Westcon Threatens To Drop Lucent, Proceed With Litigation

Distributor wants vendor to take back dead inventory

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Westcon Group is prepared to drop Lucent Technologies as a vendor partner if the two companies cannot resolve a dispute over the sale of alleged discontinued and defective products.

Westcon intends to litigate a lawsuit it filed last July in New Jersey Superior Court, Essex County, said Alan Marc Smith, CEO of Westcon Group.

"This is not a little 'sweep-it-under-the-carpet-and-hope-it's-going-to-go-away' situation," Smith said.

Westcon alleges that Lucent sold the networking distributor "tens of millions of dollars" worth of networking products that were soon discontinued, Smith said.

Lucent failed to advise Westcon about the discontinuations and related price changes, according to court documents.

In addition, Lucent would not authorize Westcon to return the products and refused to credit or replace the products as stated in the companies' distribution agreement, Westcon alleged in court documents. As a result, "Westcon has worthless inventory that is not saleable," Westcon alleges in its lawsuit.

"It sounds like it's still new equipment, but it's end-of-life [products, and no one wants to buy end-of-life products," said John Spiridgliozzi, product marketing director at CableExpress Technologies, a solution provider in Syracuse, N.Y.

Westcon also alleges that Lucent failed to notify the company about changes in product lines and pricing relating to Lucent's spin-off of Avaya in September 2000, according to court documents. Lucent also failed to establish timely procedures for the spin-off and "refused to answer questions concerning the transition," according to court documents.

"The reason behind the lawsuit is Lucent's failure to live up to its obligations under its contract with us," Smith said. The lawsuit is Westcon's first against Lucent and perhaps one of the largest it's ever filed against a vendor, he added.

"If this is not resolved amicably, it will be the end of our relationship with Lucent," Smith said.

The distributor's relationship with Lucent dates back to September 1998.

In February 2001, the Securities and Exchange Commission launched an investigation into allegations that Lucent stuffed the channel with telecom equipment, The Wall Street Journal reported last week.

Vendors sometimes encourage distributors to buy more inventory than they need so that the vendor can make quarterly sales numbers, a practice called channel stuffing, industry sources say.

The SEC investigation of Lucent stems from its restatement of its revenue for its fiscal fourth quarter ended September 2000. In December 2000, Lucent reported that its fourth-quarter sales were $679 less than previously reported. Lucent reported that $452 million of that was a result of taking back unsold equipment from distributors.

Smith declined to comment on the SEC's investigation into allegations that Lucent stuffed the channel.

Westcon's lawyers said the company plans to depose "any and all relevant" Lucent executives and customers and initiate a "full-blown" demand for documents.

Lucent executives would not comment on lawsuit. "We believe this lawsuit is completely without merit, and we will defend ourselves vigorously," a Lucent spokesperson said.

On Thursday, Westcon began to subpoena records of companies that have relationships with Lucent, the company said. Notices were mailed to courthouses in the states of 18 Lucent business partners, Westcon said. Those companies are Anixter, AT&T, Bell South, Datavision-Prologix, Graybar Electric, KMC Telecomk, Point to Point Network Services, PowerTel, Pro Networks, Qwest Communications International, SBC Communications, Solunet, Sunbelt Telecommunications, Tech Data, Verizon, Western NRG, Yegwa Communications and Zeda. The process to retrieve the records is expected to last 30 to 40 days.

Lucent distributors Ingram Micro and Tech Data said they had not experienced these types of issues with the vendor. Both said their streamlined inventory management processes eliminate such inventory problems.

"Ingram Micro is not experiencing channel stuffing with [Lucent and actually is in a negative owned-inventory position," said an Ingram Micro spokesperson.

SCOTT CAMPBELL contributed to this report.

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