# In re Nortel Networks, Inc.

> United States Bankruptcy Court, D. Delaware · May 12, 2015 · 532 B.R. 494

URL: https://www.frixlaw.com/law-library/cases/8498397

## Case

- **Full name:** IN RE: NORTEL NETWORKS, INC., Debtors
- **Court:** United States Bankruptcy Court, D. Delaware
- **Decided:** May 12, 2015
- **Citations:** 532 B.R. 494; 2015 Bankr. LEXIS 1615; 2015 WL 2374351
- **Precedential status:** Published
- **Opinion:** Opinion of the court by Gross
- **Judges:** Gross
- **Cited by:** 1 later opinions in the Frix Law Library

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## Opinion text

Re Dkt No. 13208
ALLOCATION TRIAL OPINION 1
KEVIN GROSS, UNITED STATES BANKRUPTCY JUDGE
TABLE OF CONTENTS
INTRODUCTION.. .499
PROCEDURAL SUMMARY ...500
FACTS ...502
A. The Business Lines... 502
B. Research & Development.. .504
C. Transfer Pricing.. .505 •
D. Advanced Pricing Arrangements ...506
E. Cost Sharing Agreements... 506
F. New Transfer Pricing Arrangement. . .507
G. The Master R & D Agreement. . .509
H. Rights to Intellectual Property Under the MRDA.. .510
I. The MRDA Was Tax Driven.. .510
J. The Interim Funding and Settlement Agreement. . .510
K. The Final Canadian Funding and Settlement Agreement.. .511
L. The Sale of Nortel’s Business Lines...512
M. Patent Identification... 513
N. Nortel’s Patents Had a Useful Life of Many Years... 514
O. A Licensing Business — IPCo... 514
P. All Integrated Entities Expected to Benefit From IP Monetization... 518
Q. Residual Patent Portfolio... 518
R. The Sale of Nortel’s Residual Patent Portfolio... 519
S. The Rockstar Sale Approval Hearing. . .520
THE PARTIES AND THEIR ALLOCATION POSITIONS.. .520
A. The U.S. Interests... 520
B. The Committee... 523
C. The Bondholders... 523
D. The EMEA Debtors... 523
E. The Monitor and the Canadian Debtors... 525
F. The Canadian Creditors’ Committee ...528
G. Wilmington Trust Company as Trustee... 529
H. The UK Pension Claimants... 530
LEGAL ANALYSIS .. .531
THE MRDA.. .534
A. Governing Law and Applicable Principles of Contract Interpretation ...534
B.' The Valuable “Bundle of Rights” that a Patent Affords... 538
I. NNL’s Claim to Legal Title to the IP...538
2. The Factual Matrix Surrounding Transfer Pricing, Historical Business Practices and Custom of the Industry. . .540
3. Each Participant Exclusively Held Valuable Rights to NN Technology, Including Patents, in Its Respective Territory. . .544
*499 4. Under the MRDA, Each Licensed Participant Held the Right to Sublicense in Its Exclusive Territory.. .544
5. Article 4(e) Grants the Right to thé Right to Assert Actions and Recover Damages... 545
6. The MRDA’s Further Confirmation that Licensed Participants Held All Valuable Rights to NN Technology. . .545
7. NNL Had Nothing of Value to Sell in the Licensed Participants Exclusive Territories... 546
THE FLAWED POSITIONS.. .547
A. Canadian — Ownership... 547
B. The EMEA Debtors — Contribution ...548
C. U.S. Revenue... 548
PRO RATA ALLOCATION.. .549
A. Global General and Administrative Support Functions... 551
B. R & D Functions Were Collaborative Across Borders... 552
C. Authority for Pro Rata Allocation. . .558
D. Pro Rata Allocation is Not Substantive Consolidation.. .555
E. Pro Rata Criticism is Misplaced ...557
F. Implementation of the Pro Rata Allocation. . .560
CONCLUSION.. .561
APPENDIX A: Glossary of Terms
APPENDIX B: Business Line Sales
APPENDIX C: Nortel Bonds Spreads to U.S. Government Yield Curve (Basis Point Chart)
INTRODUCTION 2
The gargantuan bankruptcy cases giving rise to the opinions of two courts on either side of the Canadian border emanate from the tragic, almost unimaginable collapse of the Nortel Enterprise. The how and why for the downfall are the subject of numerous books and articles and the Court will not gratuitously add its views which are not necessary to the work at hand. It is sufficient to note that even a writer of fiction would not dare to compose the story of the death of this multi-national enterprise and the harm it inflicted on tens of thousands of employees and creditors. The Nortel Enterprise in 2000 had stock with a value of $124.50 per share and a market capitalization of approximately $260 billion. It employed nearly 100,000 people worldwide and had annual sales of $30 billion. Two years later, the Nortel Enterprise had laid off 60,000 employees and its market capitalization had fallen to $2 billion. Nortel had shifted its focus from research and development to acquisition and expansion and thereby found itself overextended. Scandal among management added to Nortel’s problems and it was repeatedly restating its earnings. Soon, Nortel was in bankruptcy.
