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.