OPTIWAVE SEMICONDUCTOR CORP. 2775 Augustine Drive, Suite 400 San Jose, California 95054 Tel: (408) 555-7200
Fax: (408) 555-7201
www.optiwavesemi.com
June 6, 2022
VIA OVERNIGHT COURIER AND EMAIL
First Pacific Commerce Bank, N.A.
Attention: Loan Administration Department / Senior Credit Officer
345 Montgomery Street San Francisco, California 94104
Re: Material Litigation Notification — Revolving Credit Facility Credit Agreement dated as of September 14, 2020 (as amended, restated, supplemented, or otherwise modified from time to time, the "Credit Agreement") Borrower: Optiwave Semiconductor Corp. (EIN: 47-3918264)
Dear Sir or Madam:
I write in my capacity as General Counsel of Optiwave Semiconductor Corp., a Delaware corporation headquartered in San Jose, California ("OWS," the "Company," or the "Borrower"). This letter has been prepared with the assistance of our outside litigation counsel, Calderwood & Harkness LLP, One Embarcadero Center, 34th Floor, San Francisco, California 94111, who serve as litigation counsel for OWS in the matter described below.
I. Purpose of This Notification
This letter constitutes formal notification to First Pacific Commerce Bank, N.A. ("FPCB" or the "Lender") of the commencement of material litigation, as required under the reporting covenants of the Company's $40,000,000 revolving credit facility with FPCB (the "Facility"), which is governed by the Credit Agreement referenced above.
Specifically, Section 6.03(b) of the Credit Agreement requires the Borrower to provide the Lender with prompt written notice of any material litigation, claims, investigations, arbitrations, or other proceedings commenced by or against the Borrower or any of its subsidiaries that could reasonably be expected to have a Material Adverse Effect (as defined in Section 1.01 of the Credit Agreement) on the Borrower, its assets, its financial condition, or its ability to perform its obligations under the Credit Agreement, any Note, or any other Loan Document. This letter is being provided in compliance with that covenant obligation.
We also acknowledge that, pursuant to the intellectual Property Security Agreement dated September 14, 2020 (the "IP Security Agreement"), executed concurrently with the Credit Agreement, FPCB holds a first-priority perfected security interest and lien on the Company's intellectual property assets, including its portfolio of issued United States utility patents, pending patent applications, and related rights. The patents at issue in the litigation described herein are among the intellectual property assets subject to FPCB's lien, and accordingly, this notification is provided with particular attention to the Lender's interest in those collateral assets.
II. Description of the Litigation
A. Case Caption and Filing Details
The Company has commenced the following action:
Full Case Caption: Optiwave Semiconductor Corp. v. Lumos Photonics, Inc.
Case Number: 5:22-cv-03417-EJD
Court: United States District Court for the Northern District of California, San Jose Division
Assigned Judge: The Honorable Edward J. Torvelis, United States District Judge
Date of Filing: June 3, 2022
Capacity of OWS: Plaintiff
Outside Litigation Counsel: Calderwood & Harkness LLP, San Francisco, California; Responsible Partner: Alan Ngo, Esq.
A copy of the Complaint as filed is enclosed with this letter for your records.
B. Identity of the Defendant
The defendant in this action is Lumos Photonics, Inc. ("Lumos"), a Delaware corporation headquartered at 9400 McNeil Drive, Building 7, Austin, Texas 78758. Lumos is a publicly traded company, listed on the Nasdaq Global Select Market under the ticker symbol "LMPH." Lumos is an integrated device manufacturer specializing in silicon photonics components designed for deployment in hyperscale data center environments. Based on publicly available financial disclosures, Lumos reported revenues of approximately $312.8 million for its fiscal year ending December 31, 2021, and maintained an approximate market capitalization of $1.87 billion as of the date of filing (June 3, 2022). The Company notes Lumos's financial profile solely for the purpose of providing FPCB with context regarding the counterparty in this litigation and the potential recoverability of any judgment or award.
C. Nature of the Claims
OWS has filed a Complaint for Patent Infringement, asserting claims of infringement under 35 U.S.C. § 271, including both direct infringement and indirect infringement (inducement and contributory infringement). The Complaint asserts four (4) United States utility patents owned by the Company, each of which has been duly assigned to OWS and is currently in force and maintained with all required maintenance fees paid to the United States Patent and Trademark Office. The asserted patents are as follows:
1. U.S. Patent No. 10,234,567 — entitled "Integrated Waveguide Coupler with Tapered Mode Converter for Silicon Photonics Platforms," issued March 19, 2019 (the "'567 Patent");
2. U.S. Patent No. 10,891,234 — entitled "Germanium-on-Silicon Photodetector with Graded Buffer Layer for Enhanced Responsivity," issued January 14, 2021 (the "'234 Patent");
3. U.S. Patent No. 11,045,678 — entitled "Multi-Channel Optical Transceiver with Integrated Wavelength-Division Multiplexing on Silicon," issued June 29, 2021 (the "'678 Patent"); and
4. U.S. Patent No. 11,312,890 — entitled "Driver Circuit Architecture for High-Speed Silicon Photonic Mach-Zehnder Modulators," issued April 26, 2022 (the "'890 Patent").
