Exposed: Dangers of the Gray Market

So here's a military facility running equipment of questionable origin, and that's not all. Even Cisco, which wouldn't comment because of its role in the litigation, may need to defend its brand from being tarnished by its association with black-market or counterfeit goods. At the same time, government solution providers will likely wait to see how Cisco handles the situation.

"If Gulfcoast had actually sourced the equipment through authorized channels or from Cisco directly, what harm would have befallen Lockheed or the Navy? None," Castro says. "Sure, Cisco may well have issued a stern reprimand to us, but I'm not so sure they would have terminated our agreement for doing something we didn't even know was improper."

Cisco has yet to take any action against Relational, despite the fact that documents and court proceedings show the company went outside normal distribution channels and sourced product from two unauthorized companies. Cisco won't comment on what action, if any, it will take against Relational, which is among Cisco's top revenue partners.

Castro says that American Data's relationship with Lockheed has been affected as well. "Our relationship with Lockheed dates back eight to 10 years," Castro says. "Does Cisco or anyone else seriously think we would jeopardize this unique relationship for one order? Not in a hundred years."

In addition, the financial strain has led Castro to question whether his company will survive. Already, the situation has cost American Data about $450,000, with $100,000 to $150,000 in additional legal fees expected. And that doesn't factor in the loss of future revenue resulting from severed ties with Cisco. Nor does it reflect layoffs at American Data, the company's trailing cash flow, late payments to suppliers or lost productivity. "We have no other choice," Castro says. "I know what we're doing is the right thing. I've just about exhausted all our financial options, but we'll have to find a way."

The civil action may not be the only court proceeding in this case. The Navy Criminal Investigative Service is looking into a possible breach of national security and violation of the Trade Agreements Act. It's unclear which company is the target of the Navy's investigation. NCIS declined to comment for this article.

NEXT: Rules meant to be broken?