May 14, 2015

Brattle Experts Assist in Securing Favorable Outcome for Client in Nortel’s Bankruptcy Allocation Trial

On May 12, 2015, more than six years after Nortel’s bankruptcy filing, four years after liquidations of all of its assets, and six months after an unprecedented joint trial before one U.S. court and one Canadian court, two judges simultaneously, but independently, reached an important decision regarding the allocation of Nortel’s $7.3 billion liquidation proceeds among its creditors. Both decisions call for an allocation of the proceeds largely proportional to Nortel’s global creditor claims. This pro rata allocation is a modified mechanism that was proposed by Dr. Coleman Bazelon, a principal at The Brattle Group (Brattle), as an economically-rational allocation that, in the absence of an ex ante agreement among Nortel’s legal entities prior to its bankruptcy, reflected the financial and management realities of Nortel’s business operations.

As the Courts acknowledged, the core issue at dispute is the interpretation of an internal transfer pricing agreement, the Master Research and Development Agreement (MRDA), which allocated, for tax purposes, Nortel’s operating income or losses between 2001 and 2008 across Nortel’s worldwide legal entities. After bankruptcy, three debtors (Canada, the United States, and EMEA) and various creditor groups disagreed about the meaning and applicability of the MRDA, and, as a result, proposed different allocation methodologies. Both Dr. Bazelon and Dr. Steve Felgran, a transfer pricing expert supported by Brattle, concluded that the purpose of the MRDA was to allocate Nortel’s group operating profits and losses for tax compliance purposes, and did not apply to the allocation of bankruptcy proceeds.

The Courts’ decisions endorse the opinions of both Drs. Bazelon and Felgran. Justice Frank Newbould of Canada’s Ontario Superior Court of Justice ruled that the MRDA “was an operating agreement and was not intended to, nor did it, deal with the disposal of all of Nortel’s assets in situation in which no revenue was being earned and no profit or losses were occurring.” Similarly, Judge Kevin Gross of the U.S. Bankruptcy Court for Delaware determined that “the MRDA, a tax document, was clearly not meant to, nor does it even purport to, govern inter-company allocation of the proceeds from liquidated Nortel assets. … The evidence at trial was overwhelming and undisputed that the MRDA was not intended to address that contingency [global insolvency or liquidation of the Nortel Group].”

Of particular interest in the case and for future bankruptcy cases is the allocation of the $4.5 billion Nortel received in an auction of its 6,000 plus patent portfolio. Using analyses on Nortel’s patents, the Brattle team and Dr. Bazelon found that Nortel’s technologies and R&D activities were too entangled across both lines of business and international borders to be reasonably allocated across the bankruptcy estates. This conclusion was echoed by both Courts. For instance, the Canadian court observed,

“The intangible assets … were not separately located in any one jurisdiction or owned separately in different jurisdictions… R&D took place in various labs around the world in a collaborative fashion. R&D was organized around a particular project, not particular geographical locations or legal entities, and was managed on a global basis. The fact that Nortel ensured that legal entities were property created and advised in the various countries …does not mean that Nortel operated a separate business in each country. It did not.”
Dr. Bazelon’s recommended pro rata allocation method, with some modifications by the Courts, was accepted by the Canadian court as “doing what is just in the unique circumstances” of Nortel’s case, and by the U.S. court as “a fair and equitable mechanism.”

Brattle was retained in this case by Nortel’s UK pension claimants, represented by Willkie Farr & Gallagher, Thornton Grout Finnigan, and Hogan Lovells. The Brattle consulting team was led by principals Mr. William Zarakas and Dr. Bin Zhou.

Dr. Bazelon’s expert reports, as well as the Courts' decisions, can be accessed using the links below.

Associated Experts
Bazelon 066
Principal
+1.202.955.5050
Dr. Bazelon consults and testifies in numerous telecommunications matters, ranging from wireless license auctions, spectrum management, and competition policy, to patent infringement, wireless reselling, and broadband deployment. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Graves 060
Principal
+1.617.864.7900
Mr. Graves specializes in regulatory and financial economics, especially for electric and gas utilities, and in litigation matters related to securities litigation and risk management. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Seth 083
Principal
+1.202.955.5050
Dr. Seth specializes in intellectual property litigation, including investigations at the ITC. She has prepared testimony on a range of economic issues in more than a dozen ITC investigations, and has assisted leading technology companies. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Villadsen 048
Principal
+1.617.864.7900
Dr. Villadsen specializes in finance and accounting matters with an emphasis on the energy industry. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Zarakas 092
Principal
+1.617.864.7900
Mr. Zarakas is an expert in economic, financial, strategic, and regulatory analyses in the utility, telecommunications, and media industries. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Zhou 082
Principal
+1.617.864.7900
Dr. Zhou is a valuation, corporate finance, and accounting expert with more than 15 years of consulting experience. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Kumar 066
Senior Associate
+1.415.217.1000
Dr. Kumar is an economist with expertise in corporate finance issues including business valuation, tax, and transfer pricing. More icon f02782c24cccaf6d90e1da53920c42f20e5a8955f54ac2ca5727ec7dc89987b4
Figurelli26
Associate