Atari Head Sues Ally That Defected to Rival

By David E. Sanger
The New York Times

August 21, 1984

Jack Tramiel, the new chief of the Atari Corporation, has filed a suit for fraud against a small Silicon Valley computer company that once appeared a likely Atari ally and then said last week that it would be acquired by Commodore International Ltd., Atari's chief competitor.

The suit was filed against the Amiga Corporation on Aug. 13 in Santa Clara, Calif., Superior Court, just as news of the planned Commodore acquisition became known throughout the industry. But Atari, Amiga and Commodore said nothing about the suit until reports of its existence began circulating yesterday.

In the suit, Mr. Tramiel charges that Amiga, which is developing a personal computer similar to Apple Computer Inc.'s Macintosh, had been paid $500,000 by Atari to develop three microchips for Atari. But just days before Mr. Tramiel and fellow investors bought the beleaguered Atari unit from Warner Communications, the suit contends, Amiga canceled the deal, returned the money and told Atari that the chips did not work.

In fact, Atari sources contend, the chips worked perfectly well and may form the basis of a new computer that Commodore plans to market next year. The lawsuit charges Amiga, a privately held company, with fraud, but does not name Commodore as a defendant. A spokesman for Amiga declined to comment yesterday.

An Intensifying War

Industry experts said the court action was part of an intensifying war between the new Atari and Commodore, a company Mr. Tramiel founded 25 years ago. He resigned suddenly as Commodore's president in January, at the height of the company's success in the home computer market, in a dispute that reportedly centered on his effort to get one or more of his sons into the top levels of Commodore's management.

In July, in a surprise comeback that many believe poses a potent challenge to his old company, a group led by Mr. Tramiel purchased the loss-plagued Atari from Warner for $240 million in long-term notes and warrants for a third of the stock in the new venture. Since then, he has replaced all of Atari's top management and reduced the payroll from about 1,200 to a little more than 300 employees. In July, in a separate court action, Commodore obtained an injunction against four former Commodore employees recruited by Mr. Tramiel. The injunction bars them from disclosing Commodore trade secrets in their new jobs at Atari.

Mr. Tramiel has declined to talk to reporters or detail his plans since he took over Atari. But he is reportedly concentrating on developing an inexpensive personal computer similar to the Macintosh, which is generally considered one of the strongest new entries in the desktop computer market. His attention was said to be drawn toward Amiga, which demonstrated an innovative, Macintosh-like machine at the Consumer Electronics Show in Chicago in June, and by some accounts was hoping to sell the Amiga computer under the Atari name.

In fact, according to the suit, Amiga had already reached a deal with Atari, then still owned by Warner. It was developing three chips for the company for a half million dollars - critically needed cash for Amiga at the time - that Atari would have rights to license for unspecified products. Industry experts said the chips made possible unusually detailed color graphics, and could have been used in either a video game or a computer.

'Offered to Return the Advance'

''What Amiga advised the old Atari around June 29 was that it could not complete the chips,'' said Leonard I. Schreiber, Atari's general counsel and a former member of Commodore's board of directors. ''They offered to return the initial advance, and Atari accepted, taking their word on good faith.''

Later, Mr. Schreiber contends, Atari executives learned that the chips did work. But he declined to say what evidence the company held to back up the contention. The suit, he said, was filed ''before we even knew that Commodore planned to acquire Amiga.''

Irving Gould, Commodore's chairman, declined in a telephone interview from Bermuda yesterday to comment on the Atari suit. He said that it would ''still be some time'' before the acquistion of Amiga was complete. No terms of the deal have been announced.