Cisco-Arista Settlement Surprises

After making lots of noise with its high-profile lawsuit against networking rival Arista Networks (ANET), Cisco (CSCO) agreed yesterday to settle the matter for a relatively modest $400 million, after years of legal battles.

Arista will pay $400 million to Cisco to resolve the patent dispute between the two network equipment makers, Arista said in a filing on Monday. Arista will also make agreed product modifications. As part of the settlement, Arista will drop its lawsuit alleging Cisco engaged in anticompetitive behavior. The settlement comes on the week a jury trial was scheduled to begin.

The lawsuit raised eyebrows for both its claims and timing. Cisco is not generally regarded as an litigious company, but it announced the lawsuit in 2014 shortly after Arista's initial public offering (IPO) of shares. Jayshree Ullal, Arista's CEO and Cofounder, is a former Cisco executive.

Although this type of settlement was anticipated by many investors and the Wall St. community -- Arista's shares have risen steadily since the lawsuit was announced in 2014 -- the announcement came when few had expected an imminent announcement. This is a positive development for Arista, as it can get on with the business of taking market share from Cisco, as it has been doing since its IPO, without diminished uncertainty about patent issues. Arista shares have risen four-fold since 2014.

The news was welcomed by many analysts and the investment community. Arista shares rose $13.79 on Monday to 271.33 (+5.35%) with the news. Cisco shares rose +0.47 (+1.10%) to $43.30.

Raymond James analyst Simon Leopold, in a note aptly titled, "Cisco Buries the Hatchet for $400M," said the move came as a welcomed surprise.

"Although the dollar amount is consistent with what we had previously estimated based on comparisons with similar litigation cases (Palo Alto v. Juniper, A10 v. Brocade), the noise had quieted down for quite some time; we did not expect this resolution now."

With a long history of patent lawsuits in the technology markets, it's not a surprise that the suit was settled. As Leopold points out, Palo Alto and Juniper in 2014 settled a long-running patent disputes on firewall technology, with Palo Alto paying Juniper $175 million. Apple and Samsung this year resolved a long-running dispute after a verdict had been reached at $539 million for Apple, though the exact terms of that settlement were not disclosed.

The U.S. International Trade Commission ruled in 2016 that Arista infringed three patents.