March 24, 2009 8:50 AM

IBM-Sun Merger Talks Could Hinge on NetApp Litigation

Posted by Brian Baxter

A two-year-old IP battle over network storage systems between two Silicon Valley mainstays--Sun Microsystems and NetApp--could affect merger talks between Sun and the world's top provider of computer products and services, IBM.

Represented by Weil, Gotshal & Manges litigation cochair Matthew Powers and IP litigation partner Edward Reines, Sunnyvale, Calif.-based NetApp filed suit against Sun in U.S. district court in San Francisco in September 2007.

NetApp, a leading vendor of network-attached storage systems that was rated the best company to work for in America by Fortune this year, claimed that Sun's Solaris operating system infringed on NetApp patents through its ZFS file system.

The ZFS technology is critical to Sun's business plan--as evidenced by a series of blog posts in recent years by Sun CEO Jonathan Schwartz--given the importance of computer storage in running sites like Facebook, MySpace, and iTunes.

The litigation grew to three cases covering nearly 40 different patents, making it one of the few current large patent cases between two competing product companies, rather than troll-generated IP suits. ZFS patents account for 16 of the 40 at issue.

Sun has since countersued NetApp over several other patents. While some relate to storage, court documents show that Sun also has claims against NetApp for using microprocessors from Advanced Micro Devices and reselling routers manufactured by Cisco Systems. (Sun's lead lawyer, DLA Piper IP partner Mark Fowler, did not immediately return a call seeking comment.)

Discovery in the first two cases began last September and is set to close in April. A trial date has not yet been set.

Should IBM pursue its acquisition of Sun, sources say it runs the risk of taking on substantial liability should it decide to pursue the litigation with NetApp over ZFS. Sources say that with ZFS technology such an integral part of Sun's business strategy, it's unlikely IBM would abandon the litigation should an acquisition of Sun go through.

A settlement in the case also is unlikely because NetApp brought the case to protect technology that it hopes will set the company apart in the cutthroat high-tech market of Silicon Valley.

While news reports suggest an IBM acquisition of Sun is proceeding, lawyers close to the situation aren't talking about how Sun's potential acquisition value might be affected by its litigation with NetApp.

Last week Sun's former chief litigation counsel, Clayton James, announced that he was leaving the company for the Denver office of Hogan & Hartson. (A call to James was not returned by the time of this post.)

Cravath, Swaine & Moore and Wilson Sonsini Goodrich & Rosati are thought to be the two firms providing outside counsel to IBM and Sun, respectively, on the purported merger.

A call to Cravath M&A partner Scott Barshay was not returned by the time of this post. According to a May 2005 story in The National Law Journal, Barshay has "represented IBM in more than 25 mergers and acquisitions since 1998."

Barshay advised the company on its $1.1 billion acquisition of Ascential Software in March 2005 and the $1.75 billion sale of its personal computer business to Lenovo Group in December 2004. He also advised IBM on its $1.3 billion acquisition of Internet Security Systems in August 2006 and June 2007 acquisition of Waltham, Mass.-based Web security firm Watchfire.

Wilson Sonsini M&A chair Martin Korman, who advised Sun on its $4.1 billion acquisition of Louisville, Colo.-based StorageTek in June 2005, declined to comment about the firm's role in any merger talks.

In addition to the litigation with Sun, the StorageTek acquisition could also pose antitrust issues because any combined IBM-Sun entity would dominate the computer storage market, Reuters reports.

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