In issuing this opinion, the Court (sometimes referred to as “U.S. Court”) is addressing the allocation of Sales Proceeds among numerous debtor entities from numerous countries. 3 The decision follows 21 days of trial held jointly with the Ontario *500 Superior Court of Justice, Commercial List (Honourable Frank J.C. Newbould, presiding) (the “Canadian Court”). At the trial, held simultaneously in two cross-border courtrooms linked by remarkable and effective technology, the Court and the Canadian Court heard the testimony of many witnesses and admitted into evidence over 2,000 exhibits and designations from numerous depositions. Thereafter, the parties submitted post-trial briefs and proposed findings of fact and conclusions of law exceeding 1,000 pages. The parties also presented two days of closing arguments to the U.S. Court and the Canadian Court. It is from this massive and complex record that the Court and the Canadian Court must formulate their decisions.
The issue to be decided by the U.S. Court and Canadian Court is:
What is the appropriate allocation of the sums paid to Nortel in the bankruptcy sales (the “Sales Proceeds”) among the Nortel Entities?
The parties identified below have submitted widely varying approaches for deciding the issue leaving virtually no middle ground. Their strong criticism of each other’s allocation methodology also reveals why the parties were unable to resolve the dispute without the expenditure of time and expense. The Court can only speculate why the parties, all represented by the ablest of lawyers and sparing no expense, were unable to reach a settlement on allocation. For the reasons described and discussed in this opinion, the Court and the Canadian Court have arrived at the same conclusion: a modified pro rata allocation is required.
PROCEDURAL SUMMARY
On January 14, 2009 (the “Petition Date”) Nortel Networks Inc. (“NNI”) and certain of its affiliates, as debtors and debtors in possession (collectively, the “U.S. Debtors”) 4 other than Nortel Networks (CALA) Inc., 5 filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in the U.S. Court, which cases are consolidated for procedural purposes only.
As of the Petition Date, Nortel Networks Corporation (“NNC”), a publicly-traded Canadian company, was the indirect parent of more than 130 subsidiaries, located in more than 100 countries (collectively “Nortel or the Nortel Entities”). 6 NNC was the successor of a long line of technology companies, always headquartered in Canada, dating back to the founding of Bell Telephone Company of Canada in 1883. 7 NNC’s principal, direct operating subsidiary, also a Canadian company, was Nortel Networks Limited (“NNL”), *501 which in turn was the direct or indirect parent of operating companies located around the world. 8 Together with NNL, the principal companies that performed research and development (“R & D”) were NNI, a U.S. company, Nortel Networks (UK) Ltd. (“NNUK”), a United Kingdom company, Nortel Networks S.A. (“NNSA”), a French company and Nortel Networks Ireland (“NN Ireland”), an Irish company. These were known as Residual Profit Entities (“RPEs”) due to their participation in a residual profit pool in connection with Nortel’s transfer pricing arrangements. 9 Other operating companies performed sales and distribution functions and were known as Limited Risk Entities (“LREs”). 10 LREs were incorporated in most of the countries where Nortel products were sold, including in the Europe, Middle East and Africa (“EMEA”) regions. 11
On the Petition Date, the U.S. Debtors’ ultimate corporate parent, NNC, together with NNI’s direct corporate parent, NNL, and certain of their Canadian affiliates (collectively, the “Canadian Debtors” or the “Canadian Estate”) 12 commenced a proceeding with the Canadian Court under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”), seeking relief from their creditors (collectively, the “Canadian Proceedings”). The Canadian Court appointed a Monitor, Ernst & Young Inc. (the “Monitor”) Also on the Petition Date, the High Court of England and Wales placed nineteen of Nortel’s European affiliates (collectively, the “EMEA Debtors” or the “EMEA Estates”) 13 into administration (the “UK Proceedings”) under the control of individuals from Ernst & Young LLP (collectively, the “Joint Administrators”). Other Nortel affiliates commenced insolvency and dissolution proceedings around the world.
