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Nortel sues bandwidth exchange site

Software-licensing dispute pits networking giant against 100-person start-up trying to go public.

Nortel Networks announced Tuesday that it has filed a lawsuit against Arbinet-thexchange, an online marketplace for exchanging bandwidth, claiming that Arbinet is infringing on Nortel's copyrights by using software without permission.

Specifically, Nortel alleges that Arbinet has exceeded the usage level permitted under its licensing agreement. The networking company has also accused Arbinet of failing to meet its contractual obligations to buy certain switching systems from Nortel.

The lawsuit, filed in the U.S. District Court for the Eastern District of Virginia, follows a lengthy period of unsuccessful discussions between the two companies to resolve the matter, Nortel said.

New Brunswick, N.J.-based Arbinet, which filed for an initial public offering with the Securities and Exchange Commission earlier this month, had already disclosed some details about the dispute in its SEC paperwork.

"This is old news," said Chris Reid, director of marketing at Arbinet. "We disclosed this news two weeks ago in our S-1."

An S-1 is a form all companies must file with the SEC prior to going public. In the S-1, a company must disclose any risks to potential investors, including litigation.

Arbinet's S-1 states that it had received a letter from Nortel on April 13 regarding the complaint, which was filed on April 12. But as of July 9, when Arbinet filed the form, it had not been served with the complaint, the document says. The company also said in the S-1 that it had entered into settlement discussions with Nortel.

"Based upon discussions to date, (we) believe that a settlement can be reached on terms that will not be materially adverse to us," the company said in the document.

According to the S-1, Nortel is asking for injunctive relief to restrain Arbinet from using the networking company's software, as well as damages and attorneys' fees, which could total about $6 million.

Arbinet was founded in 1994 and employs 100 people. More than 300 members, mostly service providers, use the Arbinet platform to trade voice minutes and Internet capacity. The system also offers credit risk management, billing and commercial settlement of these transactions.

Such communications exchanges were popular at the height of the Internet bubble in 2000, with companies such as Arbinet, RateXchange and Enron Communications leading the pack.