As information leaks out about the agreements eBay made to buy Skype, it increasingly looks like eBay may be down the creek without a paddle to get back up.
Saikat Chauduri, professor at the University of Pennsylvania, in a Knowledge@Wharton report called “Skype’s Life after EBay: Free in More Ways Than One,” said experts say that eBay erred badly when it bought Skype without buying Joltid or Joltid’s peer-to-peer (P2P) software Global Index (GI) software that’s absolutely essential to Skype’s operation.
Without GI or an equivalent replacement, Skype cannot function.
Joltid owns the GI software and all the associated intellectual property, which includes copyrights and patents. Joltid says the deal between eBay and Joltid specifically says no modification to the GI software is allowed without Joltid’s express permission.
Skype pulled its neck out of the noose, at least temporarily, when it filed a lawsuit in the UK against Joltid just as Joltid was notifying Skype that it was terminating with cause the licensing agreement that allowed Skype to use the GI software.
Joltid says Skype breached the agreement when it obtained an illegally distributed copy of the GI software and modified it. That, Joltid said, is sufficient grounds for terminating the licensing agreement and forcing Skype to stop using the GI software.
“The License Agreement between Joltid and Skype licensed Skype to use the object code of the Copyrighted Works in executable form only,” Joltid said in a brief.
Joltid explains the term “executable form” as allowing Skype only to create software that uses the GI software and does not allow changes to GI. The company likens the situation to a software developer who gets permission to write a program that runs on Microsoft’s Windows platform. That does not give him the right to change Windows.
Joltid has filed a suit in a US court that asks for an injunction against Skype to stop the infringement. It also asks for “actual and statutory damages for infringement” that Joltid says it “reasonably” believes are accumulating at more than $75 million a day.
Joltid’s owners Niklas Zennstrom and Janus Friis are using the same principal that the record labels once used against them over the use of the two’s P2P software to download illegally copyrighted music. Joltid wants each download of Skype by consumers to be considered a separate act of copyright infringement.
Last month eBay said it had an agreement to sell 65% of Skype to a group of investment funds for $1.9 billion in cash and $125 million to be paid later. EBay said it would keep the remaining 35%.
In a suit filed in the US, Joltid sued eBay and the private investors, which includes the UK VC firm Index Ventures Management, to prevent the sale of 65% of Skype to the investors. Mike Volpi, former Joost chairman and CEO, is an Index Ventures partner.
Subsequently Joost and Joltid sued Volpi for using confidential information to negotiate the deal with eBay and the private investors to buy Skype. The suit accuses Volpi and Index Ventures Management of “breach of fiduciary duty against Volpi, aiding and abetting breach of fiduciary duty against Index, interference with prospective business advantage, misappropriation of trade secrets, breach of contract against Index, breach of confidence and civil conspiracy.”
Joltid in a motion also asks the court to “enjoin the defendants [Volpi and Index Ventures Management] from: (i) using the confidential information in connection with the operation or strategic planning of Skype; (ii) communicating such information to other parties in the ‘Buyout Group’ that has made a bid to acquire Skype from eBay; (iii) soliciting employees of Joost and Joltid with offers to join Skype; (iv) having communications with current or former employees of Joost or Joltid regarding the companies’ confidential information; and (v) further participating in the Skype acquisition or assuming any position with Skype until a final adjudication of the merits of the case.”
From here it still looks certain that an out of court settlement will have to be reached. At this point, the legal advantage appears to be with Joltid.
EBay can’t afford to write off its multi-billion investment in Skype. Joltid doesn’t want to see Skype, which its founders started, become another of their failures by watching it go down in flames as its Joost and Kazaa companies have.
The trial in the UK is set for June 2010. That’s a long time to tread water at a time when Skype urgently needs additional investments to strengthen its offering to businesses and to fight off a growing crowd of free and near-free Internet telephony services.