Coincidentally, there have been a number of objections made to the court in Delaware regarding the procedural rules of the auction and the terms upon which a sale will be made. These objections have come from the likes of Motorola, Oracle, Microsoft, AT&T and EADS, and relate to the definitions and permissible transfers of existing licenses. (The original terms of the Sale Agreement state that the patents would be sold subject to all “Commercial Licenses, certain Intercompany Licenses, and all licenses under known Outbound License Agreements and Cross-License Agreements”. It was also agreed that “Unknown Licenses” would not be transferred)

But I digress…the purpose of this post is not to analyse and dissect the definitions of these licenses, nor the implications of these terms; it suffices to say that the majority of the objections raised relate in some way to the transfer of licenses. (AT&T’s objection concerned patents involved with Industry Standards)

In this post we reveal what we know about the auction’s rules and procedures.

Unfortunately, there is not a great deal of information online, but we have fastidiously ploughed through the court documents and can now reveal the following:

• The auction will be held in private at the New York offices of Nortel’s legal advisors, but will be transcribed or recorded on video. We wish it was being shown live and the rights being sold but they seemingly chickened out of this
• Only the ‘purchaser’ (Ranger Inc. – a wholly owned subsidiary of Google) and Qualified Bidders will be entitled to bid
• The portfolio may be sold in a single sale to a single purchaser, or in parts to several purchasers. This probably reflects that like most portfolios the Nortel portfolio will have some beautiful gems, specifically those patents declared essential to Standards (one of which would be worth an awful lot to a player who had little IPR, and probably even more to a troll like IV) and a lot of almost worthless patents
• Companies must bid in excess of $929million under the rules approved by the Court, to top Google’s stalking horse bid. We have not been able to determine how this ties into the ability to bid for part—if I bid $500m for a part, I don’t top the stalking horse bid but the total sale may be more if others bid for part. We can only assume that in this instance a bid for part would be approved by the Court on a pro rata basis
• Each incremental bid at Auction shall provide net value to the estate of at least $5,000,000 over the starting or leading Bid, although this figure is subject to modification by the sellers
• Full disclosure is required regarding the identity of the bidders (and any other entities involved with the bid, including entities sponsoring, financing, participating in or benefiting from the bid, including benefits accrued through licensing) and all material terms of the bids will be disclosed throughout the auction. Why this is important is not really clear: we suppose that the sellers want to ascertain with whom they are truly dealing but it would seem more important just to maximise the sale value. How many auctions bother with knowing who is bidding? Whether this information can be provided confidentially to the seller and therefore not be disclosed outside of the bid process is unknown
• A round of bidding will conclude after each participating Qualified Bidder has had the opportunity to submit a Subsequent Bid with full knowledge of the Leading Bid. Like very high stakes poker, this should ensure optimum returns
• Qualified Bidders and their equity holders have to confirm that they will not and have not colluded with regards to the bidding and/or the transaction. How this will work in practice we have not quite ascertained. Colluded is an interesting term; RPX, we’d suggest, would have to inform its co-ordinated efforts with its members, though how an RPX member like Intel bids alone and via RPX without somehow colluding is intriguing to think about. Think also about this scenario: I’m RIM and most likely unable to financially outmuscle say Apple or Google—could I decide to call Apple and offer to stand aside in return for a license if Apple succeeds? Is this collusion?

Once the bidding has concluded, Nortel and their advisors will select the highest “or otherwise best offer or offers” to determine which Qualified Bidder(s) is/are successful.

Watch this space. Tomorrow we will be discussing the runners and riders, and will make our predictions as to who the successful Qualified Bidder(s) might be….

Catching up today, I listened to their podcast: A Private-Equity Boss In Four-Inch Stilettos about Lynn Tilton, CEO and founder of Patriarch Partners. Patriarch describes itself as:

A vertically integrated distressed private equity firm with robust in-house operational turnaround expertise

Basically they are a $7 billion PE outfit that specialises in companies about to go bankrupt. The Planet Money team followed Lynn and one of her investments, catalog company Spiegel and listened to their experience about being rescued through private equity money.

It was down to the wire for Spiegel for getting the investment from Patriarch to save the company. The managing director was already at the stage of talking to their bank’s liquidators about selling the rest of Spiegel’s merchandise of clothes and accessories and closing things down.

To hear Speigel tell it in the story, it very much seems the bank’s only focus was on selling the remaining merchandise and not on the Spiegel brand or its other intangible assets, such as its long customer relationships and sales database or its e-commerce platform.

From an IP perspective, ignoring the intangible assets misses a HUGE likely chunk of the value of a company. For most companies these days, the largest part of their value will be their intangible and IP assets. It very much seems like Lynn and Patriarch saw the value of Spiegel’s IP assets where the bank did not and snapped up quite a deal.

