Star Technologies wins $9.1 million from GE in dispute over OEM contract

Star claims GE cutoff caused 90% sales drop

Image processing developer Star Technologies was awarded a $9.1million judgment by an arbitration panel presiding over the company'sdispute with former OEM partner GE Medical Systems. Star accusedthe Milwaukee company of breaching a contract to purchase Star'simage reconstruction modules for incorporation into GE CT scanners.

The case illustrates the pitfalls small companies face whenthey rely on OEM agreements with major vendors for a large portionof their revenues. In this instance, Star, of Sterling, VA, claimsthat it lost 90% of its revenues when its OEM deal with GE brokedown.

Star supplied GE with ST-RP embedded image reconstruction processorsfor a decade, selling over 3000 of the devices to GE. The relationshipbegan to deteriorate in early 1995, however, and by May GE hadstopped buying the processors and had begun using processors ofits own design. Star accused GE of breach of contract and claimedthat GE used Star technology in developing its new processors,according to Brenda Potosnak, Star's controller and treasurer.

"They did not fulfill their purchasing requirements,"Potosnak said. "They were supposed to buy a number of processors.Instead of buying from Star, they began building them in-house.That was a breach of the contract."

According to the terms of their contract, disputes could besettled by an arbitration panel to be selected by agreement ofboth parties. This month, that panel ruled that Star is eligiblefor a $9.1 million award for lost profits. The award also includesa one-time royalty payment for the technology that GE is now using,according to Star.

Star claims that GE's options for appealing the award are limited.GE representatives were unavailable for comment as of press time.

While the $9.1 million award is short of what Star had askedfor, the company is pleased with the figure, Potosnak said. However,it does not appear to cover the firm's losses. For the first ninemonths of fiscal 1995 (end-March 1995), while the relationshipwith GE was in place, Star had revenues of $16.8 million. Forthe corresponding period of 1996, after the relationship disintegrated,Star's revenues plunged to $4 million.

Star debuted several new products at last year's RadiologicalSociety of North America conference that may help shore up itsrevenue shortfall. Film Image Scan System (FISS) converts x-rayimages digitized by a film scanner into the ACR-NEMA's DICOM 3.0format. Star has signed a joint marketing deal with Vidar of Herndon,VA, in which FISS is offered in a package with the company's VXR-12scanner, and both firms are selling the package. Star has a similaragreement with Lumisys of Sunnyvale, CA, for several film scannersmade by that company. It also has a deal with Radiographic DigitalImaging of Compton, CA, for its Cobrascan scanner.

Star's other major product, Image Management Server (IMS),is DICOM 3.0 service-class software for managing medical imagesin archives. Star is a value-added reseller for EMASS of Littleton,CO, which is using IMS to manage images in its long-term archives.

"This year has been a transition year, with significantreductions in revenue as we try to get new products to market,"Potosnak said.