Sendo's suit against Microsoft - the full chronology of events

by Charles Hall | posted on 10 January 2003

The full claim, as set out in Sendo's lawsuit against Microsoft, makes chilling reading. Here, a summary of events - as seen from US online newsletter, Online Reporter; and then a reconstruction of the chronology of the events that led up to the lawsuit.

Online newsletter Online Reporter has obtained the full claim from the Texarkana court where Sendo's suit will be heard. Charlie Hall reports:

Birmingham, UK-based cell phone maker Sendo Holdings Plc has sued Microsoft in a federal court in Texarkana, Texas, close to Sendo's US HQ in Irving, Texas, charging that Microsoft had a "secret plan" to steal its technology, wrest away its prospective customers and pass Sendo's proprietary know-how on to several low-cost Taiwanese OEMs specifically naming High Tech Computer (HTC).

It could claim God knows how many hundreds of millions in damages, punitive as well as actual.

Sendo filed the suit December 23 and lists 13 counts against Microsoft, including misappropriation of trade secrets, unfair competition, fraud, negligent misrepresentation, breach of contract and civil conspiracy. Hearings are expected to begin in late January or early February.

Most industry experts had expected Sendo to be first to ship a cell phone based on Microsoft's Smartphone technology, code named Stinger. Surprisingly, however, France Telecom-owned Orange came out with a Microsoft-based unit called the SPV (for Sound Pictures Video) that was built for it by Taiwanese contract manufacturer HTC. Coincidentally enough, a week after the HTC-made units hit the European market under the Orange label, Sendo unexpectedly and abruptly ended the relationship with Microsoft under which it had spent three years developing, a cell phone based on Microsoft's technology.

Inflammatory Charges

In the inflammatory language typical of such suits, Sendo's lawyers claim, "Microsoft's secret plan was to plunder the small company of its proprietary information, technical expertise, market knowledge, customers and prospective customers."

Warming to the subject, they said, "Microsoft used Sendo's knowledge and expertise to its benefit to gain direct entry into the burgeoning next-generation mobile phone market and then, after driving Sendo to the brink of bankruptcy, cut it out of the picture." They added, "Microsoft gained Sendo's trust and confidence through false promises that Sendo would be its ‘go-to-market' partner."

Sendo says that under the terms of its Microsoft deal, it had to deliver 300 functioning handsets to Microsoft for $3.6 million but that Microsoft never paid it the money. Sendo further claims that Microsoft sent some of the 300 handsets to Sendo competitor HTC, which then used the purloined knowledge to help it make a Microsoft-based cell phone for Sendo's potential customer Orange, to whom Sendo had introduced Microsoft. Microsoft simultaneously caused Sendo to have to delay its own production, it says.

Slip-Sliding Product Timetable:

Sendo makes these claims in its suit:

- October 1999 – Microsoft told Sendo its Smartphone software was virtually complete and that it would deliver fully functioning software to integrate into Sendo's prospective Z100 unit.

- October 2000 – Trusting Microsoft's promises, the Z100 launch was set for August 2001

- October 2000 – Microsoft said again that its software was ready and that it would "deliver fully functioning software well in advance of the target launch date."

- February 19, 2001 – Microsoft and Sendo jointly demo a Z100 prototype at 3GSM World Congress.

– February 2001 – Microsoft says the Stinger software was "code complete" and would be released to manufacturing by June 2001.

- Throughout 2001 – Sendo repeatedly informed Microsoft of critical software problems. Microsoft failed to remedy them.

- May 2001 – Microsoft software was still not ready so the launch date was pushed back to December 2001 even though Sendo says it had met three of its own four milestones.

- June 2001 – Microsoft's continued delays in delivering the quality of software promised caused Sendo to have to delay its own work to complete the integration.

- June to December 2001 – It became increasingly clear to Sendo that the Stinger software was not "code complete" as Microsoft repeatedly represented.

- December 2001 – The Stinger software was still not ready. Sendo informed Microsoft of bugs and changes that carriers and regulators would require. "Microsoft "responded that it would not remedy the defects in its software."

- Spring 2002 – "Microsoft continued its dilatory tactics and was unresponsive to Sendo's repeated requests to cure the bugs and to make the software changes required by operators."

- Mid-May 2002 – "The only software for the Z100 phone that had been released by Microsoft was interim software which was not ready for final release."

- May 27, 2002 – Sendo has units ready for testing, some of which could be ready to deliver to Microsoft and developers by June 2002.

