Diablo CEO takes witness stand in trade secrets trial against Netlist

12 March 2015. By Mike Swift.

Diablo Technologies’ chief executive took the witness stand Thursday in the company’s trade secrets trial against Netlist, with Netlist’s lawyer focusing on his character and pressuring him to acknowledge that Diablo chips in a new SanDisk memory module are closely derivative of Netlist’s proprietary technology.

Riccardo Badalone, Diablo’s chief executive officer and co-founder, spent three hours on the witness stand in US District Court in Oakland, California, including more than two hours in direct examination by Netlist lawyer Benjamin Riley. In an hour of cross-examination by Diablo’s lawyer, Badalone talked about launching Diablo with a group of college friends after being laid off by nowdefunct Nortel Networks during bursting of the dot.com bubble in 2001.

The trial that began Monday is over Netlist’s allegations that Diablo stole its trade secrets for chips that run within Dual In-Line Memory Modules, or DIMMs, a sophisticated array of integrated circuits that attach to the memory channel of a computer server and enable dramatically faster data retrieval than the standard storage channel. Badalone testified Thursday that the DIMM market could be
worth $1 billion or more.

Starting in 2008, Netlist and Diablo collaborated in the development of DIMMs for computer servers that network in large data centers, but their business relationship quickly devolved into acrimony. Given Badalone’s direct involvement in those DIMM projects, the trial is also focusing on the personal character and ethics of the Diablo CEO.

Riley’s first target Thursday was a series of profanity-peppered emails between Badalone and other members of the Diablo engineering team, about Irvine, California-based Netlist, Diablo’s then-business partner.

In a 2010 e-mail from Badalone to his engineering team that Riley showed the jury, the Diablo CEO praises the functionality of a type of chip used by Netlist that Ottawa, Ontario-based Diablo was considering using as well, saying that “is pretty solid if the performance is there. So how do we do it without the jokers in
Irvine?”

Riley elicited from Badalone — a tall, angular man with a shaved head who wore a gray suit and tie for Thursday’s testimony — the narrative behind a vulgar acronym used in a series of e-mails about DIMM chips, which were privately referred to within Diablo as “FUNDIMM” chips.

“You understood at the time that ‘F.U.’ DIMM meant, ‘Fuck You’ DIMM, correct?” Riley asked Badalone.

“Yes, we were joking around about it,” the CEO said in a measured monotone.

And in a later email, “You added the ‘N’ to mean ‘Fuck You, Netlist’?” Riley said. Badalone acknowledged that was correct, and he also allowed that a crude diagram included in another e-mail was in fact a raised middle finger aimed at Netlist.

However, the CEO said “F.U.” also referred internally at Diablo to “Flash Unification,” referring to a type of computer memory.

“Yes, that was a double entendre,” said Badalone, who remained calm throughout Riley’s questioning. “That’s pretty common in Ottawa, but one of those meanings is a middle finger.”

In testimony earlier this week, Diablo lawyer Russell Hayman got Netlist CEO C.K. “Chuck” Hong to acknowledge that Netlist’s HyperCloud DIMM had earned only $7 million in sales, while costing $40 million in development costs. Thursday, Riley got Badalone to admit that Diablo was similarly leveraged with venture capital investment, as Badalone said Diablo had only about $10
million in sales since its 2003 founding, while spending about $85 million on research and development.

And while Badalone acknowledged that Diablo had used Netlist chips protected under the development agreement between the companies to test the prototype of a Diablo DIMM product, he said the key functionality specifically protected by the development agreement was disabled in those chips.

In cross-examination by Hayman, Badalone talked about growing up in Montreal, Canada in an immigrant family from Italy, and speaking three languages fluently before getting an engineering degree.

After the Nortel layoff, Badalone testified that he founded Diablo at the age of 29 with Michael Parziale, a friend whom he met on the first day university classes at Concordia University in Montreal.

“We were wanting to work for ourselves. We both come from hard-working, entrepreneurial families and we wanted to start our own company,” Badalone said.

“So we decided to try to start our own business.” Diablo is named after a model of Lamborghini sports car, he testified.

“We were associated with speed” in computers, Badalone said. “So that’s how we came up with the name.”

“Do any of the Diablo founders have a Lamborghini?” Hayman asked him.

“No,” Badalone answered. “Not yet.”

Badalone’s testimony is expected to continue Friday.