Remember those halcyon days of the telephone industry? Switching systems dominated our thinking; Western Electric and Northern Telecom and Automatic Electric were the predominant manufacturers. Step-by-step and crossbar dominated the field, but thought was being given to electronic switching.

In 1965 the first commercial electronic central office appeared, developed by Bell Labs, and installed in Succasunna, New Jersey. It employed electronic control and electromechanical switching.

But that was not enough. In 1969 Northern Electric Laboratories (the predecessor to Bell-Northern Research), started looking into the possibilities of digital telephone systems. The first of these digital systems was shipped in 1975, and the following year Northern Telecom announced the "Digital World". The most well-known of the Digital World product family was the DMS-100 -- a fully digital central office switch. This system was a major contributor to the company's revenue for close to 15 years.

Northern Telecom grew and grew and grew. By the 1990s it was involved in virtually all aspects of the telephone industry. At its peak it employed more than 94,000 worldwide. But this growth was not sustainable; stock market speculators, counting on continuing growth, bid the stock up to unrealistic levels. The speculative telecom bubble of the late 1990s, which reached its peak in 2000, finally burst. Northern Telecom would become one of the most spectacular casualties.

For the next 8 years there was turmoil in the executive wing. CEOs and CFOs came and went. Two-thirds of the company's workforce were laid off. Restructuring became the norm.

But none of this worked, and on January 14, 2009, Nortel (a name selected after an earlier acquisition) filed for protection from creditors in the United States under Chapter 11 of the United States Bankruptcy Code. Initially the company hoped to re-emerge from bankruptcy (and it paid top dollar for retention bonuses to almost 1,000 key executives). Later that year management decided such a move was hopeless, and announced that it no longer planned to emerge from bankruptcy protection. It would seek buyers for all of its business units.

And buyers were found! In the remaining months of 2009 and in early 2010 business units were sold to Ericsson, Avaya, Ciena, Kapsch, Hitachi, Genband, and Public Works and Government Services Canada.

What was left? A portfolio of some 6,000 patents! These patents cover wireless, 4G, data networking, optical, audio, Internet, Web search, social networking technology, and semiconductors. The most valuable have to do with long term evolution (LTE), the technology being touted for 4G wireless networks.

Who is running this auction? And why would a company be interested in 6,000 patents? First, the "who". Nortel (what remains of it) selected a company called Global IP Law Group to become its intellectual property consultant. This firm spent 3 months reviewing the 6,000 patents, and then organized them to make the bid process easier.

Then the "why". The obvious answer is so that a company purchasing the patents can use them in products that they themselves can develop and sell. A less obvious answer is to serve as protection against future litigation. Better to pay for, and own, a patent than take the chance of using some part of it and being sued at a later date. You might say it is a form of protection. It is quite possible that the purchaser of these patents could benefit from them even if it as no intention of using them in a product -- simply license some company that does manufacture this type of equipment,

Who were the bidders? The list reads like a Who's Who in the telecommunications business. There was, at the head of the line, Google. The company was approved to make an initial bid -- a stalking horse bid -- to get things rolling. Its bid was $900 million, certainly not a trivial amount. Other bidders were Sony, Apple, RIM, EMC, Microsoft, Ericsson, and Intel. The actual auction, held June 26, 2011, at the law offices of Gleary Gottlieb Steen & Hamilton, attracted more than 100 participants.

Is there enough money available to pay for this portfolio? Oh, my, yes. Google had more than $36 billion of cash on hand. Apple has nearly twice that at $70 billion. Even Intel has $12 billion, and Ericsson has $13 billion.

Is everything going smoothly? Not exactly. Objections to the bidding procedures have been submitted by Microsoft, Oracle, HP, Nokia, EADS, Motorola Mobility, and four telecoms. The sticking point is what can and cannot be done with these patents after they are sold. At the present time the agreement approved by the bankruptcy court said "the purchaser of Nortel's intellectual property could engage in a 'patent hold up' of the companies reliant on the continued licensing of Nortel's patents." This says that the purchaser is not required to abide by prior patent licensing agreements. The objectors say that any purchaser should be required to continue to honor Nortel's licensing obligations.

