STEPPING INTO A MIND FIELD

SAN JOSE — One day in late 1994, the police swept down upon the Silicon Valley home of a software engineer named Mitsuru “Mitch” Igusa and carted off a computer and several floppy disks they found inside.

The reverberations from that raid are still echoing throughout this capital of high technology. Data embedded on the disks, say Santa Clara County prosecutors, amounted to hard evidence that Igusa was planning to turn over secret software program code from his ex-employer, Cadence Design Systems, to Avant! Corp.--a firm run by former Cadence employees that Igusa was allegedly planning to join.

That assertion is at the center of one of the hottest criminal cases in recent Silicon Valley history. For on April 18, the Santa Clara district attorney filed conspiracy and theft charges against Igusa, Avant! and six Avant! executives, including Chairman and Chief Executive Gerald Hsu and three Avant! founders.

The news hit the industry like a pistol shot.

The prosecutors’ complaint read like a modern-day spy story, replete with secret meetings, laundered cash payments and furtive attempts at a cover-up.

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Avant! (pronounced “Avanti”) is a highly successful developer of “place and route” software, which helps chip makers design microprocessors. Since its founding in 1991, the company has steadily eroded Cadence’s dominant share of the place-and-route market. But now analysts are wondering how long the company can survive under its legal cloud: On the day of the charges, Avant!’s stock dropped by about 50%, instantly wiping out about $230 million in market capitalization.

The company and all the other defendants, who were released on bail, have strenuously denied the charges. As Hsu last week told a gathering of high-tech industry analysts: “The charges are false, period. We are not doing anything illegal, and we intend to win in the court.”

Hsu contended that the case derives from Avant!’s success in beating Cadence with a superior product line.

“Our products are far better than Cadence’s . . . and that’s why we will win in the marketplace,” he said.

Meanwhile, the charges have opened a debate over the technology industry’s newly aggressive approach to protecting its trade secrets--and raised further questions about whether criminal authorities should be treading in an area traditionally handled in the civil courts.

Of course, battles over intellectual property have been around as long as there has been technology to commercialize. As far back as the 1870s, Thomas Edison and Alexander Graham Bell waged a patent war over the invention of the telephone (each ended up with rights to part of the technology).

But there is no question that high-tech firms have lately been waging these legal battles with greater ferocity. The reasons are obvious: Competitive advantages in the fast-moving industry have ever-shorter half-lives, and proprietary technology is growing more expensive to develop and exploit than ever before.

In the last few weeks alone, charges of trade secret theft have been lodged against business rivals by NetCom Online Services and Symantec (itself the defendant in a celebrated 1992 case). As recently as Wednesday, Xerox charged in a lawsuit that U.S. Robotics stole its handwriting-recognition technology for use in its popular Pilot electronic organizer.

And companies today are much more willing to turn over cases to the criminal authorities.

“We are getting more referrals and investigating more,” says Julius L. Finkelstein, the assistant district attorney in Santa Clara who brought the Avant! charges.

Although criminal trade secret cases are not entirely novel, corporations have in the past shied away from turning to prosecutors to help settle their competitors’ hash. Whereas most trade secret cases are principally about money, the stakes are much higher in criminal court and winning a victory is chancier.

Now, however, the criminal laws are more welcoming to trade secret cases than ever before. New federal and California statutes significantly broaden the definition of protected trade secrets to include not only the traditional categories of scientific or technical information, but also a wide range of business data, including marketing plans and even Rolodex files. The federal law imposes heavy penalties of up to $500,000 and 10 years in jail for individuals found guilty of domestic trade secret theft.

Top law enforcement officials have publicly encouraged their underlings to get on the bandwagon. FBI Director Louis Freeh has publicly cited the threat to U.S. business from industrial espionage, foreign and domestic. And Atty. Gen. Janet Reno has informed federal prosecutors that the government expects them to play a role in prosecuting high-tech crimes.

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“Someone seems to think these cases should be prosecuted, because Congress has made [trade secret theft] a crime,” says Leo Cunningham, a former assistant U.S. attorney in Silicon Valley now in private practice.

Not everyone in the Valley believes this is good news. On the contrary, many fear it threatens to undermine one of the pillars of the region’s growth: the extraordinary mobility of its intellectual workers.

The defining dream of Silicon Valley, after all, is to found a start-up to compete with one’s own employer, often by improving on its products. Now--in addition to the traditional financing, marketing and technological hurdles--start-ups face a mounting threat of legal injunctions over trade secrets.

“The dynamism of Silicon Valley largely stems from the openness of its information flows,” says AnnaLee Saxenian, an expert on Silicon Valley economy at UC Berkeley. “To the extent these lawsuits are not well-grounded in the facts, but are designed just to intimidate opponents, they do have a chilling effect.”

