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War of Tech Giants Unfolds With Multi-Billion Dollar Patent Auction [Part One]

Part I: The Nortel Patent Auction and the Bidders

This is the story of how Rockstar Bidco beat Google. It's also the story of how a war over intellectual property is heating up in Silicon Valley.

Six unlikely high-tech allies — Apple, Microsoft, RIM, Ericsson, EMC, and Sony — walked away in June with the winning bid in a hard-fought IP auction that upended public and private markets for patents and left Google, another bidder, high and dry.

The Apple-led group, known as “Rockstar Bidco,” triumphed by agreeing to pay a record-breaking $4.5 billion for thousands of wireless, networking, and other patents from bankrupt Nortel Networks.

The staggering sum offered up for this collection of IP rights may signal the beginning of a patent buying boom.

“Every day I see more people talking about patents who’d never paid much attention to them before the Nortel sale,” said Ron Laurie, Managing Director of Inflexion Point Strategy, an intellectual property investment bank and advisory firm. As George Riedel, Nortel’s Chief Strategy Officer and President of Business Units, emphasized, "’The size and dollar value for this transaction is unprecedented.’” 

The Nortel auction also figures prominently in ongoing disputes over Google’s Android smartphone platform. David Drummond, Google’s Senior Vice President and Chief Legal Officer, has just accused two Rockstar bidders and a third computer giant of launching improper IP attacks on Google’s prized communications technology.

“Android’s success has yielded… a hostile, organized campaign against Android by Microsoft, Oracle, Apple and other companies, waged through bogus patents,” said Drummond in the Official Google Blog.

Microsoft’s General Counsel, Brad Smith, swiftly tweeted back addressing a set of Novell patents about which Drummond had also complained. “Google says we bought Novell patents to keep them from Google. Really? We asked them to bid jointly with us. They said no.”  Smith’s micro-post failed to mention the Nortel issue.

Billions of dollars will be spent in the great Nortel patent sale, and it may ultimately affect billions of people. Besides the bidders themselves, other public companies with large patent portfolios, private patent holders, and countless consumers seeking more powerful, less expensive smartphones and apps may see their choices expanded or contracted as the auction’s repercussions play out.

This historic IP sale’s significance will be scrutinized in two parts on Palo Alto Patch, the first focusing on the bidding and the bidders, the second examining the auction’s effects on non-bidding patent owners.

The Bidding

Given the Nortel auction’s outcome, it’s ironic that Google appeared to hold the upper hand at the beginning. Once a huge telecom manufacturer, Nortel filed for bankruptcy in early 2009. It was a humbling fall from grace.

“At one point in 2000, Nortel was the world’s largest supplier of telecom equipment," wrote Canadian Business' Andrew Wahl, "earning revenues of $30 billion and employing 94,500 people worldwide — 25,900 people in Canada, 12,600 of whom were in R&D.”

The time and money Nortel invested in research and development created considerable intellectual property. As the bankruptcy proceedings moved forward, a portfolio of more than 6,000 patents and patent applications remained as one of Nortel’s biggest unliquidated assets. Setting the stage for the final auction, Nortel selected a $900 million offer from Google in April as a "stalking horse" bid.

A month later, courts in the U.S. and Canada approved Google’s offer, setting an effective floor for the auction that began in June. That’s when the bidders’ exuberance proved that earlier estimates of the market value of Nortel’s patent portfolio were flat out wrong.

When June came, the serious bidding began with a bang. According to Reuters, Intel started the four-day auction with a $1.5 billion opening offer, a 67% premium to the base price set by Google. As prices rose into the multiple billions, a few bidders dropped out and others sought alliances. Some joined forces with Apple as part of Rockstar Bidco, which squared off against Google’s bidding vehicle, “Ranger,” in the final rounds. 

The search titan’s bidding strategy was “Googlesque.” Perhaps commenting on prices that it regarded as being unreasonable, Google put up a figure that was mathematically irrational, offering a bid of π (pi), or $3.14159 billion. But neither that princely sum nor a final reported offer of $4 billion was sufficient for Google to carry the day.  At $4.5 billion, Apple’s band rocked out, winning with a final price that was fully five times greater than Google’s original “stalking horse bid.” 

Post-Auction Reverberations for the Bidders

Viewed in retrospect, Apple’s auction tactics seemed to work well.  In a July 20th 10-Q securities filing, Apple disclosed that its share of the $4.5 billion price would only be “approximately $2.6 billion.”  Even though Google had apparently been willing to part with an additional $1.4 billion, through vigorous partnering, Apple was able to offload financial responsibility for more than 40% of the winning bid onto others. 

Apple has been circumspect in revealing its plans for the Nortel patents.  Apple reported the $2.6 billion figure in a section of its SEC filing entitled “Off-Balance Sheet Arrangements and Contractual Obligations.”  This provided little insight into how the Nortel patent portfolio will figure into Apple’s long-term strategy.  The same 10-Q form also indicated that Apple “is vigorously defending infringement actions in courts in a number of U.S. jurisdictions and before the U.S. International Trade Commission, as well as internationally in Europe and Asia.”  Therefore, Apple might have sought Nortel’s patents as a defensive measure to protect itself in pending and possible future patent lawsuits.

