Vlingo Lawsuit Charges Nuance With Unfair Competition and Commercial Bribery

A new front has been opened in the longstanding legal war between two Massachusetts speech technology powerhouses.

On Thursday, Cambridge, MA-based Vlingo filed a lawsuit in U.S. District Court of Massachusetts charging its much bigger archrival with unfair competition, commercial bribery, breach of contract, and intentional interference with prospective business relationships. Among its chief allegations is that Burlington, MA-based Nuance Communications (NASDAQ: NUAN), out to drive up Vlingo’s costs and force it to agree to an acquisition or technology partnership, filed a baseless patent infringement lawsuit against the smaller company. The complaint also charges Nuance with interfering with Vlingo’s efforts to negotiate deals with AT&T and Nokia, in the latter case by hiring a key Nokia executive who had confidential knowledge of Vlingo’s patent portfolio and patent strategy, and says Nuance CEO Paul Ricci attempted to bribe three key Vlingo executives by offering them $5 million apiece if they could convince their board of directors to sell to Nuance.

“The bottom line is we’ve really got a case against Nuance now for illegal acts in terms of interfering with our business,” said Vlingo CEO Dave Grannan during a phone interview about the lawsuit. “They’ve really tried to destroy or buy our business anyway they can.”

(Disclosure: Xconomy Boston editor Gregory Huang is a brother-in-law of Vlingo co-founder and CTO Michael Phillips. He was not involved in the reporting, writing, or editing of this story and saw no part of it before publication.)

This is just the latest in a string of legal disputes between the two firms. Indeed, Grannan says the companies are now involved in seven open lawsuits—five brought by Nuance, two by Vlingo—covering patent infringement claims on both sides, a false advertising suit brought by Nuance against Vlingo, an investor rights case also lodged by Nuance, and last week’s unfair competition complaint filed against Nuance by Vlingo. (This is all despite the fact that Nuance is an investor in Vlingo, having led the company’s $25 million Series C financing round in October 2009 and contributed $15 million to the round.) The firms have settled one other case, and just last month, a jury in a federal court in Boston determined that Vlingo did not infringe on Nuance’s so-called ‘295 patent, ending a suit that was filed by Nuance in June 2008.

The new complaint (click here to view the PDF), filed on the heels of Vlingo’s success in the ‘295 patent case, tells a fascinating story of this complicated relationship and the long-running tension between the two speech recognition leaders, which dates back almost to Vlingo’s founding in mid-2006. Keep in mind that it only gives Vlingo’s view of events. In response to my request for comment, Nuance only provided this statement from senior vice president and general counsel Jo-Anne Sinclair: “Nuance strongly believed, and continues to believe today, that Vlingo ran afoul of Nuance patents. We dismiss the recent claims as a distraction from the one principle that matters most—that Vlingo is infringing upon Nuance’s deep, long-standing investments in innovation and intellectual property.”

Long-Spurned Suitor

“Nuance has been aware of Vlingo since Vlingo’s inception as Mobeus, Inc. in June 2006 and, since that time, has coveted Vlingo’s innovative, cutting-edge technology,” last week’s filing asserts. Just a few months after Vlingo’s formation, it says, the company presented prototype products to a Nuance sales representative for evaluation, leading to an invitation from Nuance to take part in its annual users group conference in Orlando. Nuance’s “excitement” about Vlingo at that event, the complaint says, led Ricci to invite Vlingo co-founder Mike Phillips to lunch.

That meeting took place on October 24, 2006, according to the filing, and apparently marked the first time Nuance attempted to buy Vlingo—an offer that Phillips declined. But the next month, another meeting took place between Ricci, Phillips, and John Nguyen (also a Vlingo co-founder, now VP of Engineering), in Vlingo’s office in Kendall Square. “At this meeting,” the complaint says, “Paul Ricci once again offered on behalf of Nuance to acquire Vlingo. Mike Phillips and John Nguyen informed Paul Ricci that Vlingo did not wish to be acquired by Nuance.”

At this point, the filing paints a picture of a revengeful Ricci out to bend Vlingo to his will. “In February 2007,” it says, “Vlingo received several visits from Rich Palmer, then head of corporate development at Nuance. Mr. Palmer indicated that Nuance wanted to create a ‘technology partnership’ with Vlingo. Rich Palmer reminded Mr. Phillips that Mr. Ricci takes all Nuance business personally. Mr. Palmer informed Mr. Phillips that Mr. Ricci was very disappointed that Phillips left Scansoft and did not accept Mr. Ricci’s invitation to acquire Vlingo.” A little background here: Scansoft was the name that Nuance went by until it picked up its current moniker in the course of a 2005 merger. Phillips was Scansoft’s CTO between 2003—when a company he’d founded called SpeechWorks was acquired by Scansoft—and 2005. The complaint continues: “Mr. Palmer informed Mr. Phillips that Mr. Ricci can be vindictive if he does not get his way and that Vlingo would not be happy if Mr. Palmer and Mr. Phillips could not work out a technology partnership and the matter was placed in the hands of people with big egos, such as Mr. Ricci. Finally, Mr. Palmer threatened Mr. Phillips with bearing the exorbitant cost of intellectual property litigation and told Mr. Phillips to inform his Board that they can either take the technology partnership deal offered by Nuance or pay $20 million in legal fees vindicating themselves in intellectual property litigation.”

Indeed, Vlingo alleges, its refusal to agree to the deals proposed by Ricci and Palmer was the impetus for the lawsuit that Nuance filed against Vlingo in June 2008, alleging infringement on patent number, 6,766,295 (the so-called ‘295 patent). Vlingo also charges that the 2008 suit was filed in Texas rather than Massachusetts, where both firms are based, with the intent to “increase the expense of litigation to Vlingo, so as to leverage a potential acquisition of Vlingo.” (The case was transferred to Massachusetts in August 2009, according to Vlingo’s filing.) And Vlingo additionally asserts that Nuance’s charge of infringement in the ‘295 patent suit “was objectively baseless and interposed in bad faith for anti-competitive purposes.” Last month’s verdict in Vlingo’s favor confirms that Nuance knew or should have known that Vlingo was not infringing on the patent, the newest complaint says.

Allegations of Attempted Bribery

It’s at this point in the filing that Vlingo drops the bombshell claiming that Ricci tried to bribe Phillips, Ngyuen, and Grannan into either selling the company or leaving it and joining Nuance, a move it says would completely destabilize Vlingo. A hat tip here to Bloomberg BusinessWeek, which back in May drew out much of the story based largely on an interview with Grannan.

The complaint provides more detail. It says that in September 2009, while the ‘295 patent infringement case was ongoing, Grannan and Phillips met in California with Ricci, Nuance executive vice president and chief marketing officer Steve Chambers, and another Nuance representative—and that once again Vlingo rejected a Nuance offer to acquire the company.

Several days later, the complaint says, Ricci and Chambers called Grannan and Phillips. “During the telephone call…in violation of Massachusetts’ prohibition against commercial bribery, Mr. Ricci, the CEO and Chairman of the Board of Nuance, a public company, offered to pay Messrs. Grannan, Phillips and Nguyen $5 million dollars each if they could convince the Vlingo board of directors to approve the acquisition of Vlingo on the terms previously proposed by Nuance. Mr. Ricci made an alternative offer in the event that they were unsuccessful in convincing the Vlingo board to accept the acquisitions term proposed by Nuance. Alternatively, Mr. Ricci offered Messrs. Phillips, Grannan and Nguyen $5 million each plus the monies they would have received had the acquisition went through, if they would quit Vlingo and work for Nuance. Mr. Ricci made this offer knowing full well that Messrs. Grannan, Phillips and Nguyen were key persons whose departure from Vlingo would cripple the company and, thus put Vlingo out of business.” None of the three Vlingo executives accepted the offer, according to the complaint.

