Microsoft Guards Patent Secrets in $7 Billion Nortel Trial

May 12, 2014 4:47 pm ET

(Updates with arguments in fourth paragraph.)

May 12 (Bloomberg) -- Nortel Networks Corp.’s warring creditors aren’t the only ones focused on a trial to divide the more than $7 billion remaining after the Canadian telecom giant was liquidated.

Microsoft Corp. will also have lawyers on hand to guard secrets surrounding more than 6,000 patents that it teamed up with Apple Inc. and Sony Corp. to buy for $4.5 billion.

At a trial that began today, U.S., Canadian and European creditors are fighting over how to divide cash raised through a series of auctions after what was once North America’s largest telephone-equipment maker went bankrupt in 2009.

The European creditors, including British pensioners, said the Canadians are seeking 82 percent and the Americans are after 73 percent of the $7 billion under their respective proposals. The division of the $4.5 billion raised in the patent sale has been a key sticking point.

“The U.S.-Canada fight on the patents will be the main part of the trial,” Kevin Starke, a senior analyst with CRT Capital Group Inc. in Stamford, Connecticut, said in a phone interview.

The Canadian creditors, including Nortel’s pension system, said that because the company was based in Ontario and owned the patents, it deserves the cash that was paid for them by the technology company group, according to Starke. Canada is seeking everything from the patent sale and 90 percent of all IP proceeds.

U.S. Licenses

The U.S. creditors, including bondholders seeking full interest payments, said U.S. businesses held licenses for the patents, so they deserve the money.

Judges in Wilmington, Delaware, and Toronto are presiding over the video-linked proceeding. The tech companies that now own the patents said they fear valuable secrets may accidentally leak out during 25 days of testimony and argument and want the court to shield information concerning license agreements, potential litigation targets and other matters.

Nortel’s U.S. unit contributed about $5.3 billion in assets to the bankruptcy sales, said Sheila R. Block, a lawyer for the U.S. estate speaking in Toronto. That unit also contributed about 70 percent of revenue from 2001 to 2009. As of 2001, every unit had a fully paid up license for the patents in their geographic region in perpetuity, said James L. Bromley, a lawyer for the U.S. unit in Wilmington.

‘Administrative Simplicity’

The European group dismissed Canada’s bid for sole right to the patent proceeds, saying the parent held legal ownership only for “administrative simplicity,” according to Bill Maguire, a lawyer for the unit.

The proper way to make distributions is based on each unit’s financial contribution in creating the patents, Maguire said. Investments in research and development are used to establish economic ownership of the intellectual property, which is how Nortel calculated distributions when it sold assets to Alcatel-Lucent in 2006, according to Maguire.

“You reap what you sow,” he said.

The U.S. creditors would get about 73 percent of the $7 billion under their approach, with Canada getting about 11 percent and Europe the rest, according to an exhibit presented by the European creditors.

Canada’s model would give its creditors more than 82 percent, while the U.S. and European creditors would get about 14 percent and 4 percent, respectively. The European model would give U.S. creditors 50 percent, the Canadians about 32 percent and its own creditors the remainder.

1,000 Documents

About 1,000 documents may be used that Nortel’s U.S. attorneys say potentially contain confidential information. As the papers are presented to witnesses, they might become public as part of the court record. And while other documents may be safe to disclose in public, the patent holders still want to be able to review them before they are introduced.

The Canadian and U.S. creditors have said that without clear rules, the trial could be disrupted by the need to keep so many documents secret.

U.S. Bankruptcy Judge Kevin Gross has agreed to allow sensitive material to be blacked out. With so many documents involved, however, decisions on what to keep secret may have to be made while court is in session.

Lawyers for the joint venture that Microsoft, Apple and Sony formed to buy the patents in 2011, Rockstar Consortium Inc., will be following the trial along with Ericsson AB, which bought Nortel’s wireless unit for $1 billion.

Show Why

Gross said that on certain patent-related documents, he would defer to Redmond, Washington-based Microsoft and the other companies about whether something should be kept secret. Anyone challenging the need to keep a document confidential would have to show why it should be made public, Gross said.

Nortel filed for bankruptcy after losing almost $7 billion since 2005. At its height in 2000, it reported $30 billion in annual revenue, had a market capitalization of $250 billion and employed almost 93,000 people, the company said in court papers.

“Today it’s every debtor for itself making a territorial grab” for the sale proceeds, said Brian E. O’Connor, a lawyer representing about 36,000 U.K. pension claimants. “While they fight like jackals over the decaying carcass,” the pensioners are being harmed, he said.

The case is Nortel Networks Inc., 09-bk-10138, U.S. Bankruptcy Court, District of Delaware (Wilmington).