On the Petition Date, the U.S. Debtors filed the Motion for Entry of an Order Pursuant to 11 U.S.C. § 105 (a) Approving Cross-Border Court-to-Court Protocol (the “Protocol”) [D.I. 18], which established procedures for the coordination of cross-border hearings between the Courts. The U.S. Court approved the Protocol on January 15, 2009 [D.I. 54] and the Canadi *502 an Court approved the Protocol on the Petition Date. The Courts later amended the Protocol by order of this Court on June 29, 2009 [D.I. 990] and by an order of the Canadian Court on that same date (as amended, the “Cross Border Protocol”). Subsequently, the Courts approved an Allocation Protocol which governed the trial on allocation. Order Entering Allocation Protocol, dated May 17, 2013. (the “Allocation Protocol”) [D'.1.10565],
On January 22, 2009, the Office of the United States Trustee for the District of Delaware appointed an Official Committee of Unsecured Creditors (the “Committee”) [D.I.s 141, 142], An Ad hoc Group of Bondholders (the “Bondholders” or the “Bondholder Group”) was also organized.
On June 19, 2009, Nortel announced that it was in discussions with third parties to sell its businesses and that it would consider alternatives if it was unable to maximize value through sales. As discussed below, Nortel did, in fact, sell all of its business units and associated assets to various purchasers. Most1 of Nortel’s intellectual property (“IP”) remained unsold until later.
To facilitate the sales of the businesses and defer the issue of the allocation of the sales proceeds, the Nortel Entities entered into the Interim Funding and Settlement Agreement (the “IFSA”), which the U.S. Court approved by Order, dated June 29, 2009 [D.I. 993], and the Canadian Court approved by Order, dated June 29, 2009.
On April 4, 2011, the U.S. Debtors, together with NNF and NNC, announced an agreement with an affiliate of Google Inc. to sell Nortel’s remaining patent portfolio and related assets (the “IP Assets”) for $900 million (the “Google Bid”), subject to higher or better offers. The sale of the IP Assets through an auction to Rockstar Bidco L.P. (“Rockstar” and “Rockstar Transaction”) resulted in a price of $4.6 billion. Rockstar is a consortium comprised of Apple, Ericsson, Microsoft, Blackberry, EMC and Sony. 14
The IFSA provided, inter alia, that proceeds from the sales would be and have been held in escrow pending an agreement of the parties on allocation among them or decision by the U.S. and Canadian Courts in a joint trial to be conducted in accordance with the Cross-Border Protocol, and later the Allocation Protocol. Although the parties engaged in extensive negotiations and there were two formal media-tions, the parties could not agree on an allocation. The U.S. and Canadian Courts have therefore been called upon to make the allocation determination.
FACTS
A. The Business Lines
Nortel was organized such that each entity was integrated into regional and product line management structures to share information and perform R & D, sales and other common functions across geographic boundaries and across legal entities. The structure was designed to enable Nortel to function more efficiently, drawing on employees from different functional disciplines worldwide, allowing them to work together to develop products and attract and provide service to customers, fulfilling their demands globally. 15 The matrix structure was reflected in Nortel’s R & D, sales organization, distribution *503 channels and transfer pricing arrangements. 16
As of January 2009, Nortel’s lines of business (“Business Lines”) were:
(a) Carrier Networks — wireless networking solutions for providers of mobile voice, data and multimedia communications services over technologies including:
(i) Global System for Mobile Communications (“GSM”);
(ii) Code Division Multiple Access (“CDMA”);
(iii) Carrier Voice Over Internet Protocol Applications Solutions (“CVAS”); and
(iv) the development of long-term evolution (“LTE”) wireless technology;
(b) Enterprise Solutions — enterprise communications solutions addressing the headquarters, branch and home office needs of large and small businesses; and
(c) Metro Ethernet Networks — optical networking and carrier grade eth-ernet data networking solutions, including:
(i) Carrier Ethernet switching products;
(ii) optical networking products; and
(iii) multi-service switching products. 17
■ As part of the extensive sale processes (see Appendix B), Nortel sold its businesses and assets, including: (i) the sale of certain portions of its Layer 4-7 data portfolio to Radware Ltd. [D.I. 539] (the “Layer 4-7 Sale”); (ii) the sale of substantially all of its CDMA business and LTE Access assets to Telefonaktiebolaget LM Ericsson (publ) (“Ericsson”) [D.I. 1205]; (iii) the sale of substantially all of the assets of the Enterprise Solutions business globally, including the shares of Nortel Government Solutions Incorporated and DiamondWare Ltd. to Avaya Inc. [D.I. 1514]; (iv) the sale of the assets of its Wireless Networks business associated with the development of Next Generation Packet Core network components to Hitachi Ltd. [D.I. 1760]; (v) the sale of substantially all the assets of its Optical Networking and Carrier Ethernet businesses associated with its Metro Ethernet Networks business unit to Ciena Corporation [D.I.2070]; (vi) the sale of substantially all of its GSM7GSMR business to Ericsson and Kapsch CarrierCom AG [D.I.2065]; (vii) the sale of certain assets of its Carrier Voice Over IP and Application Solutions business to GEN-BAND U.S. LLC [D.I. 2632]; (viii) the sale of certain assets of the Debtors’ Mul-ti-Service Switch business to Ericsson [D.I. 4054]; and (ix) certain other sale transactions.