Collectively, the four asserted patents (the "Asserted Patents") are part of OWS's broader portfolio of eighty-seven (87) issued United States utility patents, with fourteen (14) additional patent applications currently pending before the USPTO. The entire patent portfolio, including the Asserted Patents, is among the intellectual property assets subject to FPCB's security interest and lien under the IP Security Agreement.
The Complaint identifies two (2) accused products manufactured, marketed, sold, offered for sale, and/or imported by Lumos in the United States:
• The LumosBridge™ 800G Optical Engine, a co-packaged optics engine designed for integration into next-generation switch platforms for hyperscale data center networking; and
• The LumosEdge™ 400ZR+ Pluggable Transceiver, a coherent pluggable optical transceiver module designed for data center interconnect ("DCI") applications at distances up to 120 kilometers.
Based on publicly available information and the Company's internal market analysis, the combined revenue attributable to the accused products for calendar year 2022 (annualized based on available quarterly data) is estimated at approximately $148.6 million.
D. Relief Sought
In the Complaint, OWS seeks the following relief:
1. Compensatory Damages. OWS seeks damages in an amount to be proven at trial, which the Company believes will exceed $75,000,000, based on a reasonable royalty theory of damages. The preliminary damages estimate is derived from the application of a reasonable royalty rate of approximately 7.5% to the accused product revenue streams, inclusive of pre-suit damages for the applicable statutory period and potential enhancement for willfulness, as described below.
2. Enhanced Damages for Willful Infringement. OWS seeks enhanced damages of up to three times the compensatory damages amount pursuant to 35 U.S.C. § 284, based on the Company's contention that Lumos's infringement is willful. OWS's willfulness allegations are supported, in part, by the fact that OWS provided Lumos with written notice of infringement on March 15, 2022 (as described in Section IV below), and Lumos continued its infringing activities without modification or design-around.
3. Permanent Injunctive Relief. OWS seeks a permanent injunction prohibiting Lumos from continuing to make, use, sell, offer for sale, or import the accused products (and any colorable imitations thereof) in the United States.
4. Attorneys' Fees and Costs. OWS seeks an award of attorneys' fees and costs pursuant to 35 U.S.C. § 285, on the basis that this is an exceptional case warranting such an award.
5. Pre-Judgment and Post-Judgment Interest. OWS seeks pre-judgment interest and post-judgment interest as permitted by law.
6. Such Other Relief as the Court Deems Just and Equitable.
E. Jurisdictional Basis
The United States District Court for the Northern District of California has subject matter jurisdiction over this action pursuant to 28 U.S.C. §§ 1331 and 1338(a), as the action arises under the patent laws of the United States, 35 U.S.C. § 1 et seq. Venue is proper in the Northern District of California pursuant to 28 U.S.C. § 1400(b), based on Lumos's maintenance of a permanent sales office and engineering center located at 4750 Great America Parkway, Suite 320, Santa Clara, California 95054, where Lumos employs field application engineers and sales personnel who are engaged in the promotion, demonstration, and technical support of the accused products to customers in the Northern District.
III. Current Status of the Litigation
As of the date of this letter, the status of the litigation is as follows:
• The Complaint was filed with the Clerk of the Court on June 3, 2022.
• Service of Process. Lumos has not yet been served with the Summons and Complaint. Service is expected to be effected shortly through Lumos's registered agent for service of process in the State of California, Ashgrove Services Inc., located at 818 West 7th Street, Suite 930, Los Angeles, California 90017. The Company anticipates that service will be completed within the next seven (7) to ten (10) business days.
• Responsive Pleadings. No answer, motion to dismiss, or other responsive pleading has been filed by the defendant, as service has not yet been effected. Under Rule 12(a)(1)(A) of the Federal Rules of Civil Procedure, Lumos will have twenty-one (21) days from the date of service to respond to the Complaint.
• Preliminary Injunction. OWS has not sought a temporary restraining order or preliminary injunction at this time. The Company, in consultation with Calderwood & Harkness LLP, has determined that the interests of OWS are adequately protected by the pursuit of compensatory damages and a permanent injunction following trial.
• No Scheduling Order. No initial case management conference has been set, and no scheduling order has been entered by the Court.
