ACS Responds to Dialog Suit; Files Countersuit Alleging Breach of Contract and Fraud
Hogan, Tom, Information Today
ACS Responds to Dialog Suit
Files Countersuit Alleging Breach of Contract and Fraud
The gloves have come off and the Marquess of Queensberry rules are in jeopardy in what promises to be a protracted bout of legal fisticuffs between two of the top heavyweights in the information industry--the American Chemical Society (ACS) and Dialog Information Services. On August 31st, the ACS filed its response to Dialog's suit (filed on June 7th) which alleges that ACS has violated anti-trust laws by withholding from Dialog certain portions of the chemical information it collects and creates (see Information Today, July/August 1990). At the same time, the ACS filed a counterclaim which alleges that Dialog has, on many occasions, breached its contracts with ACS' Chemical Abstracts Service division (CAS) and engaged in fraudulent accounting practices in order to avoid paying royalties due CAS.
While the original Dialog suit seeks $150 million in actual and punitive damages, the ACS suit seeks a meager $30 million--$10 million in estimated lost royalties and $20 million in punitive damages. [Should we just subtract the one from the other, have ACS pay Dialog the $120 million difference and forget the whole thing ever happened? Not likely.]
Definitions Are Important
One of the first things that the ACS response attempts to do is to redefine some of the terms used in the Dialog suit. In particular, ACS takes issue with the use of the name "Chemical Registry System Database" or "CRSD." The "definition applied by Dialog to the acronym CRSD is an artificial construct created by Dialog to serve its own purposes in the lawsuit," the ACS response reads.
Why is this important? The assumption is that ACS would like the court to view the services that CAS offers as a "collection" of many independent databases rather than as one single comprehensive database. If this view is accepted, then the act of witholding just five or six of these databases (in particular, the full abstracts and the connection table data) from Dialog, while granting use of all the others, will seem less like an attempt at creating a monopoly and more like plain-old fair (albeit hardball) competition.
Dialog, on the other hand, would like the court to view the information CAS creates as one integrated database. Take away any significant part of the database, the reasoning goes, and you take away the online service's ability to effectively compete in that arena.
The ACS also takes issue with the way Dialog, in its suit, describes the "market" for CAS information. Where Dialog seeks to limit the debate to the market for CAS information only (or failing that, at least just chemical information), CAS believes the definition should be broadened. "Dialog and ACS compete for the distribution of information within a broader scientific and technical information market that includes not only distribution via online computer searches, but also hard copy and other alternative forms...," the suit claims.
If ACS is successful in getting the court to view the market for CAS' services as the much broader market for scientific and technical information, a market filled with overlapping and competing online databases and many other sorts of information services, then Dialog's cries of monopoly will likely fall on deaf ears, especially in light of the fact that, as the suit points out, Dialog is itself the exclusive distributor of 60-some scientific and technical databases.
If Dialog, on the other hand, can keep the focus on CAS' own databases and on CAS' predominant position in the field of chemical information, then quite another outcome might be expected.
As many Information Today readers would surely testify, the natural tendency of professional online searchers is to go to the service with the most complete information available. In the case of the CAS database this means CAS Online (or STN International), and this obviously accounts, in large degree, for the gradual but significant migration from Dialog to CAS online. Dialog will certainly produce a great deal of evidence of this migration, but the question before the court will be whether this trend is a result of fair competition or, as Dialog claims, predatory practices leading to a virtual monopoly.
The Government Support Issue
Dialog's suit, as the reader will recall, claims that the CAS databases and its computerized information services were developed with the help of government, specifically National Science Foundation, funding. Dialog alleges that the terms of the contracts under which CAS received NSF funding stipulate that CAS should make its databases available in such a way as to "promote the widest possible use of both the CAS information files and techniques for manipulating them." Dialog believes this means it should have access to all CAS information.
ACS admits that it received NSF funding but states that it has lived up to all the terms and conditions of its contracts. Furthermore, ACS doesn't believe those government grants affect the present day situation in any significant way. We present a rather long quotation from the ACS since it summarizes quite well the ACS position on this point:
In the 1960s and early 1970s, ACS received funding from the National Science Foundation to underwrite partially the costs of developing computer software for use in the storage and dissemination of secondary chemical information maintained by ACS. The funding also supported a very limited amount of database building. With that limited exception, ACS databases have been built almost entirely out of revenues received from its various information services, with modest supplements from private sources. The cost of gathering and maintaining the information stored in the databases for just one year far exceeds the total software development costs that were underwritten by the government some 15 to 25 years ago. The information ACS has collected, produced and maintained using the software developed with limited government assistance, as well as the software itself, has been made freely available to the scientific community and to the public at large, consistent with ACS's contractual obligations. The acts complained of by Dialog were taken to add competition to the marketplace and in furtherance of the more complete and effective dissemination of secondary information gathered and maintained by ACS and other organizations. Government funding bestowed upon ACS no advantage that constitutes an insurmountable barrier to the duplication of ACS's databases.
Counterclaim: Fraud and Breach of Contract
The following review of ACS' counterclaim will probably be more of interest to database publishers and online service providers--i.e., the information industry--than to online users, but if you are a user and you have managed to persevere thus far, the ACS counterclaim does provide an interesting glimpse into the inner workings of the online industry.
