Joff Wild

There may be a few anxious peeks at the clock over at Google today. By 4.00 pm EST (1.00 pm PST) all potential buyers for the Nortel patent portfolio have to have submitted their sealed opening bids. So far, Google is the only company to have declared its hand, but according to a Wall Street Journal piece published over the weekend, others are likely to follow.

Should an auction be required it will take place at the New York offices of law firm Cleary Gottlieb Steen & Hamilton. My understanding is that the different bidding teams would not be face to face, but would instead be installed in separate meeting rooms. They would be advised of the opening bid and would have time to decide whether to beat it. This process will continue until only one bidder is left standing. In short, it will be a relatively slow process – there won’t be an auctioneer upping the ante, there’ll be no gavel and no “going, going, gone”. But it should all be done in a day. That said, it is also possible that the date could be rearranged if the creditors feel that they could get a better result that way.

Anyway, on the assumption that it will happen I have been wondering whether having gone public on its bid Google can now afford not to end up the successful party. Having said it wants the portfolio to protect its own position, the company has surely made clear that it feels a level of vulnerability should the patents end up in someone else’s hands. Even if that is not the case, I can’t help thinking that this is how a non-purchase would be interpreted in many quarters. On that basis, it all looks a bit high-stakes for Google from where I am sitting.

More fancifully, given that the Nortel portfolio has been available for in-depth inspection and analysis, would there be a level of negligence if a company does not get involved in the bidding and then ends up on the losing side of a case involving patents from the portfolio being asserted against it? I suppose one of the problems with a sale such as this is that it is relatively transparent. In other auctions, you may not know who you are bidding against – on this one, you will. For the eventual purchaser that could be golden information.

But enough of my musings. How about some proper analysis? John Stec, of Bytelaw and Patentrakker, has put together a few paragraphs giving an overview of some work he has done on the Nortel portfolio. It’s interesting stuff and helps to show why so many people – including the Department of Justice – are so interested in the outcome of the Nortel sale:

As widely reported, Nortel’s portfolio of patents, applications and related rights could well be auctioned off next week, apparently in a winner takes all sale. The capital requirement to participate obviously not only limits the number of bidders, but also concentrates patent power in the winner; something that can also reasonably be expected to pose potential anti-trust issues.

Among the presumed bidders for the Nortel portfolio (and this is not meant to be anywhere near an exhaustive list) are the following companies: Apple Corporation; Oracle Corporation, including Sun; and Google Inc.

Each of these companies controls or owns a substantial number of issued US patents; thus their existing portfolios can already be described as so-called patent thickets. Each of these bidders would be expected to have various motives (offensive or defensive) for wanting to control some or all of the Nortel portfolio. Ironically, or perhaps more interestingly, some of the bidders may even be smart enough to recognise that they do not fully realise all of the reason(s) they need to acquire any specific patent (the ‘unknown unknowns’) so to speak, so the entities with deepest pockets - eg, Oracle, Google and Apple etc - can elect to take the easy way out, and offer to buy all of them, then sorting things out later; perhaps even eventually planning to profit on the deal by selling off some to Intellectual Ventures or another NPE, subject to the grant back of a licence and/or covenant not to sue.

One point to be recognised early on is that it is not easy to determine which of Nortel’s patents would be most useful to any potential bidder. This is due, in large degree, to the daunting number of potential permutations and combinations of the respective rights within the post-auction patent thickets. As Lew Plat, former CEO of Intel, once aptly observed when speaking of the inability to understand the scope of the intellectual property that HP controlled at the time: "If HP knew what HP knows, we would be three times as profitable." Perhaps that is why the DOJ and EU have remained curiously silent to date: that is, they don’t know how to start the evaluation.

Nonetheless, a reasonably useful list of desirable patent acquisitions from Nortel may be deduced by studying the respective portfolios of any prospective bidder(s) in the context of the entire Nortel portfolio; eg, examining the technological synergies among the constituents.

In an elementary example, one can evaluate the portfolios of these four players – Nortel, Google, Apple and Oracle - and extract the following lists of patents that constitute related technologies. In this context, ‘related technologies’ between two entities is meant as those inventions of one entity that read on and/or are in a citation chain with those of the other entity. Such an evaluaiton produces five lists:

• List #1 - Some of the top 32 Nortel patents that Google needs to shore up its portfolio.

• List #2 - Some of the top 33 Nortel patents that Apple needs to shore up its portfolio.

• List #3 - A few of the top 184 Nortel patents that Oracle needs to shore up its portfolio.

• List #4 - Some of the top 15 Nortel patents that Apple would probably prefer Google did not acquire.

• List #5 - Some of the top 17 Nortel patents that Oracle would probably prefer that Google did not acquire.

Each of the above patent portfolio mergers would place more power in the hands of the respective acquirer and may be something that the DOJ or EU would want to investigate in much the same way that they would examine any other proposed merger or business combination.

For further information, including corroborating details of the above analyses, see http://www.patentrakker.com/NORTEL/results.html or e mail stec@bytelaw.com.

UPDATE - Both Bloomberg and Reuters reported overnight that Microsoft and a number of other companies have gone to court to try to get changes to the terms under which the Nortel patent portfolio is to be auctioned. Microsoft, which has consistently stated it has no need to get involved in any auction because it has a "worldwide, perpetual, royalty-free license to all of Nortel's patents", is concerned because under the terms of sale agreed with Google, the stalking horse bidder, Google would reportedly have the right to terminate agreements Nortel had previously entered into. Along with Microsoft, companies such as HP and Nokia have also filed similar objections. If the court upholds these, then clearly that will have an impact on the value of the Nortel portfolio. Even if it doesn't, it is difficult to believe that the objecting companies will just shrug their shoulders and say "Oh, OK then".

On another note, there has been no word yet as to whether Google will face any opposition for the Nortel portfolio. If it does, that would trigger the auction. I have a sneaky feeling that this will take place and that Ericsson may emerge as a bidder.