Nonetheless, how the various Rockstars will allocate rights among themselves to their new IP treasures remains unclear.  Apple is believed to have set its sights especially on Nortel’s “Long Term Evolution” (LTE) wireless patents.  Nortel previously described LTE as supporting a variety of mobile Internet applications, including “video streaming, music downloading, mobile TV and many others….”   Precise details of the ways in which the winners will divide the spoils will likely emerge in future regulatory and court filings.

Apple’s auction triumph alarms Google. Before the bidding began, Kent Walker, Google’s Senior Vice President & General Counsel, expressed the hope that acquiring Nortel’s patents would “not only create a disincentive for others to sue Google, but also help” Google, its “partners and the open source community … continue to innovate,” Walker said in the Official Google Blog.

After its bidding tactics failed, Google’s executive chairman, Eric Schmidt, voiced concern over the winning consortium’s intentions.  “We… worry that this is an attempt to use patents rather than to innovate,” he told Financial Times. 

Without owning the Nortel patents, Google appears to believe that new patent infringement claims might be brought against Android. 

“A smartphone might involve as many as 250,000 (largely questionable) patent claims," said Drummond in the Official Google Blog, "and our competitors want to impose a ‘tax’ for these dubious patents that makes Android devices more expensive for consumers.” 

Drummond expressed distress over “Micropple” cooperation. “Microsoft and Apple have always been at each other’s throats, so when they get into bed together you have to start wondering what's going on,” he said.

Even if Apple endeavors to use any Nortel patents that it may ultimately control offensively against Google, it may be restrained from doing so. The American Antitrust Institute (AAI) asked the Department of Justice to intervene in the Nortel matter. The AAI argued that Apple, Microsoft, and RIM are “the three main commercial rivals to Android, Google's open-source mobile operating system.”  Since each member of that triad already possesses its own wireless patents, the AAI was particularly anxious about their acting together:

In a letter from AAI President Albert Foer to the US Department of Justice, Foer wrote, "Each of them… appears to possess the ability and incentive to use its patents offensively…; their concerted control over the entire Nortel portfolio would seem to create a much-enhanced collective ability and incentive to act in that manner, with a decisively exclusionary impact on open-source competition in particular."

Although Canadian and American bankruptcy courts have blessed the winning bid, whether the Justice Department will take further action remains unclear. 

On July 29th, citing unnamed sources, the Wall Street Journal reported that the DOJ is “intensifying” its scrutiny and looking into whether Rockstar’s members intend “to file patent infringement suits against handset makers using Google's Android software…” Therefore, the Department of Justice may limit the ways in which the winners may employ Nortel’s patents. 

Google is heartened by that possibility. “We’re encouraged that the Department of Justice … [is] looking into whether Microsoft and Apple acquired the Nortel patents for anti-competitive means,” said Drummond in the Official Google Blog.

Still, Google is not sitting on its thumbs, waiting for the Justice Department to make up its mind.  In a TechCrunch interview published on July 25th, Kent Walker advanced a fundamental criticism of the patent system.  “’A patent isn’t innovation. It’s the right to block someone else from innovating….’”  While others might regard patents differently, Walker suggested that the current wave of high-tech patent litigation might come to an end when the combatants reached a state of “’mutual assured destruction.’” 

To bulk up in the IP arms race, Google has sought out patents from companies other than Nortel. As Drummond puts it, Google is “looking at other ways to reduce the anti-competitive threats against Android by strengthening our own patent portfolio.”  

Exhibiting both insight and industriousness, SEO by the Searecently spotted IBM’s assignments of over 1,000 patents to Google and provided links to those patents. Although the amount Google spent for IBM’s patents is unclear, Google and IBM may have reached an agreement before the Nortel auction concluded. Many of the IBM assignments appear to relate to patents for non-wireless technologies.

Google may well decide to go after other wireless patent portfolios.  According to The Wall Street Journal, Google has participated in discussions to purchase InterDigital. Such an acquisition might set up the type of nuclear stalemate that Walker prophesized. InterDigital asserts that its “know-how and inventions reach across virtually all mobile and wireless devices” and that it possesses over 8,000 patents and nearly 10,000 patent applications in the U.S. and foreign countries. Whether or not Google ultimately acquires InterDigital, Google earned over $2.5 billion in the second quarter of 2011 alone and possessed $39 billion in cash and equivalents on June 30th. The Mountain View search giant has plenty of money with which to purchase additional patents.

For all the billions that Apple et al. have offered up for Nortel’s patent portfolio, it will probably be some time before we know the ultimate effects of the auction on the bidders. Oracle has brought an Android-related case against Google that may go to trial later this year. As Florian Mueller writes in Foss Patents, although U.S. District Judge William Alsup cut away at many of Oracle’s damages expert’s theories, “Oracle gets a second chance to present a report that the judge may consider acceptable.” 

In upcoming months, we may learn whether the Justice Department will investigate the Nortel auction.  And, in the meantime, Google will probably continue to urge the public to take its side.  According to Drummond, “Unless we act, consumers could face rising costs for Android devices — and fewer choices for their next phone.”

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