At the time the EMEA, U.S. and Canadian Debtors (collectively, the “Debtors”) filed for creditor protection in January 2009, only the GSM and CDMA lines of business were profitable. 18 Overall, Nortel was losing vast sums of money, its customers were, in large part, no longer supporting it, and ÑNC had by the fall of,2008, *504 written off all of its goodwill. 19
B. Research & Development
Nortel spent significant amounts on R & D; in 2004, for example, Nortel spent more on R & D as a percentage of revenue than its competitors. 20 R & D played a critical role in the sales process of the Business Lines. 21 Before the 1980s, all of Nortel’s R & D was performed in Ottawa — R & D which led to revolutionary telecommunications products that established Nortel’s reputation. 22 Subsequently, Nortel opened R & D facilities in other jurisdictions. Nortel also acquired numerous technology companies during the 1990s and early 2000s and merged their R & D organizations into those of the Nortel subsidiaries operating in their jurisdictions. 23
Subsidiaries commenced their operations and produced “state of the art” products which allowed them to become important participants in their markets. 24 R & D was coordinated through two different management structures. Decisions about the majority of R & D funding were made by the Business Lines to create, develop and improve technology for products within their particular technology areas. 25 Advanced technology research, which was intended to develop novel, cutting edge technologies with a longer time horizon to product creation (if successful) was coordinated by Nortel’s Chief Technology Officer and allocated funding through a central budget. 26 The advanced technology research produced the greatest impact in terms of innovation and patent filings. 27
The following chart summarizes Nortel R & D spending for the years 2000 to 2009. 28
*505 [[Image here]]
Nortel’s billions in R & D expenditures over the decades preceding January 2009 generated the IP, but it is impossible to trace which R&D expenses produced which IP. 29 As of January 2009, NNL held approximately 8,800 worldwide patents and applications. 30 The majority of all rights, title and interest in inventions by Nortel employees worldwide were assigned directly or indirectly to NNL. 31 As a result, nearly all of the patents and applications were assigned to Canadian entities; approximately 7000 patents and applications in the portfolio sold in the transaction discussed below had been assigned to NNL. 32
C. Transfer Pricing
Transfer pricing is the process by which a multi-national enterprise (“MNE”) sets prices for transactions between related corporate entities across taxing jurisdictions. 33 The intercompany transactions take place between entities that are commonly controlled. Therefore, transfer prices are assigned by management rather than being the result of arm’s length negotiation between parties. 34 Transfer prices are assigned rather than bargained for and because effective tax rates across jurisdictions may vary, MNEs are incentivized to minimize their global effective tax rate when setting transfer prices. 35
In light of these incentives, taxing authorities have implemented regulations that govern transfer pricing generally require that intercompany transactions be priced in a manner consistent with the way that similarly situated, uncontrolled parties would price comparable transactions at arm’s length. 36
*506 Nortel had transfer pricing arrangements that governed how it reported income in each of the jurisdictions in which it did business. 37 Within Nortel companies were treated as separate legal entities. These individual entities (“IEs”) had their own books and records, financial statements, bank accounts and cash reserves. Each company was organized in accordance with and operated under local laws. 38 Subsidiaries within Nortel filed separate financial statements with the appropriate local regulatory agency and Nortel kept detailed revenue figures for different countries and regions. 39 Nortel entities had separate boards of directors. 40
