This press release just in from Covington & Burling

Covington & Burling advised Microsoft Corp. in negotiating a definitive agreement with Facebook that assigns the social networking company the right to purchase a portion of a patent portfolio that Microsoft recently purchased from AOL Inc. Under the agreement, announced today, Facebook will pay $550 million in cash.

Covington also represented Microsoft in its $1.056 billion purchase of 925 AOL patents and patent applications earlier this month. In that deal, Microsoft secured the ability to own or assign approximately 925 U.S. patents and patent applications plus a license to AOL’s remaining patent portfolio, which contains approximately 300 additional patents that were not for sale.

As a result of today’s agreement, Facebook will obtain ownership of approximately 650 AOL patents and patent applications, plus a license to the AOL patents and applications that Microsoft will purchase and own.

After closing the transaction, Microsoft will retain ownership of approximately 300 AOL patents and applications; a license to the approximately 650 AOL patents and applications that will now be owned by Facebook; and a license to approximately 300 patents that AOL did not sell in its auction.

“Today’s agreement with Facebook enables us to recoup over half of our costs while achieving our goals from the AOL auction,” said Brad Smith, executive vice president and general counsel of Microsoft. “As we said earlier this month, we had submitted the winning AOL bid in order to obtain a durable license to the full AOL portfolio and ownership of certain patents that complement our existing portfolio.”

“This is an important acquisition for us and constitutes a win-win for the two companies,” said Ted Ullyot, general counsel of Facebook. “This is another significant step in building our intellectual property portfolio to protect Facebook’s interests over the long-term.”

Well, that did not take long - it's only two weeks since Microsoft got the patents from AOL in the first place. Perhaps those reports of what may essentially have been a fake auction for the portfolio were not so wide of the mark after all. I imagine that activist shareholder Starboard Value will be one AOL investor looking for reassurances from the company's board that this is not the case.

Whatever the reality, both Microsoft and Facebook look to have done pretty well for themselves - having made a net outlay that is significantly less than might otherwise have been the case. Given how quickly this deal has been done, it is quite possible that a lot of the detail was discussed before and during the auction process. Both parties would have done due diligence prior to the auction kicking off and then, once bidding got underway, perhaps one party suggested to the other that each could save some money if they stopped competing for everything and came to an agreement enabling them both to get what they wanted.

That, I hasten to add, is nothing but speculation. What is certain is that Facebook's patent portfolio looks a whole lot stronger than it did just a couple of months ago, while Microsoft has got all the coverage it wanted from the AOL patents for well under $600 million, not the $1 billion we all originally thought. I wonder what the rules of the auction were. Presumably AOL got to set them.

The two questions I am asking myself about all this are:

1. Has the relative inexperience of AOL in the way the patent market place works been taken advantage of here?

2. Are the way in which the auction and then the follow-up sale have been conducted going to catch the eye of a DoJ anti-trust team which, we were told in March, has only recently started to take a real interest in patent transactions?   

Sectors

IP management, Patents, IP business, IP valuation