May 11, 1998 7:40 PM PDT

S3 sues Nvidia as IPO approaches

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Nvidia, a rising star in the graphics processor world, has been hit with another patent infringement suit, a legal setback that could affect the value of the company's proposed initial public offering.

S3 filed a patent infringement suit against Nvidia today in the U.S. District Court for the Northern District of California, claiming that Nvidia infringed upon three separate video patents in developing its Riva family of graphics processors. The suit seeks damages as well as a permanent injunction that would bar future distribution of Riva processors.

The suit could be the first in a wave of actions from once-mighty S3 against its competitors, in as much as it relates to patents the company acquired from Cirrus in January. Right now, the company is evaluating these patents to see if claims exist against other graphics makers, said Walt Amaral, S3's chief financial officer.

"We are looking at other competitors," he said. Nvidia merely happens to be the first suit the company has lodged, he added.

From Nvidia's perspective, S3 filed the lawsuit to regain its market position and the suit does not have legitimacy.

"As Nvidia represents the largest threat to S3's comeback attempt into this market, it's not surprising they are targeting Nvidia. Our Riva processors were developed lawfully and we are prepared to defend ourselves vigorously," said Jen-Hsun Huang, Nvidia's CEO, in a prepared statement.

The three patents involved in S3's case revolve around how graphics accelerators process video data, said Dr. Jon Peddie, president of Jon Peddie Associates, a Tiburon, California-based consultancy.

In April, Silicon Graphics filed a similar suit against Nvidia which alleged that the company infringed upon SGI's texture-mapping patents in the development of the Riva family.

Although the outcome or validity of either case is far from certain, both suits revolve around the core of Nvidia's business. The Riva line of graphics processors is all that the company makes. The processors have garnered fairly strong reviews and launched the company into the top rank of graphics vendors.

Nvidia recently filed with the SEC for an initial public offering.

Although the lawsuits will not likely derail a proposed IPO, it could affect the initial value, speculated Peter Glaskowsky, an analyst with MicroDesign Resources.

"They can't stop the IPO. The worst that they can do is decrease the value of it," he said.

S3's motive in the suit appears to be primarily economic and seemingly provides an answer to why the company has been snapping up semiconductor patents. In January, the company acquired a number of patents from Cirrus. In February, it was discovered that S3 purchased 45 more patents developed by defunct processor maker Exponential for close to $10 million in a hotly contested silent auction that included heavyweights such as Intel and Digital.

At the time of the purchases, analysts were confounded by S3's underlying motive. Cirrus's patents were considered by some to be fairly antiquated in the fast-moving graphics processor world. Exponential, meanwhile, failed to live up to its promise as a PowerPC vendor. S3 had also finished a difficult year financially because it had missed a product cycle.

While some stated that S3 might have purchased the patents to fill in pieces in a long term product strategy, others speculated that S3 was actually trying to buy leverage. "They could use it to get into some kind of barter arrangement with Intel," mused Ashok Kumar, semiconductor analyst at Piper Jaffray, on the Exponential purchase.

Amaral stated that S3 was acting to protect its intellectual property. He also dismissed the notion that S3 was trying to interfere with any plans for an IPO. The timing of the suit owes to the fact that S3 only recently learned of its claim.

"We acquired these patents in January," he said, "It takes a while to figure out the details."

By contrast, the SGI suit may contain a personal angle, Glaskowsky speculated. The patents at the heart of that case were developed by an SGI employee who subsequently left to join Nvidia.

 

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