Net2Phone sues Cisco for alleged fraud

The complaint, filed in the U.S. Court for the District of New Jersey by Net2Phone and Adir, charges Cisco with "misappropriation of trade secrets, fraud, unfair competition, breach of contract" and "breach of fiduciary duties" related to Cisco's role in Adir, a joint venture, according to a Net2Phone statement.

Net2Phone and Adir are seeking both compensation and punitive damages in the suit.

"We have been in intense discussions with Cisco to try to come to a resolution, and hope to continue to work towards a solution," Net2Phone Chief Executive Stephen Greenberg said in a statement. "We hope to bring this matter to closure as quickly as possible and will not allow it to be a distraction to our core businesses."

Cisco said the lawsuit by Net2Phone and Adir is the result of business issues, not alleged improprieties. "This appears to be an effort to justify a business failure by filing a lawsuit," a Cisco representative said.

Adir was founded in September 2000 to build Internet-based voice products, with investments from Cisco and Net2Phone. Cisco was also part of a $25 million second round of funding for Adir that was finalized in June last year.

A Net2Phone spokeswoman said Adir was relying on Cisco's use of Adir technology for sales. Net2Phone and Adir allege that Cisco was supposed to include the Adir Internet-based voice technologies in its products--a potential boon for a fledgling company such as Adir.

"We've been talking to Cisco for many, many weeks," Net2Phone spokeswoman Sarah Hofstetter said. "This was basically the last straw. This is in the best interests of shareholders.

"We were banking on Cisco," she said.

Hofstetter said Adir created products that were then not included with Cisco technologies. Cisco has built some momentum in selling Internet-based phone systems and related equipment to corporations, calling its strategy "Avvid." Cisco and others have said the market for such technology has developed more slowly than expected.

From the outset, Net2Phone said it was interested in such a venture as Adir so it could move beyond offering voice-based services over the Net. "This will allow us to generate new forms of revenue--revenue not just from services as we do today, but revenue from actually offering product," said then-Chief Executive Howie Balter at the time of the deal. Balter has since been replaced.

Adir completed the purchase of NetSpeak, a provider of Internet-based voice software, in August 2001 to add to its breadth of technologies.

In the complaint, Net2Phone and Adir allege that "Cisco had seriously misrepresented the basis on which the entire Net2Phone-Adir-Cisco relationship was founded."

Net2Phone and Adir say the original intent of the joint venture was to jointly develop "a product that would make Adir's voice-over software compatible with Cisco's hardware products, and ultimately produce a highly marketable system for internet voice-over communication.''

The Net2Phone and Adir statement also says that, "Adir intends to continue to explore means of further reducing its cash utilization through additional cost-cutting measures and will continue to size itself for the opportunities in the marketplace."