D. Advanced Pricing Arrangements
If a tax authority disagrees with the transfer pricing methodology reflected in an MNE’s tax return for a particular year, the tax authority may initiate an audit, which could potentially lead to an adjustment in taxes owed by the MNE, penalties, tax court litigation and/or double taxation. 41 To mitigate this risk,' taxpayers may avail themselves of the advanced pricing arrangement (“APA”) process offered by tax authorities. An APA is a contract between a member of an MNE, such as NNL, and a tax authority, such as the Canadian Revenue Authority (“CRA”), the U.S. Internal Revenue Service (“IRS”) and the Inland Revenue Service (“Inland Revenue”) in the U.K., typically specifying the transfer pricing methodology that the affiliate will be permitted to use for an agreed period of time. APAs can include multiple tax authorities and members of an MNE. 42
E. Cost Sharing Agreements
From the late 1970s to December 31, 2000, Nortel operated under a series of Cost Sharing Agreements (each a “CSA”), which were bilateral agreements between NNL and each of the other R & D performing Nortel entities, including NNI, NNUK, NN Ireland and NNSA (referred to together with NNL as the “Cost Sharing Participants” or “CSPs”). 43 During the period of the final series of CSAs, NNL and each of the other CSPs entered *507 into three separate cost-sharing agreements, which governed pricing for different types of intercompany transactions: an agreement governing R & D (an “R & D CSA”), another for tangible property and another for headquarters expenses. 44
The last R & D CSA between NNL and NNI was drafted in 1996 and made effective from January 1, 1992 to reflect the terms of a 1996 APA between NNL, NNI, the CRA and the IRS. The 1992 NNL-NNI R & D CSA provided a mechanism for sharing the “costs and risks of research and development services or activities in return for interests in any NT Technology that [was] produced by such services or activities.”
F. New Transfer Pricing Arrangement
At the end of 1999, each of the three CSA APAs in effect between NNL and each of the other then-CSPs (governing R & D, tangible property, and headquarters cost sharing) had expired or was nearing expiration. 45 The CRA, IRS and Inland Revenue did not want to renew the R & D CSA APA after 1999. They had encouraged Nortel to adopt a residual profit sharing method (“RPSM”).
Beginning in late 2000, Nortel formed a team of employees (the “APA Team”) to determine the appropriate transfer pricing policy to propose to taxing authorities in the upcoming APA.process. Nortel’s APA Team investigated alternatives to the R & D CSA “[i]n an effort to minimize Nortel’s long-term effective tax rate, to make the transfer pricing administrative processes more efficient and to, over time, improve the global allocation of profits among Nor-tel affiliates.” In December 2001, Nortel’s R & D CSAs were terminated effective January 1, 2001. 46 Termination of the R & D CSAs resulted in each license-holding CSP receiving “a fully p.aid up license” to all Nortel intellectual property in existence as of that date with respect to its Exclusive Territory.
From December 2001 through March 2002, the Nortel tax group worked with external advisors to craft the specific mechanics of a RPSM for Nortel that could be submitted simultaneously to the CRA, IRS and Inland Revenue as the basis for proposed APAs for the 2000 to 2004 period 47 The resulting APA applications to those three tax authorities were filed on or about March 14, 2002. 48 Each APA application included a functional analysis prepared by Horst Frisch entitled “Economic Analysis of Nortel Networks’ Intercompa-ny Transactions” (the “Horst Frisch Report”), setting forth Nortel’s justification for its proposed RPSM on the basis of various Nortel affiliates’ roles and functions, as required to demonstrate that the proposed RPSM satisfied the arm’s length standard. 49
