Disruptive Tendencies

Skype - Joltid Licensing Dispute: Epic M&A Screw-up?

eBay must be ruing the day that it signed the M&A deal to buy Skype for $2.6b, in addition to an additional $530m as part of the earn-out provisions. Its original vision of incorporating Skype functionality into its auctions never happened. Despite that, Skype has proven itself to be quite interesting as a standalone entity, with some value potentially to be recouped via a spin-out IPO. However based on an eBay 10-Q form filed with the SEC on 7/30/2009, this is now at risk over a dispute over a license.

It seems that some of the core functionality within Skype is based on peer-to-peer software licensed from Joltid, a company also controlled by the founders of Skype, Niklas Zennstrom and Janus Friis. So if I get this right, Joltid entered into a non-arm’s length license with Skype (pre-acquisition), a company that Zennstrom and Friis also controlled. When eBay acquired Skype, it would have known that while it was “buying” Skype, it wasn’t buying Skype source code, it was licensing it from Joltid. Given the amount of money involved in the deal, and the fact that the principals were the same, insisting on a perpetual, fully paid up license, in some Field of Use (voice, IM and video applications) with rights to derivatives would seem to have been very do-able.

Instead, it appears that Zennstrom and Friis pocketed a boatload of eBay cash, and retained control of Skype’s destiny via a licensing agreement. Now with the M&A (and liquidity) at risk, eBay is now over a barrel. Negotiate and pay for that fully paid up license, re-write everything, or write it all off as the worst deal of the century. OK, maybe that’s overstating it, the Time Warner-AOL deal sucked pretty badly too.

I’ve been involved with transactions that have nearly fallen apart at the eleventh hour because of legacy tech transfer licenses. “What do you mean we’ll have to pay 4% royalties ad infinitum? We’re buying the company!” When it gets to this stage and a deal’s at risk, the original licensor has all of the leverage, and will often be “bought off”, at the expense of the shareholders, to make the issue go away so the deal can get done.

Having negotiated multiple technology transfer and M&A deals, I have learned that it is imperative to construct the tech transfer deal with M&A in mind. Exclusivity in a well-defined Field, rights to Derivative Works, Non-Assertion of IP rights, a built-in cap or royalty buy-out to convert to a license in perpetuity, are all essential. Of course, in a non-arm’s length licensing agreement, like that between Joltid and Skype, the license terms would have been very different, but in this case it is incumbent on the acquirer to recognise this and force the issue while they have the leverage.

In hindsight, many would agree, this acquisition missed the mark strategically, resulting in a $1.43b writedown. But it’s hard to fault big, bold plays with the potential to break new ground. I have a deep admiration for those involved in transactions like that. But a key takeaway is the tactical execution by eBay’s M&A team appears to have missed the inherent conflicts of interest and let slide the licensing agreement with Joltid. Now, with no leverage, it’s biting them hard. Caveat emptor!

That’s my .02!

Martin Suter

(martin.suter at iplicensing.net)

The Battle Over Purple Play-Doh

One of the most contentious areas in licensing negotiations is in the area of ownership of derivative IP. The most effective articulation of the issue that I have seen was by Jill Riola, a highly capable licensing attorney working at Akerman Senterfitt in Orlando. During negotiations with a team of attorneys from a Fortune 500 firm that was licensing our IP, she brought it back to first principles:

·         We own our IP (blue Play-Doh)

·         You own your IP (red Play-Doh)

·         We are granting you the right to create purple Play-Doh, using our blue in combination with your red

·         But you do not own purple Play-Doh, because by definition, purple must contain some blue.

Furthermore, when viewed this way, all of the terms contained within the licensing agreement, including restrictions on Field of Use, royalty rates, etc., apply for all shades of purple Play-Doh.

We could get down in the weeds and occasionally lose sight of the issue, so it was amusing to watch how Jill would bring it back to first principles. “If it’s blue Play-Doh it’s ours…You own all of the red you can develop, but if it’s purple, you don’t own it, and you owe us if you sell any.”

Agree on who owns what Play-Doh upfront, and the specifics of the agreement will be much easier to draft later.

That’s my .02!

Martin

(martin.suter@iplicensing.net)

Play-Doh is a registered trademark of Hasbro, Inc. Its use herein is strictly to illustrate a legal concept. No endorsement by Hasbro is expressed or implied.

 

Ethical Dilemma Over Linux-based Website

This past week, I decided to add blogging capabilities to this site and was surprised to find that my web hosting service (1and1.com) only has blogging options in its Linux Hosted Business offering. Coming from the commercial software business, I made a conscious choice 4 years ago to opt for the Windows Hosted service. But, I was now confronted with a choice that required some serious thinking about whether the move to open source was compromising my moral code.

"What's he talking about?", I can hear you asking.

As an Objectivist (by choice), a capitalist (by default), and an IP licensing executive (by profession), my quandary over open source software really sits at the intersection of these three areas.

My moral compass has largely been set by the influences of Ayn Rand in my formative years. Her views on individuals' rights to their own work motivated me to gravitate towards IP licensing. Her view on capitalism (in its purest form), is that it's the only moral economic and political ideology and is the manifestation of an individual's right to their work as well as their ability to profit from it. As a consequence of the nobility of the profit motive, she profoundly mistrusted altruism.

Is Linux/open source, software for socialists? Are those involved in its development doing so out of an altruistic agenda? Does its use equate to theft of someone else's IP?

I opted to start with the last question first, and printed off the GNU General Public License that I was required to enter into if I were to switch over to Linux. It's highly readable, much more so than most commercial EULAs, and is eminently clear about the rights and obligations assumed by developers who choose to modify the code base. While everyone has the right to do so, any changes they make must also be made available, as source code, under the exact same terms as the original license - free of charge and without warranty.

Now as a named co-inventor on only 1 patent, I'm not smart enough to be called an inventor myself. I do know, however, that most inventors will say that their work builds on the work of others. "Prior art" is an important concept in intellectual property, requiring citation in academic publications and patent filings. Is the source code that one gets not the same as prior art? What about derivative works based on this prior art?

Two of my favourite words to help answer this are "but for". In discussions about IP licensing, a key principle that arises regarding ownership of derivative IP can be summarised as follows: "But for the existence of the background IP, the derivative work could not have been created." This gives the background work foundational status and means that the creator of the derivative works has a legal obligation to the owner of the background IP.

In this regard, I guess that I'm OK with the requirement to forgo any claims to derivative works. Developers decide, of their own free will, to build on top of open source knowing full well what the implications are for their IP.

Next time I'll take a swing at the question: Is open source software for socialists?