Joff Wild

You have got to admire the negotiating skills of eBay's John Donahoe. One minute he was facing up to the possibility of a largely self-inflicted disaster over Skype, the next he had concluded a deal to sell a majority share in the business to a consortium of venture capital firms at a price which valued it close to the amount eBay originally paid in 2005. And if that turns out to be too low, the 35% stake in Skype that eBay continues to hold offers a very handy insurance policy.

The elephant in the room, of course, is the ongoing litigation in the UK courts between Skype and Joltid, the company formed by Skype's original founders. Joltid claims that it owns the patents which underpin the online telephone service and that these were only licensed by eBay when they made their purchase back in 2005. These licences, they state, are now invalid as eBay has failed to comply with their terms by, among other things, releasing confidential information. If the UK courts agree, there is a possibility that Skype could be closed down.

It seems pretty clear that eBay made a big IP mistake when it did the original Skype deal. Given the product was dependent on the patents, eBay should have been absolutely clear as to who owned them and under what terms they could be exploited. The question now is whether the new purchasers have done their IP homework. Given the publicity that has been generated over the last few months, it is difficult to believe that they have not. But even so, they are taking a risk. What if the UK court sides with Joltid? What if the proposed workaround turns out to be no such thing? If it is, what happens if the costs of introducing it are punitively high? And so on. 

To get a feel for the issues at stake in all of this, I asked Ted Sabety, a New York-based attorney who has also worked on the coalface in the media technology industry, for a few comments:

There appear to be four patents surrounding the Skype technology. Three of them were assigned to Skype in the Ebay purchase transaction. A fourth patent issued in January to Joltid, for a "distributed database". If that fourth patent is relevant to the Skype functionality, then Skype has

a more significant problem, given that the termination of the license likely will terminate any rights Skype has in that fourth patent. In addition, given that the source code is confidential information for Joltid, then "clean rooming" the code may avoid copyright liability, but still run into claims of trade secret misappropriation. Skype's new owners have to be betting that the trade secrets in the code were effectively made public with the patent filings.

However, disclosure of the code itself in the patent cases is part of Joltid's complaint. If that complaint holds up, then Skype is probably betting that it can lawfully reverse engineer the Skype functionality under relevant European law, presumably in Europe, for "compatibility purposes", and then use that information to inform a clean roomed code writing exercise.

All of this is difficult, costly and fraught with risk.

The bottom line is that business transactions involving the acquisition of IP require a lot of consideration about where the acquiror wants to take the technology. Buying IP and technology without extrapolating future uses only works if the buyer is getting title to all the rights (apparently, this is not what eBay did when it acquired Skype in 2005). If the buyer ends up with a license to core technology, that license has to permit upgrading by the buyer. A buyer should address competitive concerns raised by the seller with field of use restrictions or specialized non-compete clauses instead.

Joltid holds at least one patent independently from Skype, which issued in January, for a "distributed database". If this patent is relevant to the underlying technology Skype licensed in, replacing the licensed software does not get Skype out of the woods on the patent front.

The lesson here is that it is important for acquirors (eBay) always to obtain sufficient rights in a software acquisition to build the business and possibly to sell it: either by obtaining the right to modify source code or, at a minimum, obtaining sufficient patent rights independent of the existing software code in order to permit independent development. 

A couple of further thoughts on all of this. Given the IP position that eBay found itself in with Skype, it is probably fair to assume that had the company done what it should have done back in 2005, the price it would have got for Skype - either through a sale or an IPO - would have been a whole lot higher. And, finally, all the problems would go away immediately if Joltid dropped its complaint and came to the negotiating table. Maybe it had got to the stage where compromise between eBay and Joltid was out of the question. With eBay now only in the background, there are probably far fewer obstacles for a deal to be done. I would not be surprised if that's what occurs some time between now and when the acquisition is finalised.