I have highlighted the egregious portions of INTC's ethical gambit in in the Texas lawsuit.
Intel Takes Bold Steps
To Outmaneuver Foe
April 16, 1999
By DEAN TAKAHASHI
Staff Reporter of THE WALL STREET JOURNAL
Intel Corp. has used many tactics to protect its patents. But the chip maker
recently countered a rival patent claim with a maneuver unusual enough to
anger a Texas bankruptcy judge and surprise some experts in legal ethics.
The giant semiconductor maker secretly used a shell company in the
Cayman Islands to argue on its behalf in the federal bankruptcy case of
International Meta Systems Inc., a tiny El Segundo, Calif.,
computer-chip-design company. As part of the Chapter 11 proceedings,
now under way in Austin, the Cayman company challenged IMS's sale last
year of a patent to a Northbrook, Ill., law firm called TechSearch LLC.
The law firm is using the patent as the basis of a separate
patent-infringement suit against Intel, now pending in federal court in San
Francisco.
A Tangled Patent Tale
January 1998: TechSearch, a law firm, buys a microprocessor
patent from struggling International Meta Systems.
March 1998: International Meta files for bankruptcy protection in
Texas.
June 1998: TechSearch files patent infringement lawsuit against
Intel, now pending in San Francisco.
August 1998: Intel buys a Cayman Islands shell company, Maelen
Ltd.
January 1999: Maelen and the trustee of International Meta file
motion in bankruptcy court to rescind sale of patent to TechSearch.
The motion doesn't mention that Intel owns Maelen.
February 1999: TechSearch objects to the motion, noting that it
suspects Maelen is a front for Intel.
March 1999: Maelen acknowledges that it is an Intel 'affiliate.'
Bankruptcy Judge Frank Monroe rejects motion to rescind patent
sale, characterizing Intel's tactic as 'totally inappropriate.'
Initially, Intel didn't disclose its involvement in International Meta's
bankruptcy case. But after it admitted its ownership of the Cayman
company in court, Judge Frank R. Monroe, who is overseeing the
proceedings, concluded that Intel and the Cayman company had portrayed
themselves as trying to help the bankrupt debtor when they were in fact
really out to undermine the patent case.
"They are using this estate in an attempt to bring leverage upon
TechSearch and the litigation in California," the judge said, describing the
maneuver as "totally inappropriate."
Chuck Mulloy, an Intel spokesman, acknowledged the company's use of
the Cayman company. But he says Intel was using "tactics appropriate to
the plaintiff in this matter." He called TechSearch a "patent extortionist. "
'A Dirty Trick'
TechSearch sees the matter differently. "I think it shows that Intel played a
dirty trick, and it thought it wouldn't get caught," said Anthony Brown, the
firm's president. He said TechSearch isn't extorting anyone but merely
exercising its constitutional rights to enforce a patent.
Charles Wolfram, a Cornell University law professor and an ethics expert,
said Intel appeared to disclose its role only when a "gun was to their
heads," under the pressure of discovery rules. "I am distressed by this,"
Prof. Wolfram said. "What is a big company like Intel doing sneaking
around like this?"
The legal entanglement has its roots in International Meta's efforts to create
a microprocessor to match Intel's fastest chips. IMS ran out of money in
1997, and in January 1998 sold TechSearch its single microprocessor
patent -- for technology that allows a microprocessor to run programs
written for older chips. TechSearch agreed to pay IMS $50,000 for the
patent, plus 10% of whatever it might recover from enforcing it, after legal
fees.
The following March, IMS filed for Chapter 11 bankruptcy protection. In
June, TechSearch filed a patent-infringement lawsuit against Intel, which
has responded by saying TechSearch's patent is invalid. The suit is now
pending in federal court in San Francisco.
Intel, with more than 1,000 patents to its
name, has a history of being a fierce patent
litigator, often battling for years against its
rivals in court. Last August, Intel bought a
Cayman Islands shell company called Maelen Ltd., according to later
testimony in the bankruptcy case. In October, a Houston attorney for
Maelen, Thomas Kirkendall, conducted a deposition of an International
Meta executive. Appearing at a meeting of IMS's creditors, Mr.
Kirkendall said he "represented a guy by the name of Maelen," who was
pursuing a legal complaint related to the bankruptcy case, according to
TechSearch's tape-recorded transcript of the meeting.
In January, Maelen asked the bankruptcy judge to void the sale of
International Meta's patent to TechSearch, arguing that it had been sold for
too little. The motion, filed jointly with IMS's court-appointed trustee,
Randall Osherow, didn't identify Intel as the owner of Maelen.
But TechSearch was suspicious. In response to a TechSearch motion,
Maelen admitted last month that it was an "affiliate of Intel," according to
court papers. Michael Carney, a Bank of America employee in the
Cayman Islands, testified in a telephone deposition that Intel was the sole
owner of Maelen, which had assets of $100.
'Seed Money'
In discovery, Maelen's Mr. Kirkendall disclosed a memo he had written to
Intel's in-house counsel and an outside Intel attorney. The memo described
how Mr. Kirkendall convinced Mr. Osherow, the trustee for the
International Meta estate, to support Maelen's efforts to void the patent
sale. Mr. Kirkendall said he offered $25,000 in "seed money" to help IMS
recover the patent it had sold to TechSearch. A considerable portion of
the seed money would pay Mr. Osherow's administrative fee, according to
court papers Maelen filed.
Reached by telephone, Messrs. Osherow and Kirkendall declined to
comment.
According to Lee Hoevel, International Meta's president, Mr. Osherow
told him that he agreed to go along with the Intel-backed Maelen offer
because it included fees for the estate. In addition, Maelen guaranteed in
court papers it would bid a minimum of $250,000 for the patent if it was
recovered-meaning that IMS's secured creditors would stand to recover
more money than they would have under the more speculative TechSearch
transaction, he said.
Mr. Mulloy, Intel's spokesman, argued that IMS's creditors didn't get
enough money for their patent. Judge Monroe, however, concluded that it
was a conflict of interest for Maelen and Intel to suggest that they were
acting on behalf of IMS.
"I would submit that neither Maelen nor Intel gives a damn what this estate
gets" out of any patent litigation, the judge said. TechSearch's Mr. Brown
adds that in the California case, Intel is arguing that the patent is invalid
while in the bankruptcy case it is arguing that it is valuable. The company
can't have it both ways, he said.
Stephen Gillers, an ethics expert and professor of law at New York
University, called Intel's strategy "tactically risky" but not illegal. Lawrence
Fox, a partner at Drinker Biddle & Reath in Philadelphia and a former
chairman of the American Bar Association's ethics committee, said he
agreed with the judge that Intel had an obligation to disclose its interest to
the court. Intel "underestimated [TechSearch], which smelled a rat and
found one," said Geoffrey C. Hazard Jr., a law professor at the University
of Pennsylvania in Philadelphia. "At the same time, you could say that Intel
used an improper method to defeat a kind of blackmail. Someone might
say the devil take both of you."
Intel's Mr. Mulloy said firms like TechSearch require unusual tactics. "This
company exists solely for the purpose of purchasing patents and extorting
funds from another company," Mr. Mulloy said. "It's our view the
[bankruptcy-court] tactics are entirely appropriate and are designed to
conduct a vigorous defense of Intel."
It certainly hasn't given up. In its own defense in the California suit, Intel
has submitted a 1992 article about the International Meta technology that
Intel said may undermine the validity of the patent. In the bankruptcy case,
there's a new motion to void the sale of the patent to TechSearch, filed by
the largest secured creditor, IPIQ Inc., an Austin firm owned by an IMS
director. |
