Intel legal ploy angers judge

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.

Initially, Intel (Nasdaq:INTC) 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. "

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.

Guy named Maelen
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 offer
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.

Not illegal
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.

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.'