The ACS claims that it has been defrauded of several millions of dollars of royalties due it from Dialog. ACS admits it has no way of knowing exactly how much this amounts to, but estimates that underpayment to be approximately $10 million. ACS believes the practice of underpayment by Dialog to be both intentional and systematic. Here are the major ways ACS believes it is being cheated out its royalties:
* The OneSearch problem. Dialog's OneSearch service gives users the ability to search two or more databases simultaneously. ACS claims that Dialog apportions connect hour royalties resulting from a OneSearch session among the databases searched in proportion to the time the system spends actually searching each database. ACS points to its contract, however, which says that it will receive royalties based on time "that elapses between the moment a User explicitly or implicitly indicates a desire to gain Online Access to a File containing Licensed [CAS] Data and the moment said User indicates a desire to gain Online Access to a File that does not contain Licensed Data or the moment that the Online connection is terminated."
ACS claims it has tried to get a clarification from Dialog as to how Dialog defines connect time and other usage metrics but that "Dialog has refused to give a clear response to these inquiries and has instead been vague and evasive...."
* RNS vs. RSS. Dialog licensed, among others, two databases from CAS known as "RNS" and "RSS." Both contained CAS Registry Numbers, but the latter database also contained connection table data. (RSS is the database which CAS stopped offering Dialog at the end of 1989.) The RSS database license called for a minimum usage fee--ranging from $90,000 to $120,000 annually.
The ACS counterclaim alleges that Dialog's usage of the RSS database routinely fell well below the usage minimums and that ACS would therefore be due the difference between actual usage royalties and the annual minimums. Instead, ACS claims, Dialog allocated royalties due ACS under its agreement for the other ACS database (RNS) to the RSS royalty report, thereby avoiding paying the minimum usage royalty fees.
* Rounding. During the spring of this year, Dialog introduced a policy of "rounding up" time spent in a particular database to the next highest minute. If you search ABI/Inform for 10 minutes and 10 seconds, you pay for 11 minutes. According to ACS, the agreement it has with Dialog states that connect time "shall be measured, reported and paid to ACS, as required herein, using the same fraction of an hour and the same rounding algorithm that Licensee employs in charging its users for that same activity." ACS claims that Dialog has instead been applying a double standard--rounding up for the customer but measuring to the nearest one-thousandth of an hour for purposes of paying royalties.
* Under-reporting usage. This is the easiest to understand of all the charges ACS makes against Dialog--that Dialog is just simply fabricating its reports on the number of "extractions" users make from the CAS databases "with the intent to deceive."
Dialog's response to ACS's counterclaim was immediate and vehement. It called the allegations "diversionary tactics," designed "to divest attention from the serious anti-trust issues raised in our court claim."
A press release issued by Dialog the same day ACS filed its counterclaim quotes Roger Summit, Dialog's president as saying, "The ACS response fails to change in any way our belief that the Society has violated the anti-trust laws. We will look forward to our opportunity in court to answer ACS's totally contrived allegations concerning royalties."
Dr. Summit goes on to say, "We have always paid ACS royalties fully and in good faith. We have been paying tens of millions of dollars of royalties on the CAS database for well over a decade, and only after we filed our lawsuit did the Society notify us that it seeks to pursue these outrageous claims of underpayment." He notes that only once, in 1986, has ACS called for an audit of Dialog's royalty calculations and that on that occasion ACS' own auditors found that Dialog had actually overpaid the royalties.
Dialog and ACS are now entering a phase known in legal terms as a "period of discovery." In essence, they will be looking in each other's files for evidence to support their claims. At the same time, Dialog will certainly file an answer to ACS's counterclaim. Once all this has been done, a court date will be set, unless of course, an out-of-court settlement is reached, but this seems highly unlikely.
How long will all of this take? A spokesman for ACS told Information Today that they expect this will go on "for a long, long time." Undoubtedly he is correct.
Publisher's Note: I was fortunate enough to obtain and have the opportunity to read the two court filings in their entireties--Dialog's original suit and ACS's response and counterclaim. Both were, I believe, splendid pieces of legal research and writing, although I admit to having no formal legal training. But, as an interested and, hopefully, educated observer, I appreciated both documents for their clear explanations of complex issues and their persuasive arguments. I am very glad I won't have to decide this case myself.
Having already admitted that I'm no judge or lawyer, I can't resist handing down one small verdict of my own. I find ACS's attorneys guilty of putting forth the most fallacious argument of the two filings.
On page 21 of the ACS "Answer and Counterclaim" it is argued that CAS' "refusal to license its total file of chemical abstracts has not placed Dialog at a significant competitive disadvantage because, inter alia, ACS's publication Chemical Abstracts, which includes the identical information, is available to Dialog's customers."
In other words, if you choose to use Dialog instead of CAS Online and you want to get the full abstracts of, say, 100 citations from 12 different publication years, no problem--you just stroll down to the archives and find the abstracts you're looking for among the 24 bookshelves containing the Chemical Abstracts collection. You can listen to several Beethoven symphonies on your walkman while you work--an additional benefit.
"Don't have a collection in your organization," you say? Again, no problem. For several tens of thousands of dollars we can set you up with a nice little library of Chemical Abstracts. You supply the space and the money. (Of course, you could change your mind and dial up CAS Online.)
Fortunately for ACS, there are a lot more powerful arguments in their legal arsenal. This one seems to be something of a throwaway. Take a small bit of advice from this interested observer and throw this one away--for good.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: ACS Responds to Dialog Suit; Files Countersuit Alleging Breach of Contract and Fraud. Contributors: Hogan, Tom - Author. Magazine title: Information Today. Volume: 7. Issue: 9 Publication date: October 1990. Page number: 1+. © 2009 Information Today, Inc. COPYRIGHT 1990 Gale Group.
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