CA-based Quantum and MN-based Imation embroiled in anti-trust suit and counter-suit

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Quantum Corp., the world’s leading supplier of DLTtape automation systems and tape drives for backing up and archiving business-critical data, filed a counter-lawsuit against Imation Corp. on October 3 after Imation filed an antitrust lawsuit on October 1 against Quantum.

Imation’s $150 million lawsuit against the Milpitas, California-based company alleges in a recent press release that Quantum “fixed prices on DLT tapes, invited Imation to join an illegal tape cartel, inappropriately extended patents on licensed tape drives to tape media as a way to enforce its monopoly on the tape market, and misrepresented DLT-compatible tape as an open standard with competitive pricing.”

A temporary restraining order filed by Quantum was denied in a Santa Clara, California courtroom last week and a court hearing on charges against Imation for an injunction will be heard later this month, said Imation’s vice president of investor relations and corporate communication Brad Allen. The injunction would prevent Imation from shipping its new tape product – Black Watch Digital Linear Tape – to customers. The date for the Federal antitrust case for $150 million has not yet been set.

Quantum, with nearly 750 employees in Colorado Springs, has been working with the Oakdale, MN.-based company for the past two years in its certification efforts of DLT tapes. Quantum produces the DLT tape drives used worldwide for computer back-up systems. It previously manufactured its own tapes as well until the mid-90s when Fiji Photo Film Co. and Hitachi Maxell were certified by Quantum to produce the magnetic tape cartridges compatible with Quantum’s tape system. Quantum no longer manufactures the cartridges. Royalties this past year from these sales translated into about 19 percent of Quantum’s revenue.

Imation claims that it had to purchase tapes from Fuji and Maxell for resale until its manufacturing process was approved. However, the company did not pass Quantum’s standards and was not certified to manufacture and sell the tapes. Imation claims the tapes they had to buy from Fuji and Maxell until certification was approved were overpriced and Imation lost money on the deal. That figure is reflected in a portion of the $150 million lawsuit. If Imation wins the lawsuit, antitrust law states that the amount requested in the lawsuit would automatically be tripled to $450 million.

“It’s part of a cartel, a conspiracy … to carve up the markets and restrain supply,” said Allen. ” That’s what Quantum’s behavior was driving at.”

Quantum’s system and tapes were meant to work together, said Barbara Nelson, president of Quantum’s DLTtape group, adding that incompatible tapes can wear down the heads on drives.

“The system is interrelated,” said Nelson. “The tape drive and media are highly integrated in terms of how they work together.”

Quantum shares information with companies that are working through the Quantum certification process, such as drawings, test equipment and information on how the process works. The tapes are used in applications ranging from a department group with a server to high-end enterprise applications for backing up information for a bank. This also includes archives and disaster recovery.

It usually takes between two and four years to develop and qualify a product, said Nelson. If a tape does not work correctly with the drive and the drive is damaged, Quantum cannot honor any tape drive warranties. Quantum gave Imation dedicated resources, did a failure analysis, and provided software and hardware upgrades, but Imation failed repeated tests. Imation then decided to sell unqualified products, said Nelson, and not pay Quantum royalties. Allen said that Imation followed procedures and previous tapes that were approved by Quantum suddenly were rejected. He attributes this to Imation’s refusal to join the illegal tape cartel that Quantum proposed.

“It’s a very competitive market,” said Nelson. “The people who sell this media are people like Compaq, IBM, TDK. They buy from licensed manufacturers and the sellers are the people who set the price so they can set it where they want.”

Quantum’s counter-lawsuit alleges that the intellectual property it released to Imation in 1999 after an agreement was signed is a patented trade secret and that Imation is guilty of breach of contract as well as unfair practices.

Meanwhile, Imation will continue to sell the Black Watch DLT. The company claims that it designed and manufactured the product without using information from Quantum’s DLTtape series and that Quantum’s patents are on the tapes drives, not the tapes. Imation’s tapes, said Allen, will work in Quantum’s drives without problems.

With 4,200 employees worldwide, Imation showed $1.2 billion in revenues last years with 75 percent of its revenue derived from data storage units such as floppies, CD and data cartridges.

“The whole thing in a tape product is to extend a standard,” said Nelson. “You want to have as many people using and promoting your media. We want as many media suppliers, end users buying it. It’s an echo system that you want to continue to expand. That’s how you continue your leadership in the market.”