Skype Lawsuit May Complicate Sale

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.