*508 Nortel’s RPSM distinguished between the IEs (then consisting of NNL, NNI, NNUK, NN Ireland, NNSA and Nortel Networks Australia) — who, as discussed above, performed ongoing R & D, had previously been parties to R & D CSAs and performed the full range of functions — and LREs, who were routine distributors whose primary function was to sell Nortel products in their respective geographic regions, did not perform R & D and had not previously participated in an R & D CSA. 50 The RPSM allocated operating profits or losses to IEs and LREs under a two-step process. 51
To determine the total “pool” of operating profits (or losses) to be allocated among the IEs and LREs, the RPSM started with Nortel’s consolidated operating profits or losses and recalculated this figure on an “economic” basis for each entity through a series of adjustments including adding back R & JD expenses and then subtracting an amortized portion of those expenses. This calculation resulted in the gross “economic profit or loss.” 52
In the second step of the RPSM, “residual” operating profits or losses remaining after the payout of routine returns were allocated to the IEs only, based on each IEs’ relative proportion of capitalized R & D expenses from that year and preceding years, assuming a 30% amortization rate. 53
One of the objectives of Nortel when implementing the RPSM was to minimize tax payments globally. Nortel personnel and advisors designed the RPSM to shift taxable income from NNI to NNL. 54 Trial testimony of NNL’s former chief financial officers further corroborates that minimizing tax was a key goal for Nortel. 55
Over the course of eight years (2001-2008) as APA negotiations with the tax authorities continued regarding Nortel’s RPSM, the IEs made or received billions of dollars in transfer pricing payments under that system. As summarized in the following table, NNL was the chief recipient of these payments, totaling more than $4.7 billion, while NNI was the largest payor, transferring over $6.7 billion to other Nortel entities:
*509 Table 2: Transfer Pricing Payments, 2001-2008 56
[[Image here]]
As shown, in each year covered by the RPSM, NNI paid out hundreds of millions of dollars — more than a billion dollars in some years — to the other IEs. NNL received hundreds of millions of dollars in transfer pricing payments each year. In part, these transfer pricing payments by NNI were used by NNL to fund its R & D. 57
The amount of transfer pricing payments attributable to R & D and the Total R&D Funded for each entity each year in the Master Research and Development Agreement (discussed below) period are summarized below.
Table 3: R & D Funding Under the RPSM, 2001-2008
[[Image here]]
Neither the IRS nor the CRA approved Nortel’s RPSM. In 2009, following Nortel’s insolvency and more than seven years after the 2002 APA applications, the IRS and CRA directed an income adjustment of $2 billion from NNL-to NNI as a condition for resolving the APA for those years. 58
G. The Master R&D Agreement
From 2001 until the end of 2004, Nortel operated under the RPSM without any written intercompany agreement memorializing its terms. 59 In December 2004, *510 Mark Weisz circulated the final Master R & D Agreement (“MRDA”) to the IEs for execution. The agreement was signed by NNL, NNI, NNUK, NNSA and NN Ireland at various dates and made effective January 1, 2001. John Doolittle signed the MRDA on behalf of NNL. 60
H.Rights to Intellectual Property Under the MRDA
The MRDA sets forth a clear exchange of consideration between the signatories. Pursuant to Article 4(a), each Licensed Participant (“Licensed Participant”) vested legal title in NNL to the intellectual property it created. Expressly “in consideration therefor,” NNL granted an exclusive license (“Exclusive License”) back to each Licensed Participant: 61
Except as otherwise specifically agreed, legal title to any and all NN Technology whether now in existence or acquired or developed pursuant to the terms of this Agreement shall be vested in NNL. In consideration therefor, NNL agrees in enter into an Exclusive - License with each of the Licensed Participants as set forth in Article 5.
