Thanks to Monday’s joint announcement of Microsoft’s $300 million investment in a new Barnes & Noble’s digital and college textbook subsidiary, we will never know who actually won the patent showdown between the software and bookselling giants. An administrative law judge at the U.S. International Trade Commission last week put off an initial determination in Microsoft’s patent infringement case against B&N, which was tried in February. Now that the two are partners in the e-book business, the patent litigation will end without a ruling on the merits from the ITC or from the U.S. district judge overseeing Microsoft’s parallel infringement suit in Seattle federal court.
But that doesn’t mean we can’t talk about which side won the case.
It’s easier to argue that Barnes & Noble (and its vast army of lawyers from Cravath, Swaine & Moore, Kenyon & Kenyon, Quinn Emanuel Urquhart & Sullivan, and Boies, Schiller & Flexner) came out ahead. The dispute began, you’re recall, when Microsoft tried to get Barnes & Noble to license its IP for use in the bookseller’s Android-powered e-reader, the Nook. After Barnes & Noble balked at Microsoft’s fee demands, Microsoft sued B&N in Seattle and at the ITC. Barnes & Noble countered with a defense that Microsoft was misusing its patent portfolio to demand unconscionable fees from Android users, even taking its antitrust allegation to the Justice Department. But B&N’s patent misuse defense was knocked out in the ITC case — making it all the more (apparently) remarkable that in Monday’s deal, Microsoft paid B&N, the patent defendant, a sum of money that exceeded the marketplace value of its investment. How often does a patent plaintiff pay the defendant in a settlement? Especially when that defendant is on the ropes and urgently searching for a strategic investor?
Barnes & Noble’s shareholders clearly regarded the deal as a huge victory for the company. B&N stock nearly doubled before settling back in a down market. So if you’re another Android user thinking about saying no to Microsoft when it comes around with a licensing demand, you have to be emboldened by the B&N story: After enduring a year under scrutiny as a defendant, Barnes & Noble ends up with $300 million and drastically improved business prospects. That’s not the scorched-earth result you might fear from taking on Microsoft and its lawyers. (In this case, Sidley Austin; Orrick, Herrington & Sutcliffe; Woodcock Washburn; and Adduci, Mastriani and Schaumberg.)
But there’s a line in Microsoft and Barnes & Noble’s joint announcement of the deal that might give Microsoft challengers pause — and makes it unclear which side will come out on top in the long run. Both Barnes & Noble and Microsoft publicly emphasized the synergies of their new partnership, which gives Microsoft an entry point into a market it believes will be shaped by advanced software add-ons to simple e-books and gives Barnes & Noble a presence on Microsoft’s soon-to-be-released tablets, as well as a much-needed investor. The announcement also included a note that Barnes & Noble and the new digital and textbook subsidiary “will have a royalty-bearing license under Microsoft’s patents for its NOOK eReader and tablet products.”
So Barnes & Noble is licensing Microsoft IP after all. If you’re wondering about the terms, keep wondering. Microsoft has jealously guarded any disclosure of its licensing arrangements in the Barnes & Noble litigation, to the extent that the company demanded that B&N patent misuse filings be removed from the ITC record. There are no available specifics on what B&N and the new subsidiary have agreed to pay, so for all we know, Microsoft is getting all it originally wanted in Nook royalties.