Morpheus Parent Company Sues eBay Over Skype Technology

The company that makes the Morpheus peer-to-peer software has filed a US$4 billion suit against eBay and its Skype online phone calling unit, saying others are benefiting from technology that belongs to it.

StreamCast Networks filed a suit that names eBay as one of 21 defendants, including the founders of Kazaa, another peer-to-peer network. StreamCast claims it had the right of first refusal when the founders of Kazaa sold the company and transferred its phone technology to another firm.

Injunction Sought

In addition to $4.1 billion in damages, the suit seeks an injunction that would prohibit eBay from selling Skype’s online phone calling services. The suit was originally filed in January but was updated on Monday to include eBay for the first time.

At issue is the FastTrack IP technology, which StreamCast used to launch Morpheus and which it claims it should have had the right to acquire under an earlier agreement with the founders of Kazaa and Skype.

Filed in U.S. District Court in Los Angeles, the suit claims violation of the RICO Act as well as antitrust violations.

“We are taking action because we believe the rights to the Skype and FastTrack technologies were swept out from under our feet, and our 28 million Morpheus users were stolen from us,” said Michael Weiss, StreamCast’s CEO. “The real story needs to be told.”

An eBay spokesperson declined to comment on the suit.

Deal Not Done

According to the lawsuit, Kazaa co-founders Niklas Zennstrom and Janus Friis, who went on to found Skype, “engaged in a conspiracy through which they, among other things, misappropriated assets and a customer base belonging to StreamCast and illegally and secretly transferred away the rights to the FastTrack technology.”

The complaint suggests that Morpheus’ 28 million users were “knocked off” the FastTrack network as a prelude to the sale of Skype, essentially clearing the way for the Skype sale to eBay, a $2.6 billion deal announced last September.

StreamCast’s general counsel Matthew Neco said many of the 21 defendants named in the suit “engaged in a conspiracy and shut Morpheus out of the FastTrack P2P market and failed to honor an agreement with StreamCast that it had the right to acquire the FastTrack technology and other assets.” Another attorney for the firm said FastTrack “rightfully belongs to StreamCast.”

Morpheus and its parent company are no strangers to the courts, having battled for years with movie and music studios as one of the lead defendants in the MGM vs. Grokster case. That case resulted in the shutdown of the Grokster service after the U.S. Supreme Court ruled last year that P2P firms could be found liable by courts for copyright infringement even though their technology also has legal and non-infringing uses.

Additional legal proceedings are still expected in that case as studios continue to seek to root out illegal file-swapping by shutting down the tools swappers use to exchange digital files.

Deep Pockets?

RICO — the Racketeer Influenced and Corrupt Organizations Act — was passed in the 1970s to help law enforcement crack down on organized crime, but has been used broadly recently to allege a range of acts involving conspiracies to defraud.

RICO cases can be costly for defendants because the law has automatic triggers for triple damages in successful prosecutions. The StreamCast suit suggests moves made to incorporate Skype overseas and other actions taken before the eBay purchase trigger RICO provisions.

Some observers were quick to downplay the risk of the suit to eBay and investors didn’t flinch, with eBay shares down just pennies after the news broke widely.

Attorneys noted that the case is not a patent infringement matter, at least at this point, but more of a question of whether agreements were broken in order to enable the eBay purchase of Skype.

Jeffrey E. Grell, a lawyer specializing in RICO cases, told the E-Commerce Times that invoking the law where it applies can be an effective tool for ratcheting up the potential damages a defendant could be facing. That in turn can create significant additional motivation for reaching a settlement before cases reach trial.

“If fact situations warrant a RICO claim, it can be a legitimate and powerful tool,” Grell said.

The inclusion of those charges is likely to fuel the fire of skeptics who say StreamCast only moved to take action after the big pay day for the founders of Morpheus rival Kazaa.