- June 2002 – Microsoft tells Sendo that the Microsoft engineers working on the Smartphone 2002 were being taken off that project to work on Smartphone 2003. Sendo later discovers the statement to be false.

- October 22, 2002 -Sendo competitor High Tech Computer (HTC) launches a Microsoft Smartphone 2002-based cell phone with Sendo customer, the carrier Orange.

"Follow the Money In the suit that Sendo's Texas lawyers filed, it makes these allegations about its financial and contractual dealings with Microsoft:

- October 1999 – Microsoft and Sendo first meet at the T99 Telecom Fair. That month they execute a non-disclosure agreement (NDA).

- October 2000 – A so-called Strategic Development and Marketing Agreement (SDMA) is made that called for Microsoft to invest in Sendo under an Investment Agreement (later called a Shareholders' Agreement) to be completed by that December.

- December 2000 – Sendo hits its first two development milestones but Microsoft does not pay for their completion on a timely basis, "severely and negatively" impacting Sendo's cash flow.

- May 2001 – The Shareholders' Agreement is completed five months late. Microsoft is to invest $12 million and appoint a board member. Sendo continues "to work on the development in good faith."

- Late 2001 – Because of Microsoft's delays in delivering fully functional software and paying expenses called for under the SDMA, Sendo asks Microsoft to pay all costs due to the delays. Microsoft refuses.

- On or about December 2001 – Sendo has a cash flow crisis and seeks VC funding. It is refused because it can't guarantee a Z100 ship date. It then asks Microsoft to exercise its Sendo warrants. Microsoft refuses "with the full knowledge that this refusal would push Sendo toward insolvency."

- December 10, 2001 – Microsoft executive and Sendo board member Marc Brown submits a Term Credit Agreement calling for Microsoft Capital Corporation (MCC) to lend Sendo $14 million, payable in a first installment of $8 million and two later installments of $3 million each. Microsoft can demand immediate repayment if Sendo does not hit Z100 revenue, cash flow and sales targets.

- February 14, 2002 – MCC fails to pay the first $8 million and says the money will be split into two installments of $2 million and $6 million.

- February 2002 – Sendo stops producing other phones to build 300 Z100 working prototypes for Microsoft to test. It cost $3.6 million and Sendo invoices Microsoft as the two companies had agreed but Microsoft refuses to pay.

- March 2002 – Sendo hits its final SDMA-mandated milestone for which Microsoft is supposed to pay Sendo $1.5 million. Microsoft refuses and insists the Z100 comply with a surprise new batch of tests that Microsoft had neither written nor finalized yet.

- May 2002 – Microsoft again refuses to pay Sendo the $1.5 million for the final milestone. MCC refuses to advance Sendo the next loan installment. MCC threatens to claim that Sendo is in default on the loan that Microsoft had made.

- May 27, 2002 – Microsoft unexpectedly demands a multi-day Z100 product review at Sendo's facilities with Sendo engineers. Without it Microsoft threatens to disown the Z100. Microsoft also demands that Sendo suspend other phone development.

- June 2002 – MCC proposes to advance the second and third loan installments but on new non-negotiable terms.

- September 16, 2002 – Sendo requests the targets specified in the Credit Agreement be waived because Microsoft failed to deliver working software.

- September 23, 2002 – Marc Brown tells the Sendo board that Microsoft will not let Sendo shareholder Bowman Capital purchase shares and will not exercise any of its own warrants – either transaction would have provided needed working capital. Brown also tells the board that MCC would not waive the September Z100 targets before October 1.

- October 2002 – Sendo is still having trouble raising venture capital. Microsoft suggests it file for bankruptcy. MCC requires Sendo to let KPMG accountants go through its financials in detail.

- October 22, 2002 – Sendo rival HTC launches a Microsoft Smartphone 2002-based cell phone and, together with Microsoft, announces Orange as its first customer.

- October 28, 2002 – Marc Brown resigns from Sendo's board.

- October 29, 2002 – Sendo terminates the SDMA and demands that Microsoft return all its IP.

- November 2002 – Sendo repeatedly demands that Microsoft return all Sendo "deliverables" and intellectual property, specifically the source code and the Z100 prototypes Microsoft allegedly gave HTC and possibly other third parties.

Promises, Promises

Sendo says that as late as May 22 Microsoft executive and Sendo board member Marc Brown assured the Sendo board that "Microsoft was not working with anyone else as an "initial go-to-partner."

