Level 3 and Limelight Patent Suit: Here's How to Settle It

On Monday, in the Eastern District Court of Virginia, the Level 3 (LVLT) and Limelight Networks (LLNW) patent suit got underway. While this is only the start of what is expected to be a long and drawn out legal proceeding, I think Level 3 and Limelight Networks should come to terms and end the suit.

As a company, Level 3 is in a very different position today than they were almost two years ago when they first notified Limelight about the patents they control from the SAVVIS acquisition. Two years ago, Level 3's stock price was around $7 and they had a market cap of almost $10 billion. Today, their stock is under a dollar and their market cap is under $2 billion. Times have changed, the economy has gotten worse and companies are now doing everything they can to cut costs.

Like all companies, Level 3 is under a lot of pressure in the New Year to increase sales, but they also have a lot of debt to worry about. The telecom industry could take a big hit in 2009 and one would have to think that Level 3 will raise more money as soon as market conditions allow. In my opinion, the last thing Level 3 needs right now is to be spending money, time and resources on a patent suit with Limelight. Even if Level 3 were to win the suit, the process would most likely take years with all the appeals and it's not as if Level 3 would get a lot in the way of damages when compared to the rest of Level 3's total yearly revenue.

Meanwhile, Level 3 spends millions on the suit, ties up executives and can't spend every waking second possible working to improve the rest of their business. Any company engaged in a lawsuit is always distracted in some way from focusing 100% on their customers. Not that the suit helps Limelight Networks either, which is now spending money and time on two suits, the other being from Akamai (AKAM). The difference however with the Akamai suit is that Akamai and Limelight are a lot more similar in terms of services offered than Limelight and Level 3 are. Level 3 is a carrier and as a result, gets the majority of their revenue from other services outside of similar CDN services offered by Limelight. Level 3 has a lot less to lose with Limelight than Akamai does.

In addition to Level 3 and market conditions changing in the past two years, the technology being debated has changed quite a bit since that time as well. Much of the Level 3 suit is talking about very generic technology and in my opinion, language that could be debated forever. My impression is that when Level 3 filed the suit, it was based on their assumption and interpretation of how they thought the Limelight Network was operating at the time. But compared to two years ago, Limelight is an entirely different company from a technology and services standpoint. Much has changed and I wonder just how much of the patents in question are even relevant to Limelight's offering today.

Like any company, Level 3 wants to protect their patent portfolio and enforce what they believe to be infringement on Limelight's part. But at the same time, I think Level 3 has to weigh what can be gained in the long run, by what can be lost in the short term. Unless a settlement is reached, Level 3 is not going to see any money anytime soon, and could lose the case and never see any money at all. Meanwhile they spend their own money and time on the suit and can't spend that time on improving their business in other ways. It's a bad time for Level 3 to be doing anything other than focusing 100% on their business.

So how could Level 3 and Limelight settle the suit? Limelight buys a lot of transit, one of the core services offered by Level 3. Level 3 could come to some kind of agreement to drop the suit against Limelight if Limelight purchased a certain amount of transit from them each year. I don't know what percentage of transit purchased by Limelight is from Level 3, but I'm sure it is a number that could be greatly increased.

Level 3 would get immediate revenue, would cut the millions they are going to spend this year on the suit and could focus their efforts on other aspects of their business. And with Level 3 offering other services Limelight purchases, like co-location, one could make a reasonable argument that Level 3 could sell Limelight other products outside of just transit. I don't think it's that far fetched of an idea.

While I have no knowledge if any such discussion is taking place amongst Level 3 and Limelight, we are at a point in business where all companies are looking at ways to cut costs, increase revenue and focus their efforts on strengthening their core business, not spending time on things that are distractions. Level 3 could accomplish all of these things by thinking about other ways to solve the patent disagreement outside of being engaged in a multi-year, multimillion dollar suit.

Disclosure: None

Comments

[Max Borne:]

Good commentary.

Maximizing one's assets is always a priority. If they bartered a deal, it would save money and simultaneously increase revenue.

Dump the lawsuit and jettison the lawyers, in favor or more immediate revenues.

Jan 07 05:08 PM

[Fluids only:]

I don't agree with this article. Level 3's primary motivation is to impede a competitor. With this sort of case, all the work is in the preparation and it can pretty much just roll out from here, It wouldn't more than a single line item on page 5 of crowe's monthly report. At the same time though, it will be a real thorn in the side of Limelight - in terms of always having to address it in a powerpoint slide in their customer sales presenations, investor presentations etc. It also means that as acquisition target it becomes more of a risk (and thus lowers the value) to all except Level 3 (and by the same token Akamai). It's a good placeholder, a good irritant.

I'm not sure that the suggested solution would be all that attractive to Level 3 - a deal whereby Limelight wins the customer account and Level 3 gets to provide some of the upstream IP? Level 3 wants the customer!

Jan 08 12:15 AM

[Dan Rayburn:]

Akamai's primary motivation was to impede a competitor as well, and so far, that lawsuit hasn't. While many thought the Akamai suit would be a big thorn in Limelight's side, look at what has happened since the suit. Limelight continues to win business, increases revenue and improve their margins, all while taking some of Akamai's business. Why would Level 3 be any more successful than Akamai?

And customers don't care which CDN is suing another. Over the past ten years there have been at least a dozen such suits like this. To date, no CDN has ever been shut down and no customer has been affected. These suits are no different.

Jan 08 10:51 AM

[User 334436:]

Since when do lawyers have anything to do with customer service or the products offered. They aren't out there selling and they aren't answering phones for customers with problems... The lawyers are probably salaried anyway, might as well give them something to do.

Jan 09 03:44 PM