AOL May Have to Pay Up Before It Spins Off

As Time Warner (TWX) and AOL get ready to part company and go their separate ways, a lawsuit filed back in 2007 by a small company called Modavox (MDVX.OB), which has sued them for patent infringement of their Intellectual property in the area of Behavioral Targeted Marketing, may have significant impact on both AOL and Time Warner valuations. Recent filings by Modavox asking for sanctions and a recently released 8K third party valuation may indicate how serious this issue is. The issue is not solely AOL's as there is also an additional lawsuit filed against the parent company Time Warner.

Although the case involves patent infringement, a highly technical subject matter, the recently filed motion by Modavox’s attorney’s requesting sanctions israther simplistic. The motion suggests AOL / Tacoda and its attorneys repeatedly and intentionally failed to comply with general court orders pertaining to discovery procedures, findings of spoliation and spurious production and destruction of code and perjury, amongst other things. The filings illustrate a clear picture of the AOL / Tacoda’s defense being one of stalling and refusal to provide the court required documentation. To date Modavox is still claiming a failure on the part of Tacoda to deliver the required source code.

An example of just two of the multitude of the sanctions being requested: Modavox is requesting a jury instruction that Tacoda destroyed portions of the source code that existed in 2007 when this motion was filed. They are also asking the court to issue an order that in defending this action Tacoda is precluded from asserting it has not infringed Plaintiff's patents in reliance upon source code or metadata it has failed to produce as of the date of filing this motion. A compete list of the requested sanctions can be found in the filing.

The court has set an agreed upon timetable that allows AOL/Tacoda two weeks from the time of this filing in late October to respond and then another week for Modavox to respond. As the clock ticks on the Time Warner/AOL spin off and investment bankers figure out true post spin valuations for both companies, a potential liability could significantly impact shareholder value.

Disclosure: No positions