It’s no secret that many trade secret claims mask a deeper agenda. As James H.A. Pooley, a trade secret expert at the Menlo Park law firm of Fish & Richardson, warned fellow lawyers in an article last year: “Beware of personal, inappropriate motives [for filing cases] that may be shrouded in corporate terms.”

These include “ego (for example, of the founder who believes that he or she created the relevant industry); greed; revenge; and scapegoating (i.e., explaining to management or shareholders why things are such a mess).”

Nor have these cases become any easier--or cheaper--to win. Consider the eight-year fight between Intel Corp. and Advanced Micro Devices, or AMD, over Intel’s contention that AMD had infringed its technology for the 386 microprocessor. (AMD contended that a prior licensing agreement gave it rights to the technology.)

The two sides incurred an estimated $100 million in litigation costs before finally settling the case in 1995 for a token payment of $40 million from AMD to Intel.

Costs are high because the facts at issue can be impossibly obscure. To sway the jury, each side must hire an army of experts to analyze what might be hundreds of thousands of lines of “code”--formulas, functions and instructions written in the arcane languages that tell computers what to do--in search of clues that all or part of the defendant company’s version might have been copied from the plaintiff’s.

The process also involves making delicate judgments over the importance to a program or product of any given formula or block of code, as well as how much of what an engineer holds in his head belongs to his former company.

Such complications explain why local prosecutors have tended to tread gingerly around trade secrets cases. Several years ago, Santa Cruz County’s highly publicized prosecution of a Symantec executive for allegedly stealing secrets from Borland International, a rival software firm, blew up because the financially strapped district attorney’s office asked Borland to help pay for an expert witness. That created a conflict of interest, the state Supreme Court ruled last year, that may have encouraged the district attorney to prosecute an otherwise weak case. (He dropped the charges.)

The wide disagreements over which trade secrets deserve legal protection in high technology and how to shield them, many legal experts say, underscore why this is no place for the heavy bludgeon of criminal law.

“Employees leaving the mother ship is the story of this valley,” Cunningham says. “There’s some thinking that criminal law shouldn’t be the leading edge.”

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Nevertheless, Santa Clara authorities contend the Avant! case easily meets any standards of willful criminal conduct a jury might impose.

“We draw the line at an employee taking source code (that is, the basic programming of a software product) from his employer,” Finkelstein says. “If you’re working at a bank, you’re not allowed to take money home.”

As it happens, much of the battle between Cadence and Avant! was played out in civil court long before the criminal case was filed. In mid-1994, in fact, the two companies settled an earlier trade secret claim after Avant! agreed to cease hiring away Cadence workers for six months.

The civil case did not end there, however; within weeks, Cadence learned it was about to lose Igusa, who was widely regarded as one of the most brilliant engineers in the field.

Just before leaving Cadence, according to a prosecution affidavit, Igusa e-mailed several messages from his office computer to a personal e-mail account that he could access from home. One was an extraordinary 5 million bytes long, suggesting he had e-mailed an important file.

“Either that or he sent the Encyclopedia Britannica,” Finkelstein says.

At that point, according to Cadence attorney Michael Page, Cadence turned to the police. Two weeks after opening their investigation, police staged their search of Igusa’s property. They say they found source code for at least five Cadence programs on Igusa’s computer and disks, including some from which he seemed to have started removing Cadence copyright notices.

Cadence says it later found other evidence of what Page calls “a long and sordid pattern” of theft, including Cadence program files turning up on Avant! office computers. At one point Cypress Semiconductor Corp., a customer of both firms, alerted Cadence that its engineers had compared the two companies’ leading programs and found at least 2,000 suspicious matches.

Meanwhile, Igusa found himself without a formal job, for the Avant! board of directors was chary of hiring him after the police raid and while a Cadence civil suit over the trade secrets was still alive.

Instead, four top Avant! executives, including Hsu, each chipped in $50,000 to a fund aimed at investing in a private venture with Igusa in a way that “strongly suggests” they were planning to “secretly launder payments to Igusa,” the district attorney’s affidavit says.

Avant! lawyers argue that no one has yet produced any strong evidence that Cadence code ended up in Avant! products, other than some code for which Avant! thought it had permission to use under the 1994 settlement and that it voluntarily rewrote.

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But U.S. District Judge Ronald M. Whyte rejected that argument, finding that Avant! had no such permission and that the rewriting may not have fully expunged the offending code.

Whyte denied Cadence’s request for an injunction halting sales of several Avant! products, on the grounds that it would probably put Avant! out of business. Instead, he said, the case should proceed to trial, where Cadence can claim damages from Avant! for any infringement it can prove.

Finkelstein contends that may not be enough to protect the public’s interest.

“We felt this was a case that had to be brought,” he says. “If the charges are sustained, it would mean that thousands of investors sank hundreds of thousands of dollars into a company founded on stolen technology.”