Four years ago, Swiss venture capital firm Index Ventures became one of the first backers of Skype. Now, just two weeks after Index and a group of private investors agreed to buy 65% of the Internet calling service from eBay, the VC firm has been drawn into a messy legal battle with Skype’s founders.
In a lawsuit filed Wednesday in California court, entrepreneurs Niklas Zennström and Janus Friis allege eBay and Skype’s new investors are in violation of copyright law and seek damages that could total more than $75 million for each day they operate Skype. Experts say the suit could delay eBay from closing the $1.9 billion sale – which still awaits regulatory approval – or scare off Skype’s new investors altogether.
Allegations from Zennström and Friis have been a monkey on eBay’s back ever since March, when the pair’s company Joltid filed a lawsuit that would prevent eBay from using the core technology that makes the Internet calling service work, and which eBay had been licensing from Joltid since purchasing Skype in 2005. That lawsuit is scheduled for trial next year in a British court. “The first suit said ‘every time somebody downloads the Skype program, you are stepping on our intellectual property.’ Now they are saying ‘we’re going to charge you for it,’” says Randy Katz, partner of law firm Baker Hostetler, which is not affiliated with any of the plaintiffs or defendants.
Earlier this year, eBay disclosed in a 10-Q regulatory filing that it was in the process of building a replacement to the to peer-to-peer technology it licenses from Joltid, a sign it may be prepared to lose the court battle. No further details about the status of that project have emerged, and it’s unclear what eBay and Skype’s buyers would be left with if the substitute doesn’t come to fruition and Zennström and Friis prevail.
The legal uncertainty surrounding Skype was enough to cause eBay to stipulate in the sale agreement that it will be responsible for half of any fees that result from the court battle, even after Skype officially changes hands. “They sold 65% of the company and retained half of the liability,” says Todd Wade, partner of St. Louis-based law firm Bryan Cave.
But if damages end up being $75 million per day, eBay’s promise to foot half the bill may offer little solace to Index Ventures and co-investors Silver Lake Partners, Andreessen & Horowitz, and the Canada Pension Plan Investment Board. EBay’s SEC filing on the deal says the consortium can back out at any time for a fee of $300 million.
Baker Hostetler’s Katz, who has followed the legal actions involving Skype, believes Zennström and Friis are after one of three things: adding urgency to the litigation that’s already lined up in British court; capitalizing on the “deep pockets” of the new investors, who may opt to settle; or chasing off the investors to reopen the possibility of buying back Skype themselves. In April, the New York Times reported that the pair were in discussions with private equity firms to make eBay a bid for the business.
Joltid’s “allegations and claims are without merit and are founded on fundamental legal and factual errors,” says eBay spokesman John Pluhowski in a statement. “We remain on track to close the transaction in the fourth quarter of 2009.”
Silver Lake Partners, which led the consortium to buy Skype, had no comment on the litigation. A representative for Joltid did not immediately return a request for comment. Update, Thursday at 10 AM ET: A spokesman from Joltid has provided the following statement...
Joltid is the world's leader in peer-to-peer technologies, holding the intellectual property rights to several key applications which it has licensed to a number of companies, among them Skype.
Joltid terminated its license agreement with Skype as a result of breaches by Skype. Skype has infringed Joltid’s copyrights. Joltid will vigorously enforce its copyrights and other intellectual property rights in all of the technologies it has innovated.
Joltid also sent over a copy of the complaint. Have a look: