FAQ: What You Need To Know About Monday’s Mobile Patent Auction

One of the most pivotal events at the intersection of patent law and the mobile industry kicks off on Monday, when the fate of 6,000 patents will be put on sale before a who’s who of mobile industry giants. Here’s what you need to know what you need to know about the historic auction:

So, what’s going on again?

Remember Nortel? The darling of the first dot-com boom, telecom equipment maker Nortel fell on hard times several years ago, eventually forced to declare bankruptcy as accounting scandals, competitive pressures, and the Great Recession took their toll. Rather than try and recapture past glory, Nortel decided that it was going to liquidate its holdings, selling off pieces of its business to various suitors and former competitors. One of the last remaining assets, around 6,000 granted and in-process patents, is finally ready to go on sale.

Wait, you can buy and sell patents, documents designed to protect an original inventor from being run roughshod by established corporate interests, on the open market?


How sad. What kind of patents are we talking about?

From one of the countless court filings in Nortel’s bankruptcy case comes this description: “At this time, Nortel’s residual patent assets are one of Nortel’s largest remaining assets. The Stalking Horse Agreement contemplates the sale of approximately 6,000 U.S. and foreign patents and patent applications spanning wireless, wireless 4G, data networking, optical, voice, internet, service provider, semiconductors and other patent portfolios. The extensive patent portfolio touches nearly every aspect of telecommunications and additional markets as well, including Internet search and social networking.”

Whoa, I am not a lawyer. What is a “stalking-horse agreement”? Sounds like something PETA would find abhorrent.

A stalking-horse agreement is a common practice in complicated auctions such as this one. Basically, the seller (Nortel) enters into a preliminary agreement with an interested purchaser to set the “stalking-horse bid,” which you could think of like an ante in a poker game: if you want to win, you’ve got to top the stalking-horse bid. The idea is to set a floor for future bids that’s pleasing enough to the seller (or the seller’s creditors), who can now avoid having to evaluate low-ball bids.

So who is the stalking horse?

Google (NSDQ: GOOG). In April, Google announced that it and Nortel had agreed to set the floor for the auction at $900 million, signing a deal to assign the patents to a Google subsidiary known as Ranger Inc. All it really means it that if nobody wants to bid higher than $900 million Google would get the patents, but that’s simply not going to happen: several companies are watching this auction very closely.

Why does Google want the patents?

When revealing that it had struck the stalking-horse deal with Nortel, Google’s Kent Walker said that Google hoped to fend off patent trolls lawsuits with the Nortel patents, writing in a blog post that “… as things stand today, one of a company’s best defenses against this kind of litigation is (ironically) to have a formidable patent portfolio, as this helps maintain your freedom to develop new products and services. Google is a relatively young company, and although we have a growing number of patents, many of our competitors have larger portfolios given their longer histories.” (Update 11:35 a.m. PT: Florian Mueller of FOSS Patents wrote in to point out that patent trolls aren’t really deterred by patent portfolios, since you can’t assert your own patents against somebody who doesn’t make anything. Duly noted.)

Should we believe them?

Probably. Google doesn’t have much of a history as a patent-assertive company, although it’s playing defense on a number of fronts against patent claims from companies like Oracle as well as those that are suing its Android partners over mobile patents. Pretty much everybody is suing everybody these days in the mobile world, even though Apple (NSDQ: AAPL) and Nokia (NYSE: NOK) recently agreed to settle their differences. Google could use the Nortel patents to countersue people who sued it first as to improve its leverage, but they’d face a huge backlash if they went on the offense with the Nortel patents after making those types of public statements.

Who else is going to be involved in this auction?

Just about any modern mobile company you can envision. In recent weeks, Apple, Intel (NSDQ: INTC), Research in Motion (NSDQ: RIMM), Ericsson (NSDQ: ERIC), Microsoft (NSDQ: MSFT), ZTE, and patent holding company RPX have all been rumored or confirmed to be interested in the patent portfolio. In court filings, Nortel said that 105 parties expressed initial interest in the patents, and it whittled down that number to 40 parties who were asked to sign non-disclosure agreements and allowed to review the patents before deciding whether to bid.

As a result, The AmLaw Daily thinks that Monday’s auction “could set a record for the most money ever raised in a single public sale of intellectual property assets.”

How is this going to work?

The parties other than Google that are interested in the patents have already submitted bids to Nortel, which is in the process of evaluating whether or not those bids are qualified to participate in the first round of the auction. That’s probably why we’re doing this a week later than originally anticipated: Nortel announced last week that due to “the significant level of interest” in the process, it would need an additional week to make sure everything went smoothly.

On Monday representatives from Nortel will start the auction, revealing the subsequent bids received after Google’s initial $900 million offer. The best offer of those initial submissions will be declared the starting bid, and bidding will commence in $5 million increments from thereafter. It’s not clear if everybody will get little placards with their corporate logos to hold up when they wish to bid, or if one of the guys from the Mecum classic car auctions will be tapped to call the bids in staccato fashion.

When will we know who won?

Nortel and its creditors will evaluate each bid and decide whether or not it’s worthy before moving onto the next one. It’s not clear how many rounds they are prepared to go, but everybody who has submitted a qualified bid will be given the opportunity to top whoever is in the lead at the end of a round of bids. Complicating matters further, it would appear that the patents can be sold as a complete package or in pieces, according to one of the court filings.

A winning bid and an alternative runner-up bid will be selected and submitted for approval by both the U.S. Bankruptcy Court for the District of Delaware and the Ontario Superior Court of Justice in Nortel’s home country of Canada. A “sale hearing” is currently scheduled for July 11th to approve the final sale, and objections can be filed to the propose sale until July 6th, so it will be a few weeks before everything is set in stone.

Why should I care about this?

The winner of these patents could be poised to unleash a new wave of lawsuits against the mobile industry, or effectively blunt the mobile patent attacks that have become increasingly common over the last few years. This industry has evolved so quickly and has so far to go that the financial stakes are huge: billions of dollars are already being made on the sale of mobile devices and mobile software, and it’s only the beginning.

A mobile patent lawsuit arguably forced RIM of course in the middle of the last decade as they were forced to content with the pesky challenge from NTP, and the company has really never been the same since. Things are a bit different now that the industry is more mature and patent trolls are better understood, but every major company involved in the mobile industry wants to make sure they are protected against a similar outcome. RIM was forced to pay NTP $612 million for patents that may or may not have actually been legitimate, and that doesn’t even count the amount of money the company spent over six or seven years defending itself in court. (Update 11:35 a.m. PT: As noted above, existing patents wouldn’t have necessarily protected RIM against NTP.)

Hopefully, the process has forced the U.S. government to finally examine how patents are granted in this country and come up with some sort of reform that protects individual inventors while discouraging the frivolous lawsuits that seemingly make up the majority of patent cases these days. The U.S. House of Representatives passed a patent-reform bill this week, and President Obama has said he’ll sign it if the House and Senate can work out the differences between two similar bills.

Either way, it’s a turning point in the development of the modern mobile computing industry. As Google put it, like it or not, patent law is often a numbers game, and it’s not very often that such a large block of relevant patents comes up for sale at a time when companies like Apple and Google are sitting on piles of cash. They can afford to make this auction very lucrative for Nortel and very expensive for competitors.