So what happened? Six companies -- Sony, Apple, RIM, EMC, Microsoft, Ericsson -- formed a consortium and pooled their resources. The winning bid: $4.5 billion! Five times Google's opening bid! It's fair to assume that their primary motivation was to gather legal ammunition for potential law suits and to out-flank Google, which has done amazingly well lately with its Android software. (None of the winners use Android in their smartphones). This approach might be especially meaningful to Google, in that the company is young, and consequently has a relatively small patent portfolio (Google, 701 patents, Sony 34,307, Apple 1,830, RIM 1,950, EMC 2,150, Microsoft 17,936, Ericsson 9,334)

The Nortel saga is almost over. A once-proud company has been a victim of the economy, questionable management, giddy optimism, and changing technology. The last segment of the company -- a vast patent portfolio -- has now been sold.

Patent Trolls
On the morning of February 14, 1876, a patent was filed at the Patent Office in Washington D.C. by Alexander Graham Bell. This patent, No. 174,465, was allowed on March 3, 1876, and issued on March 7. It was entitled improvements in Telegraphy, and did not so much as mention the word telephone. This patent has been challenged thousands of times in court, and has continued to withstand the challenges.

Bell was the first to patent the telephone.

A patent is a set of rights granted by a national government to an inventor for a limited period of time in exchange for a public disclosure of an invention. Note that a patent is not a right to practice or use the invention -- rather it is a right to exclude others from practicing or using the invention.

Also, like any other property right, it may be sold, licensed, transferred, given away, or simply abandoned.

To put it simply, a person (or company) can buy, and enforce, a patent even if that person has neither the capability or intention of developing the product described by the patent. The enforcemnt can be done by suing others for infringement of these patents. The term applied to this person is patent troll. (The term was popularized in 2001 by Peter Detkin, former assistang general counsel of Intel.)
 
All of this has suddenly become timely because Nortel, which filed for bancruptcy some time ago and then decided to liquidate, has auctioned off a portfolio of some 6,000 patents.

Those patents, some of which have to do with Long Term Evolution (LTE), the transmission scheme used in 4G cellular systems, are very valuable.

And the patent trolls are salivating.

A conventional technology company will likely spend millions of dollars developing a product, and then, to protect the technology of that product, file a patent. That company will then further develop the product or find additional uses for it in an attempt to recoup the development costs. It will also monitor the marketplace to search for infringing technologies. (In many cases the infringing companies are unaware of the existing patents.)

If a company is notified that it appears to be infringing a particular patent, there are frequently serious consequences. It is, of course, possible to challenge that company, but this can be very expensive. The cost of defending against a patent infringement suit is on the order of $1 million before a trial, and $2.5 million for a complete defense. Frequently a company will choose to settle rather than fight the case in court. (The uncertainty of the outcome of jury trials also encourages settlement).

The company pejoratively known as a patent troll sees things differently. By one means or another it has become the owner of the patent, and it has every right to defend that patent. Even, it must be pointed out, if it has no intention of using it vis-a-vis product development or sale.

The usual starting point is to follow the industry, watch news coverage and analysis, and participate in industry events. Published patent applications are also reviewed for signs that there might be an infringement. This is followed with a formal letter describing the infringement, and then a law suit. The object of this suit is selected carefully -- a company with little or no money to defend itself is a good target.

Another approach is to buy one or more (or even thousands) of patents from a company going through bankruptcy. (Nortel is a good example.) In any case, a core criticism of patent trolls is they can negotiate licensing fees that are grossly out of alignment with their contribution to the infringer's product. This, of course, increases the costs and risks of manufacturing.

So, what is the holder of a patent to do to avoid infringing another's patents? It isn't easy! There are hundreds of companies out there that are involved in essentially the same industry, and monitoring their activities is no small task. Furthermore, there is no way of knowing whether a patent troll is in any way involved until after significant investment has been made in a technology or product.

About the most a company can do is limit their exposure to patent trolls. These methods include:

Design around. There is usually more than one way to skin a cat (but not always). Tell me what is being patented, and I'll find a way around it.

Patent watch. Follow the industry. Examine new patents and patent applications.

Patent search. Before embarking on a major development program, check to see what others are doing.

Litigation. Challenge the patents themselves. Search for prior art. Is the technology even patentable?

Settle. Sometimes this is the least expensive approach.

Defensive patent aggregation. Gather a huge portfolio of patents so that they don't end up in the hands of others, and so that they can be used in cross-licensing discussions. (Google, a fairly young company, does not have a huge patent portfolio. This approach is to its disadvantage.)

The U.S. Patent office is swamped with patent applications. In this high-tech age that number is growing. Just as the products protected by patents are valuable, so also are the patents themselves.

What’s your take on this subject? Leave a comment and get the conversation going.