Emulex won another round in its legal battle with Digital Equipment Corp. this week as a federal appeals court lifted a ban that would have prohibited the Costa Mesa-based company from developing a new generation of products that are the key to its future sales.
The U.S. Court of Appeals for the Federal Circuit in Washington threw out the most damaging part of a lower court injunction that forbid Emulex from developing, manufacturing or selling certain computer products that work specifically with Digital's latest and fast-selling business computer system.
The line of products directly affected is expected to bring in as much as $10 million in sales this year, according to Michael J. Lewis, chief financial officer at Emulex.
"This is very good news. . . . If they would have decided the other way, we would have had to stop making the products," Lewis said.
The ban had been part of a temporary injunction that Maynard, Mass.-based Digital obtained last year as part of an ongoing patent infringement and trade secrets suit against Emulex. The ban forbids Emulex's developing or selling products that were designed by anyone using information improperly obtained from Digital.
In January, the appeals court temporarily overturned a lower court ban and allowed Emulex to resume production until a final decision could be reached. In May, Emulex began shipping the new Digital-compatible products, which include a quadruple disk-drive unit that is compatible with Digital's new DEC 8000 super minicomputer.
Digital, which said the court's decision was expected, is evaluating whether it will fight to regain the ban, according to spokeswoman Nikki Richardson.
Digital's lawsuit, filed in July, 1985, alleges that Emulex has used information improperly removed from Digital's files by a former employee who was later hired by Emulex.
The suit asks for unspecified damages in lost sales. Emulex is a leading manufacturer of components compatible with Digital's computers.
Lewis said that Emulex "always has been willing to entertain discussion for the settlement of the suit," but that no agreement has been reached. Digital officials would not comment on the possibility of a settlement.
Not Dependent on Digital
Although Emulex has been developing products that are not dependent on Digital technology, 65% to 70% of the company's product line is designed specifically to work with Digital's computers, Lewis said. He said that most of Emulex's Digital-compatible products were not affected by the ban, but two-thirds of the company's Digital-related sales could be lost if Emulex is unsuccessful in the suit.
Emulex reported sales of $103.8 million in its fiscal year, which ended June 28. The company said costs from folding its retail personal computer products division caused fiscal 1987 earnings to plunge 53% to $3.5 million.
Analysts said the legal battle with Digital, which has stretched on for more than two years, has also hampered Emulex's performance, particularly because the company has been forced at least twice to halt work on products for the new Digital line.
Emulex stock, which trades over-the-counter, gained 10% Wednesday to close at $8.125, up 75 cents.