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Liquid Audio Unloads Intellectual Property Assets

With the results of a highly contentious proxy battle still up in the air, and on the verge of liquidation just last week, digital music distribution player Liquid Audio Monday got a helping hand from Microsoft .

Microsoft played the white knight by buying up the rights to Liquid Audio's patents for a cash consideration of $7 million.

Liquid Audio President and CEO Gerry Kearby, whose continued leadership of the struggling company rests on the outcome of the proxy vote held last Thursday, said the move plays into the firm's new strategy of shedding product development in favor of exclusive focus on the digital distribution of media to retail.

The foreign and domestic patents Microsoft picks up through the deal include digital rights management (DRM) technology, technology for secure content transfer to portable devices, and technology which will allow it to honor territorial restrictions for digital music content.

In addition to the cash consideration, Microsoft will grant Liquid Audio a royalty-free license to continue to use its digital distribution system.

Founded in 1996, Liquid Audio carved out a niche as a secure, copyright-friendly distribution network for record labels and artists that won it partnerships with the likes of Amazon , CDNow.com and Sony Music Club. Liquid Audio's fee-based download service allowed users to download songs to a Liquid Audio player, but prevented copying.

But the company was quickly overshadowed by peer-to-peer (P2P) network plays like Napster, which allowed users to copy content without a fee.

Everything came to a head last Thursday, in a proxy battle in which a number of shareholders attempted to oust Kearby and fellow board member Raymond Doig, the key figures behind a push to merge Liquid Audio with privately-held Alliance Entertainment, a Coral Springs, Fla.-based distributor of video games, CDs and DVDs. The dissident shareholders, led by New York-based investor group MM Cos. (formerly musicmaker.com), sought to block the merger in favor of liquidating Liquid Audio's cash reserves, which totaled $80 million as of June 30.

MM Chairman Seymour Holtzman said last Friday that preliminary results of the proxy battle gave him and his supporters 14 million votes among the 22.8 million shares outstanding, which would place him and partner Jim Mitarotonda on the board, replacing Kearby and Doig.

Official results are expected Friday, Oct. 4.