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Avant trade secrets trial to begin

Executives face possible jail time and fines over the alleged 1994 theft of a rival's source code.

A criminal trade-secrets case against chip-design software maker Avant is scheduled to go to trial Monday after years of delays.

The company and eight people who worked for or were associated with it face charges including conspiracy to commit trade secret theft, trade secret theft, receiving stolen property, and securities fraud. If convicted of the felony charges, each defendant could serve as many as 11 years in jail and face fines of $27 million. Defendants include Chief Executive Gerald Hsu and four founders of Avant (pronounced ah-VAHN-tee).

The charges stem from an investigation begun in 1994 into allegations that Avant workers lifted source code from rival Cadence Design Systems and illegally used it in some products. The charges were first filed in 1997.

Jury selection begins Monday, with opening statements starting once a jury is seated.

The trial reflects the importance of trade secrets, the currency that's fueled Silicon Valley since its inception. Intellectual property is becoming even more significant as competition in the tech industry grows increasingly fierce.

For years, companies have been filing suit against those who hire away employees privy to secret design plans and processes in the hopes of hampering rivals. In recent months, Trident Microsystems, Compaq Computer and Microtune all have sued competitors, alleging they stole secret product information.

It's rare for defendants in trade secret disputes to face criminal charges such as those before Avant, but even those cases are becoming more frequent. In the last month alone, two Lucent Technologies scientists were arrested and charged with stealing information and planning to send it to a Chinese company. And the district attorney's office in San Mateo County, Calif., arrested a former administrative assistant for The Barksdale Group on accusations of pilfering trade secrets about the firm's portfolio companies.

Looking for a precedent
Julius Finkelstein, deputy district attorney for Santa Clara County, said he decided to pursue criminal charges in the Avant case because of the "amount of thievery and the amount of money that was made" through the company's alleged actions.

He added that many tech companies will keep a close eye on the trial.

"It will serve in the future as a test as to whether other companies want to get involved in the criminal cases," Finkelstein said. For example, he said, a conviction could convince more companies to cooperate in criminal cases, as Cadence did.

Such cases are complicated because the speed of technology innovation moves more rapidly than the courts. The disputed code, part of software used to design computer chips, isn't contained in any of the products Avant currently sells.

"We're looking forward to our chance to get our day in court," said Clayton Parker, Avant's head of U.S. corporate marketing, who denied the charges. "This is sort of old news. They're talking about products we no longer sell."

In addition to the criminal case, Avant is involved in a civil trial in federal court brought by Cadence that makes many of the same charges as the criminal complaint. The judge hearing that case, U.S. District Judge Ronald Whyte, already issued a temporary order preventing the company from shipping some of the products containing the disputed code.

However, that case is on hold pending the outcome of the criminal case. In addition, Whyte dropped some of the trade secret claims against Avant because Cadence signed a release in 1994. However, Cadence is seeking to reinstate those claims, and the 9th U.S. Circuit Court of Appeals is scheduled to hear arguments on the matter Tuesday.

Avant would not comment on whether it is involved in settlement talks related to this case. In March, the company settled two shareholders lawsuits that were inspired partly by the criminal proceedings against it.

During the trial, Finkelstein will argue that the company conspired to steal trade secrets from Cadence and made at least $200 million after doing so. In addition, the prosecutor will argue that the company committed securities fraud by failing to disclose in federal financial filings that some of its core products contained Cadence code. The securities fraud charges mirror the allegations in the civil suit that Avant recently settled.

Avant, which has long denied the charges and filed numerous motions to delay the proceedings, is expected to claim that the disputed code is old and therefore irrelevant and that its engineers were acting aggressively, but not illegally, when they incorporated some Cadence code into its products. The company also has alleged that the district attorney's office has been unduly influenced by Cadence.

The case already has been mired in numerous delays. Last spring, a judge tossed out another indictment against the company, ruling that the grand jury failed to comply with legal procedure when it didn't record some of the proceedings.

The charges were reinstated--along with the additional claim related to receiving stolen property--in September. This time around, potential jurors already have filled out questionnaires. Jury selection is expected to take a couple of weeks.