A Canadian court and a U.S. court (in Ontario and Delaware respectively) have agreed on how the proceeds of the Nortel patent auction ought to be split as between the parent company and a U.S. subsidiary.
Roughly $4 billion in bond debt was attached primarily to the two national units of the multinational company: Nortel U.S. and Nortel Canada. Meanwhile the parent corporation left behind an unfunded pension in its U.K. arm. So hedge funds that had invested in the debt of the two North American national units found themselves effectively at odds with the pensioners of the U.K. branch.
On the one hand, to the extent assets were to be left in the hands of the global entity, they would be available for the bondholders. On the other hand, it was in the interest of the group of hedge funds (a group that included Centerbridge Partners, Monarch Alternative Capital, and Quantum Partners) that as many assets as possible be attributed to the piggy banks of the national subsidiaries, backing those bonds.
The allocation decision issued May 12th adopted a "modified pro rata allocation model" -- translation, victory for the pensioners. Nortel will be treated in large part (though not rigidly) as a single global entity for purpose of the allocation of patent wealth.
Three Common Takes on this News
Most of the accounts of this that you may have seen thus far have taken one of three tacks. Some look at the tangled status of the litigation that makes this bi-national agreement necessary and notable: the news that the courts are finding a way out of a maze is news because the maze is so intricate. Certain the maze took a long time developing itself. The bankruptcy was filed in 2009; the auction took place in 2011; this decision in 2015; the litigation has a long way to go yet.
A second tack has looks at the lighter side of the auction, for example at Google’s bid of pi for Nortel Networks’ wireless patent portfolio. Specifically, Google big $3.14159 billion. The great thing about bidding pi is that if another team that loves irrational-numeric constants bids e, then pi wins.
A third take has been the whole “pensioners beleaguered by nasty speculative hedge fund moguls” angle. But of course the bankruptcy codes of the nations involved don’t exist so that judges can decide which potential payees are worthy. Nor does one really enlighten us by telling us that the hedge funds lost this one. They may or may not end up losing when all is said and done – there is a long way to go yet. But even if they do, the fact will simply illustrate the truism that the pursuit of alpha involves risk.
A Fourth Take on the News
Personally, I think there’s a more novel take-away from this decision, at least on the Delaware side of it. I’m struck by a brief passage therein that suggests the degree to which the United States dominates the patent-granting and patent-litigating world, shown in this binational litigation about a very multi-national company. The U.S. is the 99.5% country. That is, a full 99.5% of Nortel’s technologies were protected by patents filed in the U.S. nearly three-quarters of Nortel’s technologies (73% to be picky) were protected by patents filed only in the United States. Those numbers strike me as extraordinary.
The U.S. also has a reputation (well deserved) as one of the most litigious spots on the planet. The fact that a Canadian headquartered concern did most of its patent filing in the U.S., indeed protected much of its valuable technology with U.S. patents only, speaks volumes to the high-tech branch of this national trait.
Accordingly, much of our pursuit of alpha amount to betting on what courts will say and do, on technology as on much else.
Context
Another contextualizing fact here? The winning bid in this case came from Rockstar, a consortium made up of Apple, Blackberry, Ericsson, Microsoft, and Sony.
Rockstar sold much of this portfolio to RPX Clearinghouse last December. The RPX Clearinghouse is an entity that claims to be an anti-troll. That is: a defensive patent allocation service that licenses to its members to whole range of patents and associated rights in its portfolio, in return of course for annual membership fees (calibrated to the member's corporate size).
There is a lot to be said about the whole idea of defensive patent allocation services. Let this post serve as my IOU--I’ll say some of what there is to be said, soon.