IV. Pre-Litigation Background
Prior to the commencement of this action, the following relevant events occurred:
• March 15, 2022. OWS, through its Vice President of intellectual Property, Theodore Marchetti, sent a detailed cease-and-desist letter to Lumos's General Counsel, identifying U.S. Patent Nos. 10,234,567 and 10,891,234, providing claim charts mapping specific claims of those patents to the accused products, and requesting that Lumos cease its infringing activities and enter into licensing discussions.
• April 4, 2022. Lumos responded to OWS's cease-and-desist letter through outside patent counsel, denying that its products infringe any valid claim of the identified OWS patents and affirmatively asserting that the OWS patents are invalid in view of alleged prior art. Lumos declined to engage in licensing discussions or to modify its accused products.
• April 28, 2022. Following thorough deliberation and review of the available evidence, the OWS Board of Directors, including representatives of the Company's majority shareholder, Vantage Point Capital Partners Fund IV, LP (which holds approximately 62% of OWS's outstanding common equity), authorized the commencement of patent infringement litigation against Lumos. The Board's authorization encompassed the assertion of all four Asserted Patents, including the '678 Patent and '890 Patent, which were not referenced in the original cease-and-desist letter but which were identified as infringed during subsequent technical analysis.
• May 12, 2022. Calderwood & Harkness LLP was formally engaged as litigation counsel for OWS in this matter, pursuant to an engagement letter executed on that date. Calderwood & Harkness's team includes Partner Alan Ngo (lead counsel), Partner Marcus Delgado (co-lead counsel), and a team of associates and technical advisors with extensive experience in semiconductor and photonics patent litigation.
V. Assessment of Impact on Collateral and Borrower
The Company wishes to provide FPCB with its assessment of the potential impact of this litigation on the Company, its assets, and its ability to perform its obligations under the Credit Agreement and related Loan Documents.
OWS's Position as Plaintiff and Patent Owner. OWS is the plaintiff and patent owner in this action. The Company is affirmatively asserting and enforcing its intellectual property rights against a third party. This action is not a challenge to OWS's ownership of the Asserted Patents, nor has any third party initiated a proceeding to invalidate, cancel, or otherwise challenge the enforceability of the Asserted Patents (other than as may be asserted in responsive pleadings, as noted below).
Anticipated Counterclaims. The Company notes that, consistent with standard practice in patent infringement litigation in the United States, it is anticipated that Lumos will assert counterclaims seeking a declaratory judgment of non-infringement and invalidity with respect to some or all of the Asserted Patents. Such counterclaims are a routine defensive tactic employed by defendants in virtually all patent infringement cases and do not, in the Company's assessment, reflect a meaningful independent threat to the validity or enforceability of the Asserted Patents. In fact, Lumos has already signaled its intention to contest validity in its April 4, 2022 response to OWS's cease-and-desist letter. OWS, in consultation with Calderwood & Harkness LLP, has high confidence in the validity and enforceability of all four Asserted Patents. Each patent survived rigorous examination before the USPTO, and the Company is not aware of any prior art that was not considered during prosecution that would materially affect the patentability of the claimed inventions.
Valuation of Asserted Patents. Prior to the commencement of litigation, the Company commissioned an independent valuation of the Asserted Patents from Clearpath IP Valuation Services, Inc., a nationally recognized intellectual property valuation firm based in Boston, Massachusetts. The valuation was conducted under the direction of Jennifer Armitage, CFA, CLP, a senior managing director at Clearpath with over twenty years of experience in patent portfolio valuation. Based on the income approach and comparable licensing transaction analysis, Clearpath assigned a collective fair market value of $42.8 million to the four Asserted Patents as of March 1, 2022. For reference, Clearpath's most recent valuation of OWS's entire patent portfolio (conducted in connection with the Company's annual collateral reporting obligations) was $215.0 million as of December 31, 2021. The Asserted Patents thus represent approximately 19.9% of the total portfolio value by the Clearpath valuation methodology.
No Anticipated Material Adverse Effect. The Company does not believe that the commencement or prosecution of this litigation will have a Material Adverse Effect on OWS, its financial condition, its assets, or its ability to service its obligations under the Credit Agreement. The Company's fiscal year 2022 revenue is projected at approximately $187.4 million, and its operations remain entirely unaffected by the filing of this action. OWS continues to manufacture, sell, and license its products and technology in the ordinary course of business, and there has been no disruption to customer relationships, supply chain arrangements, or production capacity as a result of this litigation.