Sendo claims Microsoft used false promises about investing and lending it money to gain access to its proprietary hardware expertise and trade secrets, then provided the expertise and secrets to Taiwanese companies. It specifically claims that Microsoft sent pre-production Sendo phones to HTC so HTC could deliver a knockoff to Orange, a customer Sendo had introduced Microsoft to.

Microsoft's "Secret Plan" Unfolds

Sendo, a three-a-half-year-old start-up with limited resources and dependent on Microsoft funding it, claims that Microsoft tried to drive it into bankruptcy so that Microsoft could "obtain an irrevocable royalty-free license to use Sendo's Z100 intellectual property, including rights to make, use, or copy the Sendo Smartphone to create other Smartphones and to, most importantly for Microsoft, sublicense those rights to third parties."

Sendo alleges that Microsoft hurt it financially by not delivering working software, thereby keeping it from the market, and, defaulted as well on a $12 million investment it had pledged in mid-2001.

Sendo says that it is now on the "brink of bankruptcy," and that pulling out of the Microsoft deal will cost it about $300 million in lost annual revenue and about $40 million in development costs.

The company alleges that Brown, the Microsoft employee appointed to Sendo's board, knew of its precarious financial situation and that it "was rapidly depleting its working capital by funding the development overruns caused by Microsoft's delays."

Sendo says that Brown, a director in Microsoft's Corporate Development and Strategy Group, suggested this past October that the company file for bankruptcy, the move that would have let Microsoft get the royalty-free license to Sendo's Z100 IP.

Brown resigned from Sendo's board on October 28, the day before the split became public.

Microsoft's Response

Microsoft has said little so far other than that it's reviewing the filing, but hastened to add that it "greatly values intellectual property and respects the IP rights of others."

Microsoft owns between 5% and 12% of Sendo for which it agreed to pay $12 million. CCT Telecom Group, the Chinese cell phone maker that was to make Sendo's products, owns about 50% of firm, with the company's directors holding the rest. Sendo says it repaid the money that it got from Microsoft Capital.

Microsoft has made some capital out of a report in The Inquirer, which stated that "the SPV from Orange which is made by HTC appears to work while the few Z100s that escaped into journalistic hands still displayed problems." Subsequent reports in What Mobile? magazine suggest that the opposite may in fact be true; they were not the only magazine to run the Orange SPV head to head against the Z100, and find the Z100 by far the better design.

The Fallout

The suit hit less than two months after Sendo pulled out of its alliance with Microsoft, claiming it had not been given access to source code. It subsequently cancelled the Microsoft phone, which it said was already in production, and signed an alternate Java-based Series 60 software license with Nokia. Sendo says it's also going to take a license from Symbian.

It's thought Sendo could lose as much as a year substituting the new software. According to Sendo spokesperson Marijke van Hooren, Sendo will launch a Symbian Series 60-based Smartphone but not until the second half of this year. Series 60 is Nokia's implementation of the Symbian operating system.

Meanwhile, over the holidays, Digitimes, the Taiwanese newswire, said Compal and Asustek would also make Microsoft-based phones. HTC, ostensibly the chief beneficiary of Microsoft's secret plan, poured salt in Sendo's wounds by announcing a second Smartphone 2002-based device due this quarter.

Of the brand-name cell makers such as Motorola, Siemens, Nokia, Ericsson and Sony, only Samsung has gone with Microsoft's cell phone operating system and its Microsoft alliance is limited. Samsung is using the Symbian OS for its more sophisticated handsets. Electronics king Sony, which has partnered with Ericsson for cell phone development and manufacturing, has grown increasingly wary of Microsoft's inroads into the digital media and telecommunications market.

Three former Philips executives started Sendo in August 1999. In November, when Sendo announced that it would throw the Microsoft Stinger OS overboard, CEO Hugh Brogan said that a review of its smart phone strategy convinced it that the "Series 60 fully embraces both our mission and the new strategy."

Although Sendo wouldn't comment further for "legal reasons," it's believed that, in addition to whatever Microsoft may or may not have done, other key factors, albeit discovered only late-in-the-day, that influenced Sendo's decision were: access to the OS source code, an industry standard OS and availability of existing industry components like Java and Multimedia Message Service (MMS).

HTC, by the way, makes HP's iPaq handheld computer and a combination PDA-mobile phone for British mobile service provider O2.

The suit may add fuel to the attempts of Microsoft's competitors to get European antitrust regulators to do something about Microsoft's alleged abuse of its monopoly dominance of the PC operating system market.

Note: We have a copy of the paperwork that Sendo filed with the court. Call 516-759-7025 or e-mail if you want it.