Cisco faces lawsuit over gear, business practices

The nasty court battle began in late April, when the networking giant filed a lawsuit demanding payment for loans it gave to a Louisiana phone company called American Metrocomm (AMC) so that it could buy Cisco equipment.

AMC responded with a countersuit last month. The carrier, which offers high-speed Internet and phone connections to small businesses, argues that it was forced to refund about $1.4 million to its customers because defective Cisco equipment failed to provide promised services.

"If the gear had worked, we'd be paying our bill," said Michael Henry, chief executive of AMC, which filed the suit after rejecting a $40 million settlement offer from Cisco. "Bottom line: The Cisco gear doesn't work, and they're just looking for scapegoats."

The case reflects the difficulties of the rapidly changing "backbone" business of building the lines needed to keep pace with the explosive growth of online traffic. As both older telecommunications companies and newer ones like AMC offer expanded Internet services, the odds for such disputes are likely to increase in this untested terrain.

The issues are particularly sensitive for Cisco, which recognizes that its position as a market leader could make it vulnerable to broader antitrust charges. Cisco has sought to avoid even the perception of questionable business practices, well aware of the backlash that has befallen Microsoft in Washington's current antitrust climate.

Cisco adamantly denies the charges leveled by AMC, pointing to its track record with other clients. The company says the lawsuit is the first filed by a Cisco customer in the United States and the first ever involving more than $20,000 in claims.

"We're asking the judge to have AMC pay us what they owe us and state that nothing is wrong with the equipment," Cisco spokeswoman Lorene Arey said. "We want the judge, in essence, to have AMC state the equipment is fine."

AMC's countersuit, filed in U.S. District Court in Louisiana, demands about $62 million in damages and costs associated with the Cisco equipment. The suit accuses Cisco of fraud and violation of the unfair trade practices and consumer protection law for allegedly selling faulty equipment used to build asynchronous transfer mode (ATM) networks.

The suit also charges Cisco with allowing improper financial relationships between several of its employees and Florida start-up WorldWide Web Systems, which sold AMC the Cisco products and builds software that runs on the equipment. In addition to the Cisco equipment, AMC contends that WorldWide sold it billing software that didn't work either.

AMC accuses several Cisco employees of having conflicts of interest with WorldWide, claims that have prompted the transfer or suspension of Cisco employees and a change in corporate policy that prevents workers from investing in companies that conduct business with Cisco.

AMC alleges that Cisco account manager Sue Lin Lange pressured AMC to acquire the Cisco equipment from WorldWide and subsequently received a $350,000 commission.

The lawsuit accuses Lange of allegedly ignoring AMC's complaints that the Cisco equipment doesn't work.

"As AMC employees attempted to resolve the numerous...failures, Lange attempted to have AMC fire those employees," the lawsuit says. "Lange went so far as to attend an AMC board of directors meeting where she voiced the opinion that the AMC president was incompetent and should be terminated."

Lange, who returned the $350,000, has been suspended.

The allegations are offshoots of two other lawsuits in Florida, where WorldWide accuses two Cisco salesmen--Vince Rotondo of Georgia and Keith Bennett of Ohio--of allegedly extorting $5 million during a five-month period last year.

Attorneys for the salesmen deny any improprieties and say their clients are scapegoats in the case. Rotondo was dismissed by Cisco, while Bennett resigned because he had a better opportunity elsewhere, the attorneys said. Debbie Traficante, who managed both Cisco salesmen, has been transferred to a new job within Cisco.

The company said it is also investigating the actions of Cisco employee Gene Principada, to whom WorldWide allegedly paid $30,000 to become a certified partner--a designation that proves a company can build and install networks using Cisco equipment. AMC contends that WorldWide was certified even though it did not meet Cisco's stringent requirements.

Cisco concedes that the highly competitive networking contract environment makes the company vulnerable to the situation it faces today, spokeswoman Arey said. But she added that the company has a long history of empowering employees with decision-making responsibilities and is willing to accept the occasional personnel problem to ensure that independence.

"This company is really run on a trust," Arey said. "The trust is that you do the best thing for the customer."