The sad thing is that from what we hear, many times in bankruptcy or insolvency the true value of the IP gets lost and the focus goes back to calculations around the bricks and mortar physical assets.

Definitely worth a listen.

A view. To try to make this simple to understand.

To call Nathan or IV a troll is incredibly simplistic.

IV has built one of the Worlds most sophisticated businesses and it has the potential to have substantial direct and indirect returns for its shareholders. IVs people are amongst the brightest IP and business minds you could wish to find anywhere. And what they have done is combine lots of the smartest and newest ways of creating value from IP into the same entity in a patent and IP play on an absolutely massive scale.

 They are an invention house, and have adopted and reinvented leading edge patent strategies to create a portfolio of their own IP which, in its own, would be of high high worth.

 In combination they have acquired patents, hard to say how many as they are very private, but lots of patents on an unprecedented scale. Some say they have 30,000 patent families, but it is impossible to know exactly how many. What is believed though is that this number puts them in the Premier league (up there with IBM, Nokia, Qualcomm and others) in terms of IP influence. The buying has not come cheap but they’ve worked hard on starting with buying anything to moving to buying quality.

 And along the way they’ve worked hard on their IP reputation. Ask people who know anything and they’d say that if IV breathes in your direction, take a license. Perfect in the US world of IP where licenses are cheaper than litigation so companies like Acacia Research, a genuine troll, can prosper. But they don’t want to see seen to be litigators…that’s bad for reputation so they outsource that part to others who aren’t so bothered about what the outside world thinks of them.

 This is IP genius on a scale never seen before and which would be hard to come close to replicating again in a generation given what IV has successfully done. If you imagine or remember one of those days when the idea you had could change the world. Amazingly though almost nobody outside of the IP community and largely outside of the US has a clue that this is going on. Which it has been for 10 years.

The full impact of this is to be seen. What Nathan though appears to realise in his public statements is that all things intangible make up a large and unexplained part of shareholder value. The accountants don’t explain it, shareholders don’t ask about it, most business leaders don’t understand it. It still amazes me that people don’t even ask! IV is playing an arbitrage game; it knows what is valuable and it knows the value to it of what its buying. The sellers do not.

 This is grand and to be complimented. It will be hugely successful.

 Andrew

I wonder what a telco with 405m users would be worth? That is an awful lot of relationship capital to work with.

• what is IP and what are intangibles
• why should we care about IP (varying importance for different types of companies)

Any comments or feedback, please don’t hesitate to get in touch.

The first in the series will be on 23 September 2009 at 12 noon UK time (BST) or 13:00 CEST. The debut session will dive right in and tackle Best Practise in IP Diligence for Investors and address:

• what is IP and what are intangibles
• why should we care about IP (varying importance for different types of companies)

The session will then dive even deeper into:

• The real world vs the legal and theoretical approaches to diligence
• IP assets diligence (what questions to ask)
• IP risks diligence (working back from full freedom to operate)
• IP ownership (areas to specifically watch)
• Optional diligence areas (Strategy and Governance)

For more, including how to register, see the Best Practise in IP Diligence for Investors on the European Venture Capital Association website. You can always keep up with ipVA’s activities here and over at our news feed on ipvalueadded.com.

A short Timeline

2001 – Kazaa, a p2p filesharing technology, released (which went on to some IP legal problems of its own).

2002 – Skype founded by Kazaa creators

2003 – initial release of Skype

2005 – eBay buys Skype in a $2.6bn deal (totaling 3.1bn through to today)

2009 – eBay announces that Skype will IPO and be valued at over $2bn. Joltid, a company set up by Skype founders claims that eBay/Skype only has a license to a core technology used by Skype to work. eBay must pay money for a continuing license or face rewriting its core code while keeping its millions of users happy (no small task).

The stakes

Skype has 480 million registered users its revenues in the last quarter were $170m. eBay was thought to be able to use Skype to produce gains with its auction site on high end items, but any added benefits to the eBay site have not materialized.

The Guardian states that the Joltid/eBay dispute is driven by Niklas Zennström – one of Skype’s creators and owner of Joltid – as a negotiation strategy in an effort to buy the company back.

The technology

Skype’s founders and key developers know p2p. They helped develop Kazaa before tackling VoIP with Skype and then went on to found Joost. The core piece of code at stake between Skype and Joltid is a product called Global Index:

Global Index™. Global Index is the world’s most technologically advanced, scalable and field-tested peer-to-peer technology. Global Index creates a self-organizing and self-healing distributed storage, transport and data object management system that does away with the costs of traditional datacenter solutions and enables a range of applications from communications to broadcasting and beyond.

The biggest implementation of Global Index to date has been Skype where Global Index enables peer-to-peer voice, video and chat communications.

They are also patent holders as well:

Joltid also holds a comprehensive portfolio of intellectual property including US patent 7,480,658, covering distributed database systems and co-ordinated decentralized peer-to-peer computing.