VI. Litigation Budget and Funding
The OWS Board of Directors has reviewed and approved a litigation budget of $4.2 million to fund the prosecution of this action through trial, inclusive of outside counsel fees, expert witness fees, e-discovery costs, and related litigation expenses. This budget was developed in consultation with Calderwood & Harkness LLP based on their experience in comparable patent infringement actions in the Northern District of California and is consistent with industry benchmarks published by the American intellectual Property Law Association for patent cases of this complexity and damages range.
The litigation is being self-funded by OWS from available cash reserves, with the concurrence and support of Vantage Point Capital Partners Fund IV, LP, as majority shareholder. No third-party litigation funding has been obtained, nor has the Company pledged, assigned, or otherwise encumbered any portion of the potential litigation recovery in favor of any third party.
The Company does not anticipate that the litigation expenditures described above will impair OWS's financial position or its ability to comply with the financial covenants, reporting covenants, or any other covenants contained in the Credit Agreement. The approved litigation budget represents approximately 2.2% of OWS's projected FY 2022 revenue and is well within the Company's operating cash flow capacity.
VII. Ongoing Notification Commitment
OWS commits to providing FPCB with prompt written updates regarding any material developments in this litigation. Without limiting the generality of the foregoing, the Company will notify FPCB in writing of the following events, among others, promptly upon their occurrence:
(a) the entry of any preliminary or permanent injunctive relief, whether in favor of or against OWS;
(b) the entry of any judgment, verdict, or award in the action, including any damages award;
(c) the terms of any settlement agreement or consent decree;
(d) any ruling by the Court on claim construction (i.e., Markman ruling) that could materially affect the scope of the Asserted Patents;
(e) any ruling on the validity or enforceability of any of the Asserted Patents, including any finding of invalidity or unenforceability;
(f) the institution of any inter partes review, post-grant review, or other USPTO proceeding challenging the validity of any of the Asserted Patents;
(g) any appeal to the United States Court of Appeals for the Federal Circuit;
(h) any material change to the litigation budget or the Company's assessment of the potential outcome of the litigation; and
(i) any other development that could reasonably be expected to have a material impact on the value of the intellectual property assets subject to FPCB's security interest.
In addition, OWS will provide FPCB with copies of material court orders, opinions, and rulings upon written request by the Lender, subject to reasonable protections for attorney-client privileged communications and attorney work product.
VIII. Contact Information for Further Inquiries
Should FPCB have any questions regarding this notification or require additional information concerning the litigation described herein, please direct inquiries to either of the following:
Sandra Ellison General Counsel Optiwave Semiconductor Corp. 2775 Augustine Drive, Suite 400 San Jose, California 95054 Telephone: (408) 555-7218
Email: sellison@optiwavesemi.com
Alan Ngo Partner Calderwood & Harkness LLP One Embarcadero Center, 34th Floor San Francisco, California 94111 Telephone: (415) 555-8340
Email: ango@calderwoodharkness.com
Please note that any inquiries directed to Mr. Ngo regarding the substance of the litigation will be coordinated with the Company to ensure that privileged and confidential information is appropriately protected.
IX. Closing
OWS respectfully requests that FPCB acknowledge receipt of this notification by returning a signed copy of this letter or by written confirmation sent to my attention at the address or email set forth above.
This letter is being provided for informational purposes in compliance with the Company's contractual obligations under Section 6.03(b) of the Credit Agreement and is not intended to, and does not, constitute a waiver of any rights, remedies, privileges, or defenses available to the Company under the Credit Agreement, any other Loan Document, or applicable law. Nothing in this letter shall be deemed an admission by the Company of any fact, liability, or obligation, except as expressly stated herein.
The Company expressly reserves and does not waive the attorney-client privilege, the work product doctrine, and any other applicable privilege or protection with respect to all communications between OWS and its counsel (whether in-house or outside counsel) relating to the litigation described herein or any other matter. Any inadvertent disclosure of privileged or protected information in connection with this notification shall not constitute a waiver of any such privilege or protection.
We appreciate FPCB's continued partnership and remain committed to maintaining full transparency with the Lender regarding all material developments affecting the Company's business and financial condition.
Sincerely,
OPTIWAVE SEMICONDUCTOR CORP.
By: ________
Sandra Ellison General Counsel
Date: June 6, 2022
Enclosure:
Copy of Complaint filed June 3, 2022 — Optiwave Semiconductor Corp. v. Lumos Photonics, Inc., Case No. 5:22-cv-03417-EJD (N.D. Cal.)
cc:
Dr. Priya Ramanathan, Chief Executive Officer, Optiwave Semiconductor Corp. Theodore "Ted" Marchetti, Vice President of intellectual Property, Optiwave Semiconductor Corp. Alan Ngo, Partner, Calderwood & Harkness LLP Marcus Delgado, Partner, Calderwood & Harkness LLP