In reading the S-1 filing of Avaya (yes some of us find reading financial filings more fun than watching paint dry) I happened across the following on page 20:

We are dependent on our intellectual property. If we are not able to protect our proprietary rights or if those rights are invalidated or circumvented, our business may be adversely affected.

While this, and the accompanying explanation, is standard in such filings (interestingly no citations are given for pending actions) it does make the mind wander.

What are the risks not just to Avaya, but to everyone in our space? After all, history reveals a long list of companies that as a result of their legal beagles:

·         Thrived because of their ability to:

o    create defensible intellectual property

o   pursue those whom allegedly engaged in infringement

·         Withered from being caught and could not bear the expenses associated

In fact, and the guilty shall remain nameless, several companies have been rightly accused of being innovative law firms and not innovative technology companies. 

One way of looking at the past decade of communications industry growth can be characterized in the short hand of IP³:   

·         Internet Protocol (IP) —it has as foretold and evangelized become the dominant means for exchanging not just data, but voice and video

·         Instantaneous Presence (IP) —the reason d’être driving amongst other things: unified messaging/ communications, collaboration, texting and mobile apps by the thousands, etc.  

·         Intellectual Property (IP) — self explanatory, but a critical driver of company valuations, particularly start-ups

A lot of keyboards have been worn out writing about the first two items, but other than the occasional blockbuster cases the vast majority of intellectual property suits do not go to trial, and terms of settlements are rarely disclosed.

Occasionally we get a glimpse. For instance, a May 27 article in Mobiledia, “Microsoft Makes More From Android Than Windows,” reported that since Microsoft settled an infringement case with HTC in April 2010 — whereby HTC pays Microsoft $5 for every Android device shipped — HTC sold 30 million handsets for a Microsoft payout of $150 million. They noted this is five times greater than Microsoft makes on its Windows Phone (News - Alert) line. The article also cites what it terms the “cash-cow” IP suits can represent. It cites Nokia suing Apple, Apple suing a host of smartphone makers and Microsoft pursuing other companies using the Android OS. 

But, I digress. The matter at hand is a bit closer to my telecom heart, and potentially as if not more explosive.

 Tracey E. Schelmetic, TMCnet Contributor in her article, “Justice Department Probing Nortel (News - Alert) Patent Sale,” cited that according to the Wall Street Journal’s sources the Justice Department’s antitrust division is said to be reviewing Google’s $900 million “stalking horse” bid for Nortel’s patents, although it hasn’t found major competitive issues that would lead it to challenge its purchase. The WSJ’s sources indicated concerns not just about Google (News - Alert), but also Apple (News - Alert) and Blackberry maker Research in Motion (News - Alert) (RIM) who also are interested in the Nortel patents. 

The Avaya IPO is also pertinent. Back on April 12, Scotts Valley, CA-based VirnetX Holding Corporation, an Internet Security software company, announced it filed an Aastra USA, Inc., Aastra Technologies Ltd., Apple Inc., Cisco Systems, Inc., NEC Corporation, and NEC Corporation of America in the United States District Court for the Eastern District of Texas, Tyler Division. The complaint includes allegations of patent infringement regarding five patents owned by VirnetX, U.S. Patent Nos. 6,502,135, 6,839,759, 7,188,180, 7,418,504, 7,490,151. In its complaint, VirnetX seeks both damages and injunctive relief.

In a subsequent release the same day it amended a previous complaint in a similar lawsuit filed against Mitel Networks Corporation, Mitel Networks, Inc., Siemens Enterprise Communications GmbH & Co. KG, and Siemens Enterprise Communications, Inc. to include Avaya. Named in the complaint were Avaya’s 4600 and 9600 series IP Phones, Avaya’s A175 Desktop Video Device with Avaya Flare Experience, Avaya’s SIP Enablement Services and Avaya’s Aura Session Manager. In other words, a nice chunk of the core of Avaya’s IP product line.

Least one think that a suit by VirnetX is trivial, read up on the settlement announced between VirnetX and Microsoft announced on May 17, 2010. Brought in the same court, Microsoft took a license to the VirnetX patents for Microsoft’s products for use of the VirnetX Domain Name Initiative and agreed to a one-time payment of $200 million to VirnetX. All other aspects of the settlement and license were not disclosed.

A few questions spring to mind:

·         Is $900M too little to pay for 6,000 Nortel patents regardless of who gets them?

·         Should those patents, especially given the litigious nature of potential buyers be sold as a single group?

·         In aggressive hands what is the threat to the economic vitality and investments in innovation of the entire industry of a vigorous move to literally upset the applecart on just a handful of key patents? And, remember the portfolio includes not just filed by Nortel but also acquisitions over the years like Bay Networks

·         How much of a threat to the Avaya IPO is VirnetX and have the underwriters really taken this into account in their valuation calculations?

Inquiring minds want to know. Unfortunately, due to the impenetrable nature of this part of the business, we are likely not to find out. Reality is many in the industry, depending on how all of this shakes out are likely to be more POed than enthusiasts of IP and IPOs.

Peter Bernstein is a technology industry veteran, having worked in multiple capacities with several of the industry's biggest brands, including Avaya, Alcatel-Lucent (News - Alert), Telcordia, HP, Siemens, Nortel, France Telecom, and others, and having served on the Advisory Boards of 15 technology startups. To read more of Peter's work, please visit his columnist page.