I.The MRDA Was Tax Driven
The risk that Nortel would be audited by tax authorities without an agreement in place prompted Nortel to draft the MRDA. 62 Accordingly, the MRDA was a tax-driven contract, drafted primarily by Nortel’s tax team and external tax counsel, and it was intended to memorialize the group’s transfer pricing policy in place from 2001 forward. 63
Nortel also was aware that the transfer pricing policies it had proposed in its 2002 APA application and which were reflected in the MRDA were subject to approval by the tax authorities, and intended that arrangements in the MRDA would ultimately either be approved by those authorities or be revised to secure approval. 64
The MRDA enabled Nortel to maintain separate and distinct legal entities in order to avoid NNL having a “permanent establishment” in another jurisdiction by conducting business there, particularly in the United States. Nortel management was aware that under U.S. tax law, if a partnership is engaged in a U.S. trade or business, non-U.S. resident partners that own an interest in that partnership are also deemed to have a U.S. trade or business, and may be subject to tax in the United States if that trade or business is treated as creating a permanent establishment for the non-U.S. partner. 65
J.The Interim Funding and ' Settlement Agreement
On the Petition Date, with the approval of the U.S. Court, NNI loaned to NNL $75 million under a new revolving loan agreement (the “Intercompany DIP Loan”). The amounts owing to NNI under the Intercompany DIP Loan were repaid with proceeds from the sale of Nortel’s Carling facility. 66 Also in January 2009, NNI paid *511 to NNL an additional $30 million, as a transfer pricing payment. 67
On June 9, 2009, the U.S. Debtors (excluding NN CALA, which had not yet filed for bankruptcy), Canadian Debtors and EMEA Debtors (excluding NNSA, who later acceded to the agreement) entered into the IFSA to address both interim funding of NNL as well as principles under which collaborative sales of Nortel’s businesses and assets could take place. 68
The IFSA provided for a payment by NNI to NNL of $157 million (net of the $30 million previously paid in January) in full settlement of any transfer pricing and other claims NNL might have had against NNI for the period from the Petition Date through September 30, 2009. In April 2009, the Monitor reported that NNL needed this payment in order to have “adequate cash resources to fund operations.” 69 The process allowed, but did not obligate, the U.S. Debtors, Canadian Debtors and EMEA Debtors to jointly sell Nortel’s assets without a prior agreement on allocation, but it required the parties to negotiate in good faith to reach agreement on allocation before submitting the question to the Courts. 70 The IFSA made explicit that there was no obligation for any Debtor to proceed with a sale transaction if it determined that it was not in the best interests of its creditors. 71
The IFSA also referred to the U.S. Debtors, the Canadian Debtors and the EMEA Debtors as “Selling Debtors.” The IFSA required that any agreement or determination by either the U.S. Debtors or Canadian Debtors related to license termination agreements and the allocation of Sales Proceeds required the prior consent of the Bondholder Group, acting in good faith. The U.S. Debtors had to obtain similar consent from the Committee. 72 Each Licensed Participant agreed under the IFSA that if, and only if, it determined to participate in a sale that was in the best interests of its creditors, it would enter into a license termination agreement relinquishing its Exclusive License. 73 The IFSA provided that the termination or relinquishment of a license would be deemed a sale with the Licensed Participant being deemed a seller. 74 The IFSA made clear that any such license terminations would be provided “in consideration of a right to an allocation to be determined” from such sale. 75 The IFSA was not an “amendment, modification or waiver of rights” of any party under any other agreement, including the MRDA. 76 The U.S. Court and Canadian Court entered orders approving the IFSA following a joint hearing on June 29, 2009 (the “U.S. IFSA Order” and the “Canadian IFSA Order”). 77
K. The Final Canadian Funding and Settlement Agreement
At the end of 2009, NNL approached NNI and requested additional financing, *512 stating that without additional cash, NNL would have to shut down. 78 At the time of NNL’s request for additional financing, NNL’s and NNI’s requests to the CRA and IRS for approval of an APA governing the RPSM regime for the 2001-2005 and 2006-2011 periods were still unresolved. 79
The parties addressed both NNL’s cash needs and the tax settlement in a new agreement entitled the Final Canadian Funding and Settlement Agreement (the “FCFSA”). The provisions of the FCFSA included the following: 80
(a) NNI agreed to pay NNL $190.8 million in full and final settlement of any and all claims that NNL might have (or could have through the final conclusion of the Canadian Debtors’ proceedings) against NNI, whether based on transfer pricing arrangements, other intercompany agreements or otherwise.
(b) NNI and NNL agreed to enter into APAs with the IRS and CRA, respectively, for the years 2001-2005 on the terms set by the tax authorities.
(c) NNL granted NNI an allowed $2.06 billion claim in NNL’s CCAA proceedings, with such claim not being subject to offset or reduction.
(d) NNL and NNI agreed not to exercise any rights of termination under the MRDA without the prior written consent of the other parties to the MRDA, the Committee and the Bondholder Group.
The EMEA Debtors and NNL separately agreed that they would not exercise any right of termination. 81
On December 23, 2009, NNI, NNL, the Monitor and other U.S. and Canadian Debtors executed the FCFSA. 82 The U.S. Court and Canadian Court entered orders approving the FCFSA following a joint hearing on January 21, 2010. The order entered by the Canadian Court approving the FCFSA expressly allowed NNI’s $2.06 billion claim against NNL, which was not subject to offset or reduction. 83
L. The Sale of Nortel’s Business Lines
Nortel’s Business Lines were sold in a consensual, “cooperative and coordinated fashion.” 84 From shortly after the IFSA was approved through April 4, 2011, all parties worked together and successfully sold the following businesses in joint sale processes across multiple jurisdictions, most of which involved vigorous auctions conducted pursuant to Section 363 of the United States Bankruptcy Code and Court-approved sales processes in accordance with the CCAA. These sales (together, the “Business Line Sales”) generated $3,285 billion of which approximately $2.85 billion is now available. The specific details of the Business Line Sales are set forth in Appendix A to this opinion.
