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Riverstone, Tellabs squabble over contract

Equipment manufacturer Riverstone Networks files a breach of contract lawsuit against the telecom equipment maker just two days after receiving a similar suit.

Equipment manufacturer Riverstone Networks filed a breach of contract lawsuit against fellow telecom equipment maker Tellabs, two days after Tellabs filed a similar suit against Riverstone.

At issue is the joint marketing and sales agreement the two companies signed in November 2000 that required Riverstone to sell its high-speed network routing devices to Tellabs, a maker of equipment to manage traffic on phone networks.

Tellabs planned, in turn, to bundle Riverstone's equipment with its own cable modem technology and sell the package of technology to high-speed cable Internet access providers.

Tellabs fired the first legal salvo on Aug. 28 by terminating its contract with Riverstone and filed a lawsuit that alleged that Riverstone did not make products meeting the agreement's guidelines. Riverstone filed its own suit Thursday seeking damages for breech of contract.

"We are disappointed that the relationship with Tellabs is ending in this fashion," Riverstone Chief Executive Romulus Pereira said in a conference call Thursday. "This notwithstanding, we remain committed to serving the cable market."

The lawsuit is another example of how seismic shifts in the telecom sector have made past contracts untenable.

"As is the case with almost any contract (signed) 18 months ago, there have been a set of expectations that have not been realized and have put some companies in egregious positions," Salomon Smith Barney analyst Alex Henderson said.

In the case of the Tellabs agreement, the two parties originally agreed to sell a maximum of $100 million worth of Riverstone equipment over a time frame between 18 months and 24 months but only managed to sell $5 million so far.

Tellabs representative George Stenitzer agrees those were the terms, but he adds "that was contingent on Riverstone meeting their product development milestones, which they have failed to meet, particularly on how they were going to handle voice traffic."

Stenitzer also said that Tellabs has not sold any Riverstone equipment to its customers and that the $5 million of equipment it bought is still in its own labs or the labs of its telecom carrier customers.

Tellabs is suing Riverstone for $10 million plus punitive damages. Riverstone is seeking damages for early termination of the contract that would require Tellabs to pay Riverstone 60 percent of the sales figures previously agreed upon, which amounts to $55 million, $60 million minus the $5 million in sales.

Riverstone said it expects that the lawsuit and contract difficulties will not effect the company's short- or long-term earnings expectations. On its last earnings call, Riverstone said it expected fiscal second-quarter revenue to increase between 20 percent and 25 percent from the previous quarter's $44.2 million.