Arps, Slate, Meagher & Flom.

By “holding ADIR at bay” while it allegedly worked on the side with other, competing VoIP software makers, “Cisco gave itself the power to slow down one project and accelerate the other, reducing competition for the final product by tying up a potential competitor, as well as cross-fertilizing ideas between projects in the process.” As a result of its alliance with Cisco, Net2Phone and ADIR claim that ADIR missed getting its products to market more quickly

The New Jersey-based Net2Phone also claims that it was induced to spend $48 million in stock to acquire competitor NetSpeak Corp. as part of its alliance to develop VoIP products for Cisco. But the lawsuit alleges that Cisco was working on competing VoIP products on its own as far back as 1999.

A Cisco spokeman said the lawsuit appears to be an effort to justify a business failure.

During a recent interview, Net2Phone CEO Stephen Greenberg conceded that the ADIR subsidiary has been burden to Net2Phone’s finances.

“Over the past months, we’ve taken steps to reduce the burn. We’ve reduced it by over 50 percent and we’ll continue to do so. What we’re doing with ADIR is simply right-sizing it.”

In a statement about the lawsuit, Greenberg said, “both Net2Phone and ADIR made extraordinary efforts to maximize our synergies with Cisco, however we were unable to resolve issues in a manner that would be beneficial to us and our shareholders.”

He said the company hopes to bring the matter to closure as quickly as possible.

Net2Phone did not specify the amount of damages the lawsuit is seeking.

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