Cadence V.S. Avant!

Cadence was the industry leader in the electronic design automation (EDA) industry. The EDA industry features software products used in the computeraided design of sophisticated integrated circuits (ICs). Use of automation software enables more efficient layout, increased density, and a decrease in design time, chip size, and IC production costs.The major customers of these EDA products include application specific chip developers, such as LSI Logic and Cirrus Logic, and designers and manufacturers of general purpose semiconductors, such as Intel Corporation and Cypress Semiconductor.Software in this field is remarkable for its complexity. A typical EDA program development or upgrade cycle will take at least four years to complete. The total worldwide sales of EDA software in 1995 totaled between $1.2 and $1.6 billion, according to industry analysts.

The EDA business is by no means an easy industry to enter or in which to increase market share. There is fierce competition for new customers, because once a customer signs a deal with an EDA vendor, there are extremely high switching costs. Furthermore, companies are dissuaded from entering this industry by the extremely expensive nature of research and development.

In 1991, four employees decided to leave Cadence and form a new company, named ArcSys. This company would be a direct competitor of Cadence. In their exit interview, all four refused to sign Cadence's standard agreement reaffirming their nondisclosure obligations. ArcSys was incorporated on February 28, before any of them had actually left Cadence's employment. Another employee Gerald Hsu resigned, in March 1994 to became CEO of ArcSys. On September 1, 1994, Mitch Igusa, one of Cadence's most talented engineers, notified Joe Costello, Cadence CEO, that he was resigning from Cadence. Igusa's position was as Architect, one of the company's most valued programmers. Igusa told Costello that he wanted to be wealthier and that he felt there were better financial opportunities elsewhere in the industry, such as at a startup.

Joe Costello had two immediate reactions. First, he was concerned at the loss of a key programmer. Perhaps more importantly, he was frightened at the possibility of trade secret confidentiality being violated. Igusa had access to all of Cadence's source code and other proprietary information.Costello tried to persuade Igusa to stay. Costello told Igusa that he could redesign his job; he could do anything he wanted to make himself happy at Cadence. Igusa declined. Costello told him that he could define his own compensation package. When his attempts had failed, Costello told Igusa to meet with Cadence's attorney and sign a standard acknowledgment of this continuing nonuse and nondisclosure obligations. Igusa declined this as well "for legal reasons."

Concerned by Igusa's refusals and evasive replies, Costello ordered a review of his recent computer operations. He was shocked by what he found. On September 15, 1994, Igusa had e-mailed a series of files from his workstation to his private NetCom account, which he accessed from home. The message totaled 6 MB in size, with the largest single file being 5.3 MB. With this information, Cadence alerted the Santa Clara Country District Attorney's office. The D.A. obtained a search warrant for Igusa's residence. They found what they expected. Igusa had e-mailed himself the source code of Cadence's Gate Ensemble program. Also, he had copied onto a number of floppy disks copies of QPlace and FRoute, Cadence's crown jewels, in their entirety with cosmetic alterations to conceal their origin.

Also in August 1995, compelling evidence was found from a routine visit of one of Cadence's engineers to Cypress Semiconductor. In the course of that meeting, Cypress's IC designers showed the engineer a demonstration of the ArcSys products. He was shocked at the remarkable similarities to Cadence's product.

On November 7, 1995, Arcsys changed its name to Avant! (pronounced ah-VAHN-tee). On December 5, 1995, the District Attorneys office, The FBI, The San Jose Police and the Sunnyvale police raided Avant!'s offices and searched the premises and found more incriminating evidence. The day after the search of Avant!'s headquarters, Cadence filed a complaint in federal district court in San Jose for copyright infringement, misappropriation of trade secrets, unfair competition, and related charges.

The major points alleged in support of this claim were:

• Cadence source code and software design and architecture constituted protectable trade secrets.
• Avant!'s conduct constituted misappropriation under the Uniform Trade Secret Act.
• Cadence will be irreparably harmed if a preliminary injunction is not granted.

Put yourself in Joe Costello's position. How could you have better protected your company's intellectual property?

Put yourself in Gerald Hsu's position. How could you have better developed the requisite intellectual property while protecting Avant! from legal problems?