I did a quick search of esp@cenet and the USPTO website (including assignments database) but only found one Joltid patent, which is the 7,480,658 patent mentioned above. It was granted in January of 2009, and if that’s the core of their litigation on the patent side of things, they should hope it’s a good one.

The dispute

Joltid claim that they only licensed their technology to Skype, and that the license has terminated.  This means that eBay paid billions for Skype without sorting out the licensing issues or having any sort of strategy around re-writing the core Skype code. The funny thing is that this is not the first time that there has been an ownership dispute over this same technology.

The end result is that eBay is stuck litigating in the English courts while it scrambles around for a solution to this ownership problem. It is much like facing down a patent troll or a competitor when going to IPO. The immediate parallel that comes to mind is Wolfson.

Edinburgh based Wolfson Electronics was set to go for IPO in 2003 in the middle of a down market for tech stocks. The previous year it posted £20.2m in turnover, with £2.4m coming from the US and expected to float for £213 million. Only days before Wolfson prepared to go public with its CEO book-building across Europe, Wolfson’s competitor in the US, Cirrus Logic, files a patent infringement suit. The suit delays the IPO, but only slightly as a result of a quick response and a clear presentation of the IP risks by Wolfson. They achieve a high price despite a tough climate for tech stocks.

It seems to me that even if eBay found out they made a mistake after their initial purchase of Skype by not securing a formal license and ownership of the relevant IP, they should have at least been planning quite heavily for a dispute later on, particularly at IPO. Like Wolfson, they should have had an answer waiting.

In short, this corporate reporting practice has been looking at moves to put IP on the balance sheet from the angle of accountants, while we examine ways to make IP more relevant to the business from the perspective of the legally trained. Each approach takes into consideration the other (we look at ways to move IP assets on to balance sheets and they consider the impact of the different IP rights, for example), but I think it is safe to summarize the approach in this way.

Some thoughts and questions that came out of this conversation:

• Often the view is that if not in the financial statements then not important – both a part of the reason IP gets ignored and a reason to find ways to move it onto the balance sheet.
• In small cap companies, the relationship is often more “personal” and so people will be looking beyond a “I-Capital statement” anyway.
• How do you build confidence (internally and externally) around the forecasts in an I-Capital statement?

Incidentally, through this conversation I was made aware of World ICI (WICI), which with my other hat on, specifically sparked my interest in data.  They are working on, in part, data frameworks for corporate reporting through XBRL frameworks. XBRL stands for eXtensile Business Reporting Language and is way to, put simply, make business reports machine readable so that machines can do all sort of neat stuff with them.

For some people, having a patent says: “We know about the IP system, we use it, and we are protected.” Conversely, if these same people expect to see patents and don’t (or don’t see “enough”), then they may feel that the company is not doing enough in the IP area with connected negative connotations.

Sometimes companies need patents because investors and analysts think that they should have them, and simply telling a great IP Story around why you don’t isn’t enough. One simple solution: get some patents.

While I still hold by that as an option, I’ve been thinking lately about the opposite situation:

When can having a patent attracted unwanted attention?

Same type of company in this example: a company that doesn’t rely on patents as part of its core commercial or IP strategy.  But this time, in a market where patents don’t play a major role in how companies are run, structured, and the risks in the marketplace.

An example could be a consumer internet company relying primarily on e-commerce. Sure there are patents, such as the famous (or infamous) 1 Click patent, that impact this area, but the primary model for this business is selling goods online. The most important IP would likely be branding, perhaps some proprietary software, and customer databases.

What happens if in the process of running this business they think of something patentable? And then go and patent it?

Having just one patent changes the ballgame from a VC/Investor perspective.  They suddenly start to think about the IP side of the business that much more carefully. The patent will likely receive quite a bit of attention. Costs won’t likely be a factor for an investor to do a pretty thorough review of the patent as there will be just the one.

The focus switches from the far more important stuff – strong brand, customer relationships, sales figures, expansion plans, market share – to the patent that’s not relevant to the business model. The patent then costs more than just the filings and renewals – it becomes a distraction for the business trying to raise money.

The lesson for companies: if you patent, do it well or not at all.

Speakers in the hour-long web seminar will:

• Discuss where the global IP service market is heading;
• Ask why Europe lags behind the US;
• Explain the European perspective on IP services;
• Highlight some of the practical approaches to IP valuation; and
• Examine how to make IP a priority for CEOs.

Please see the direct event link or MIP Webinar page for more info.

This web seminar will be moderated by James Nurton of Managing IP and speakers will include:

Andrew Watson, ipVA

Benoit Geurts, Exponent IP

Ben Goodger, Rouse

Elizabeth Gutteridge, Deloitte LLP

UPDATE (HT to Jackie): And I should mention that the webinar is free (registration is required).