Friday, July 29, 2011

IBM's patent deal with Google

Bloomberg reported that Google "acquired a batch of patents" from IBM without specifying how many and in which field. According to SEO by the Sea, the USPTO was informed on July 12 and 13 of the fact that Google was assigned 1,030 granted patents from IBM in a variety of areas ranging from chips and object oriented programming to relational databases and business processes.

I have looked up the USPTO's patent assignment database, and based on random picks, the information reported by SEO by the Sea is plausible. I am going to take a look at more of the reassigned patents in the days ahead.

Execution date of most or all of the assignments:
May 3, 2011

There are different execution dates of the assignment documents. Based on my random picks, most (if not all) of those assignments were signed on May 3, 2011.

The Nortel patent auction took place two months later. Google still made a $4 billion bid to buy Nortel's patents and is currently rumored to be trying to acquire InterDigital LLC. The efforts Google continues to make after the IBM deal means that Google doesn't believe this one deal is enough to address its patent issues. That said, let there be no doubt that this is very significant progress for Google, which held only about 700 granted patents by a recent count before these assignments (and less than 600 in January).

Google's tactical options depend on encumbrances

If those patents were unencumbered by existing license agreements, Google could use them in a variety of ways.

In the near term, one of the most obvious ways to put them to use would be to pick some that may read on important Oracle products and propose to Oracle a cross-license that would resolve the Android IP dispute on more favorable terms than Google could negotiate without such leverage. Many of the transferred patents cover fields of technology that are key to Oracle, though this doesn't automatically mean that Oracle infringes any valid ones of them.

A countersuit by Google against Oracle would likely result in further escalation, given that Oracle owns more than 20,000 patents and could probably attack Google in Java-unrelated ways. Also, Oracle has a head start (unless the ongoing Java/Dalvik-related lawsuit gets stayed). But if Google wants a cross-license on sweet terms, it might have to countersue.

Google could also sell some of those patents to embattled Android device makers such as HTC. HTC could then, for example, use them in countersuits or counterclaims against Apple, possibly with an obligation to sell the patents back to Google after the dispute.

But all of this is a matter of encumbrances, and it's highly unlikely that those patents are entirely unencumbered. IBM has over the years entered into many license agreements with other companies in the industry. It's hard to find announcements of such deals, but IBM has always been very active in that regard. At least in negotiations in which IBM wasn't able to unilaterally dictate the terms, licensees will usually have ensured that their license agreement can't be rendered useless or circumvented by selling the patents to another entity. Lodsys is an example of a patent holder who bought patents that a previous owner (Intellectual Ventures) licensed to many others, and Lodsys and Apple now disagree over whether Apple's related license extends to its app developers.

I don't know if IBM ever licensed any of these patents to Oracle. If it did, Google would not be able to use the related patents as leverage against Oracle. The same applies to any other company in the industry, be it Apple, Microsoft, Nokia or you name them.

How strong is Google now?

If there are encumbrances that limit Google's ways to use those patents, the strength of this package deal could be much less than it appears at first sight. Assuming for the sake of the argument that Google has many tactical options regarding different companies asserting patents against Android, the question is how much Google can do now to protect Android.

This is difficult to assess from the outside, but my feeling is that this deal can help Google to defend itself against other patent holders if it's sued directly. It can serve to deter some companies from suing Google directly. But it's hard to imagine that this deal puts Google into such an incredibly powerful position that it can give an intellectual property guarantee (including indemnification) to its device makers.

IBM's motivation

With tens of thousands of U.S. patents, IBM can easily sell 1,000 of them without being in an appreciably weaker position. The question is whether this was a lucrative deal for IBM -- an opportunity to cash in on patents that IBM might have earmarked for divestment -- or driven by a a more strategic rationale.

Most patent auctions take place in private. Maybe IBM auctioned these patents off and nobody talked about it because of non-disclosure agreements. But if IBM had shopped those patents around, it's likely that something would have leaked, at least after the transaction.

If IBM didn't sell those patents in an auction, some other questions come up:

  • Why didn't IBM seek to maximize the selling price? A month before the execution date of the deal -- May 3 --, it was already known that Google's stalking horse bid for Nortel's patents amounted to $900 million, and everyone knew those patents were going to be sold for more since an auction isn't truly an auction until it's for real. So the obvious way for IBM to drive up the price would have been to have some of the same players bid. After all, IBM's executives have a fiduciary duty to sell the company's assets at the best possible price. They can't just sell patents below market value unless there's a strategic reasoning. That leads to the next question.

  • If the motivation was more on the strategic than the financial side, why would IBM support Google (potentially against different other companies)? IBM doesn't have any direct economic benefits from Android. While Android is basically a Linux fork, IBM's own business is about Linux, not Android, so any effects would be highly indirect and actually doubtful. Instead, IBM might be interested in Android as a platform for its own mobile client applications. Mobile access to enterprise solutions is increasingly important. IBM appears less concerned about a possible need to compete with Google's cloud services in some fields in the future -- maybe not right now, but this could happen, and Google could use Android as leverage against everyone else's -- including IBM's -- offerings. The deal between IBM and Google may address this potential future conflict in some way.

  • It also seems that this direct deal between IBM and Google bypassed the Open Invention Network, a patent holding firm that claims it wants to protect Linux against patent assertions. Google recently became an associate member of the OIN, and IBM is one of its founders (and probably the most active player involved with it besides Red Hat). While the OIN doesn't cover Android so far (otherwise Oracle couldn't have sued Google), IBM could have tried to bring those 1,000 patents into OIN -- possibly with a significant financial commitment on Google's part to support the transaction and a broader scope of the OIN. The fact that IBM and Google sidelined the OIN in this case is interesting. The OIN may play only a secondary role in IBM's and Google's future plans.

  • IBM actually sided with Oracle late last year with respect to the Java Community Process against Google and the Apache Software Foundation. But if IBM and Oracle don't have a cross-license in place (maybe they never formalized a patent deal because they thought that destruction is mutually assured if they sue each other), then IBM's patent deal with Google could now give Google leverage to weaken Oracle's control over Java.

Again, the above bullet points are all based on the assumption that it wasn't just a cash-in-on-excess-baggage type of deal. I believe it was about more than that, but I don't know for sure.

[Update] I also gave comments on this to the Los Angeles Times and VentureBeat. [/Update]

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