(Note: Grannan and Phillips told me they accepted the major Series C financing investment from Nuance very soon after this meeting in part because they believed it would pave the way toward a better relationship in the future—and because the financing round was being conducted at what they considered a fair valuation for Vlingo, unlike Nuance’s offers to buy the company outright.)

The AT&T and Nokia Stories

Another key part of Vlingo’s complaint alleges Nuance’s interference with its attempts to make separate deals with Nokia, the Finnish mobile giant, and AT&T.

The complaint says that in the late summer of 2010, Vlingo was attempting to sell its products and services to Nokia—at a time when Nuance was also attempting to make a deal with the Finnish concern. As part of the negotiations, Vlingo alleges, Nokia executive Bruce Bowden requested “a detailed analysis of Vlingo’s patent portfolio and Vlingo’s patent strategy.” Vlingo provided the requested documents on August 30 and September 1, 2010. After that, things seemed to be going well. “In a telephone call with Nokia’s Janne Karjalainen on September 15, 2010, Vlingo was informed that Nokia and Vlingo were in agreement in principal on the terms laid out in Nokia’s Request for Proposal and that Vlingo should plan to have the appropriate personnel travel to London to start drafting a contract with Nokia’s attorneys on September 23 and 24, 2010.”

But less than a week later, on September 21, Vlingo was told by Nokia that the Finnish company had decided to move forward with a different vendor, according to the filing. That same day, it continues, Bowden informed Vlingo that he was leaving Nokia and had a conflict that prevented him for working with Vlingo. The Cambridge company soon learned that Bowden had joined Nuance, where he currently serves as EVP for corporate development. What’s more, according to the complaint, a letter filed with the SEC revealed that Bowden’s deal included a base salary of $350,000, plus other forms of compensation.

“Nuance lured Mr. Bowden away from Nokia with unrealistic higher salary and other remuneration in order to obtain valuable, confidential information about Vlingo in order to interfere with the prospective advantageous business relationship between Vlingo and Nokia and obtain the Nokia business for Nuance,” Vlingo alleges. As a result, it adds, “Nuance obtained business from Nokia that, absent Nuance’s intentional interference, would have been given by Nokia to Vlingo.”

The AT&T situation took place this summer. The complaint says that in July, Vlingo and Nuance entered into two confidentiality agreements under which Vlingo gave Nuance confidential information regarding certain transactions it was negotiating with AT&T. Grannan told me on our phone call that Vlingo shared this information with Nuance as part of efforts to resolve their litigation and either arrive at a fair price for an acquisition or enter into a cross-licensing deal—only the filing indicates it didn’t turn out like he expected. “Nuance used confidential information provided by Vlingo to Nuance under the protection of the agreements to communicate with at least AT&T in order to interrupt and interfere in Vlingo’s attempts to enter into a commercially advantageous business relationship with AT&T,” the filing alleges. “More particularly Steve Chambers, Executive Vice President of Nuance, called AT&T and urged AT&T not to form a syndicate with Vlingo because Nuance was forming its own syndicate that Nuance urged AT&T to join.”

It turned out that Vlingo got the deal with AT&T anyway. But Grannan says that isn’t the point—and that anything that slows down a deal costs his company money, both in direct costs for things like paying lawyers more than it would have, and by delaying the start of revenues from the agreement.

The complaint, which seeks unspecified damages, attorney costs, and other relief as the court sees fit, maintains that “Nuance has caused damage, reparable and irreparable, to Vlingo.”

Despite it all, Grannan and Phillips say they are not against selling Vlingo to Nuance, at least in principle. Phillips, who has already been through just such an acquisition (Scansoft’s 2003 purchase of SpeechWorks) says, “We certainly understand what these guys are like and what they’re doing in the market. That being said, we’re not against selling the company to them if it makes sense—but we don’t want to be forced into doing it at a low price based on these tactics that they use.”

In the meantime, says Grannan, “We want to build product and innovate, and not focus on all this legal shenanigans that they create.”

Bob is Xconomy's founder and chairman. You can email him at bbuderi@xconomy.com. Follow @bbuderi

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