Intel legal ploy angers judge

The giant semiconductor maker secretly used a shell company in the CaymanIslands to argue on its behalf in the federal bankruptcy case of InternationalMeta Systems Inc., a tiny El Segundo, Calif., computer-chip-design company. Aspart of the Chapter 11 proceedings, now under way in Austin, the Cayman companychallenged IMS's sale last year of a patent to a Northbrook, Ill., law firmcalled TechSearch LLC. The law firm is using the patent as the basis of aseparate patent-infringement suit against Intel, now pending in federal court inSan Francisco.

Initially, Intel (Nasdaq:INTC) didn't disclose its involvement in International Meta'sbankruptcy case. But after it admitted its ownership of the Cayman company incourt, Judge Frank R. Monroe, who is overseeing the proceedings, concluded thatIntel and the Cayman company had portrayed themselves as trying to help thebankrupt 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 andthe litigation in California," the judge said, describing the maneuver as"totally inappropriate."

Chuck Mulloy, an Intel spokesman, acknowledged the company's use of the Caymancompany. But he says Intel was using "tactics appropriate to the plaintiff inthis matter." He called TechSearch a "patent extortionist. "

TechSearch sees the matter differently. "I think it shows that Intel played adirty trick, and it thought it wouldn't get caught," said Anthony Brown, thefirm's president. He said TechSearch isn't extorting anyone but merelyexercising its constitutional rights to enforce a patent.

Charles Wolfram, a Cornell University law professor and an ethics expert, saidIntel appeared to disclose its role only when a "gun was to their heads," underthe 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 createa microprocessor to match Intel's fastest chips. IMS ran out of money in 1997,and in January 1998 sold TechSearch its single microprocessor patent -- fortechnology 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 itmight 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 hasresponded by saying TechSearch's patent is invalid. The suit is now pending infederal court in San Francisco.

Intel, with more than 1,000 patents to its name, has a history of being afierce 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 Houstonattorney for Maelen, Thomas Kirkendall, conducted a deposition of anInternational 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 alegal complaint related to the bankruptcy case, according to TechSearch'stape-recorded transcript of the meeting.

In January, Maelen asked the bankruptcy judge to void the sale ofInternational Meta's patent to TechSearch, arguing that it had been sold for toolittle. The motion, filed jointly with IMS's court-appointed trustee, RandallOsherow, didn't identify Intel as the owner of Maelen.

But TechSearch was suspicious. In response to a TechSearch motion, Maelenadmitted last month that it was an "affiliate of Intel," according to courtpapers. 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 toIntel's in-house counsel and an outside Intel attorney. The memo described howMr. Kirkendall convinced Mr. Osherow, the trustee for the International Metaestate, to support Maelen's efforts to void the patent sale. Mr. Kirkendall saidhe offered $25,000 in "seed money" to help IMS recover the patent it had sold toTechSearch. A considerable portion of the seed money would pay Mr. Osherow'sadministrative 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 himthat he agreed to go along with the Intel-backed Maelen offer because itincluded fees for the estate. In addition, Maelen guaranteed in court papers itwould bid a minimum of $250,000 for the patent if it was recovered-meaning thatIMS's secured creditors would stand to recover more money than they would haveunder the more speculative TechSearch transaction, he said.

Mr. Mulloy, Intel's spokesman, argued that IMS's creditors didn't get enoughmoney for their patent. Judge Monroe, however, concluded that it was a conflictof interest for Maelen and Intel to suggest that they were acting on behalf ofIMS.

"I would submit that neither Maelen nor Intel gives a damn what this estategets" out of any patent litigation, the judge said. TechSearch's Mr. Brown addsthat in the California case, Intel is arguing that the patent is invalid whilein the bankruptcy case it is arguing that it is valuable. The company can't haveit 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, apartner at Drinker Biddle & Reath in Philadelphia and a former chairman of theAmerican Bar Association's ethics committee, said he agreed with the judge thatIntel had an obligation to disclose its interest to the court.

Intel "underestimated [TechSearch], which smelled a rat and found one," saidGeoffrey C. Hazard Jr., a law professor at the University of Pennsylvania inPhiladelphia. "At the same time, you could say that Intel used an impropermethod to defeat a kind of blackmail. Someone might say the devil take both ofyou."

Intel's Mr. Mulloy said firms like TechSearch require unusual tactics. "Thiscompany exists solely for the purpose of purchasing patents and extorting fundsfrom another company," Mr. Mulloy said. "It's our view the [bankruptcy-court]tactics are entirely appropriate and are designed to conduct a vigorous defenseof Intel."

It certainly hasn't given up. In its own defense in the California suit, Intelhas submitted a 1992 article about the International Meta technology that Intelsaid may undermine the validity of the patent. In the bankruptcy case, there's anew motion to void the sale of the patent to TechSearch, filed by the largestsecured 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 fromstruggling International Meta Systems.

March 1998: International Meta files for bankruptcy protection in Texas.

June 1998: TechSearch files patent infringement lawsuit against Intel, nowpending 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 inbankruptcy court to rescind sale of patent to TechSearch. The motion doesn'tmention that Intel owns Maelen.

February 1999: TechSearch objects to the motion, noting that it suspectsMaelen is a front for Intel.

March 1999: Maelen acknowledges that it is an Intel `affiliate.' BankruptcyJudge Frank Monroe rejects motion to rescind patent sale, characterizing Intel'stactic as `totally inappropriate.'