Nortel, Google, and the Ongoing Rights of Licensees in Bankruptcy [Updated]

We have previously discussed Google's $900 million Stalking Horse bid to purchase Nortel's portfolio of more than 6,000 patents.  Nortel was a Canadian-based telecommunications equipment manufacturer. The company is now bankrupt and the company's assets have largely been sold to pay its debts. The patent portfolio represents one of the last remaining company assets.

Over the years, Nortel has licensed its technology and its patent rights to various other companies, including Research-in-Motion, Microsoft, Plantronics, Foundry Networks, and others.

An interesting aspect of the proposed transfer would involve "vesting all of Nortel's right, title and interest in and to such patent assets absolutely in the purchaser free and clear of and from all encumbrances."  Ongoing licenses would also be rejected and terminated as permissible by law.

Bankruptcy has a tendency to disturb well-settled contracts.  In particular, a bankruptcy trustee has the right to either assume or reject executory agreements.  Executory agreements are typically seen as any ongoing contract where both parties have ongoing material obligations.  When the bankruptcy trustee rejects an executor agreement, the wronged-party has a right to collect for breach of contract, but only as an unsecured creditor. (Unsecured creditors typically receive very little money from the liquidating party.)

Both US and Canadian law provide an important exception for executory licenses of patents and copyrights.  See Section 365(n) of the Bankruptcy Code.  A patent licensee can continue to enforce its rights under the license if it continues to pay any royalty due.  Courts do typically allow the trustee to prevent assignment of non-exclusive licenses. In this case, Nortel's trustee has "affirmatively and reasonably refused to give consent … to any renewal, extension, assignment, amendment, waiver or modification of any license [or] any Cross-License Agreement…. [No licensee] shall have the right or power to transfer any of its obligations, right, title or interest in the licenses."  The trustee's proposal also indicates that licensees who do not come forward to explicitly claim their right as licensees will lose their rights: The licenses will be terminated at "closing and shall forever be barred, released and extinguished."

Moving forward, the scope of rights granted to licensees and the potential licensing revenue stream will likely have a major impact on whether competitors bid against Google.  Microsoft has publicly claimed its belief that its rights as a licensee will continue to bind subsequent purchasers of the Nortel patents.

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16 thoughts on “Nortel, Google, and the Ongoing Rights of Licensees in Bankruptcy [Updated]

  1. Thanks, Dennis. In that post I was focussed on the mirror image question of whether a successful bidder would be able to step into Nortel’s shoes as licensee. Your post above hit on what is probably the larger concern — i.e., whether Nortel’s licensees will have to renegotiate with a successful bidder.

  2. Dennis,

    I wish I could agree with you, but even the federal bankruptcy courts engage in a choice of law analysis before deciding what law should be used to interpret the relevant contract language. While the Ninth Circuit (applying federal common law) has affirmed a district court’s affirmance of a bankruptcy court’s order denying a debtor’s assumption and assignment of a patent license — see link to bulk.resource.org — many other bankruptcy courts have refused.

    Meanwhile, California state courts at least have refused to accept federal common law jurisdiction in this area.

    link to scholar.google.com

    How comforting is it to licensees to know that the interpretation the license they’re paying could be so different depending on what court the lawsuit gets filed in?

    This is the most under-appreciated problem for the patent system. But it’s never on the agenda in reform legislation because the legal analysis is so complex.

  3. Michael, in bankruptcy the choice of law issues may be simpler than in traditional contract law issues because of the federal bankruptcy laws that establish the rules of the game. Here, the right to reject an executory contract stems from the statute itself. (Section 365 of the Bankruptcy Code). There are some differences in interpretation based upon circuit splits. In addition, the recent Qimonda case is interesting because it involved rejection of US licensing rights based upon a German bankruptcy.

  4. Ned,

    There are numerous areas of federal common law that remain post Erie, and the Supreme Court has upheld the constitutionality of federal common law on numerous occasions.

    In Clearfield Trust (1943), the Supreme Court recognized the need for federal common law in regulating commercial paper issued by the United States. How does patent title invoke federal interests less than commercial paper?

    In Kimbell Foods (1979) the Supreme Court recognized that federal common law might supercede state common law where federal programs, by their nature, are and must be uniform in character throughout the nation. Nobody would question whether questions of patent law would need to be applied uniformly throughout the nation. Why then question whether questions of ownership (including transferability of licenses) should be applied uniformly throughout the nation?

    Moreover, in view of the rulings in states like California, there is a significant conflict between state law and federal patent policy — a key consideration the Supreme Court has cited in deciding whether or not federal common law should be recognized.

    Last but not least, federal courts legislate in the interstices all the time. The argument that courts cannot make rules because they are not a legislature is a red herring.

  5. Michael, I really think you would need Congress to legislate that one. The Supreme Court cannot override the constitution and it cannot legislate.

  6. “Courts do typically allow the trustee to prevent assignment of non-exclusive licenses.”

    Which courts? State or federal? If state, which state?

    There are complex choice of law issues at play here. The Supreme Court would do everybody a huge favor by affirming the Federal Circuit’s application of federal common law to interpretation of patent licenses and assignments in Stanford v. Roche.

  7. Given all the “big boy” parties involved, the high value of the assets and licenses, and the legal gray area present, me thinks this will end up being one for the Supremes to sort out.

    See ya’ in ’15!

  8. Guys I have a scholarly question for you. Does anyone know, with certainty, when lulz were first discovered? I presume that they were in existence since time immemorial, but who were the first to recognize them for the awesome that they truly are?

    WE MAY NEVER KNOW SINCE ED SHUT DOWN!

    link to encyclopediadramatica.com

    is gonzor, maybe forever. Support the new ED OHi for a better tomorrow!

  9. I wonder if 365(n) would apply to the common situation where a reciprocal patent licensing agreement is created with the amount of each party’s royalty payments structured such that no actual money changes hands.

    Does that imply that the asset purchaser can not terminate the licensee’s rights, but in turn also obtains a non-cancellable license of the licensees’ patents?

  10. “Microsoft is separately part of a deal to purchase 882 other Nortel patents for $450 million.”

    I think you mean Novell; Microsoft are part of the CPTN group which is to pay Novell $450M for Novells 880 strong patent portfolio.

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