As part of the Business Line Sales pro: cess, the U.S. and EMEA Debtors entered into License Termination Agreements (the “LTAs”). Prior to the U.S. Debtors executing an LTA for any Business Line Sale, *513 the U.S. Creditors Committee and the Bondholder Group needed to, and did, consent to the transactions. 85
Only some of Nortel’s patents were sold in the Business Line Sales. If a patent was not “predominantly used” in a Business Line it was not transferred to a purchaser, and the purchaser was generally granted a nonexclusive right to practice the patent in a limited field of use. 86
Nortel transferred 2,700 patents as part of the Business Line Sales. 87 NNL retained ownership of the patents licensed to the Business Line Sales purchasers. 88 Thousands of R & D personnel, principally in Canada but also in the other RPE jurisdictions, were transferred to the purchasers of the lines of business. 89 The transfer of the valuable assembled workforce, including R & D personnel, enabled the purchasers to continue to operate the businesses without interruption.
As all Debtors, the Committee, Bondholders and the Canadian Creditors Committee (“CCC”) agree, and the U.S. Court and the Canadian Court found when they approved them, the Business Line Sales proceeds generated through the auction process represent the fair market value of the Business Lines. 90
M. Patent Identification
In the Business Line Sales, it was important that Nortel identify which IP rights — principally patent rights — needed to be conveyed; each prospective purchaser wished to obtain as many patents as possible as part of each sale transaction. Conversely, Nortel wanted to ensure that the only patents transferred were those incorporated exclusively or principally in the business line in question so as to retain value within Nortel and not to jeopardize the ability to sell the other Business Lines that might require rights to the same patents. 91
When the Business Lines were being sold, Nortel’s IP Group undertook a patent segmentation process to determine which patents would be transferred with each of the Business Lines. The standard for transfer of a patent in the sales was whether the IP in question was “predominantly used” in a given Business Line. IP that was used in multiple Business Lines (“shared” IP) was not sold with the businesses and rights to use that IP were instead conveyed to Business Line purchasers as necessary, generally via limited, non-exclusive licenses. 92 There is no evidence that, pre-petition, Nortel had ever undertaken such an exercise to determine whether a given patent was predominantly used in a specific Business Line, used in multiple Business Lines or not used in any Business Line in the normal course of its business or that Nortel ever monitored *514 which patents were used or not used in Business Lines. In conducting the patent segmentation process, Nortel’s IP Group sought to reduce the number of patents sold in the Business Line Sales to maximize the number of patents that would remain outside the Business Line Sales and retain such patents as part of a large portfolio to maximize value for creditors. 93 , 94
N. Nortel’s Patents Had a Useful Life of Many Years
U.S. patents are granted for a 20-year period. 95 A patent is within its economic useful life if it can be sold. As Canadian Debtors’ expert Timothy Reichert wrote in an article, “commercial transferability is the most objective of the three definitions of economic life.” 96 When measuring the useful life of a patent, it is necessary to distinguish between the life of a product utilizing a patent and the life of a technology or patent itself. While a particular product may become obsolete in a relatively short period, the patents incorporated into that product may survive through many generations of products and be utilized and built upon for a far longer period than the initial product itself. 97 The useful economic life of many Nortel patents well exceeded five years. 98 The vast majority of the patents that sold collectively for approximately $4.5 billion were more than a decade old at the time of the sale. 99 Nortel’s valuable patents were largely created in the late 1990s to early 2000s, corresponding to Nortel’s peak. 100 99% of the high-interest patents that were sold to Rockstar had been developed before 2006, more than 5 years before the sale to Rockstar in 2011. 101 80% of the high-interest patents sold to Rockstar were developed in 2000 or earlier, during the period that Nortel employed a cost-sharing arrangement to fund R & D. 102
O. A Licensing Business — IPCo
After completing the Business Line Sales, Nortel retained a substantial number of intellectual property assets (the “Patent Portfolio” or the “Residual IP”). Over the course of more than a year, the Debtors, other stakeholders and their ad-visors carefully weighed a possible sale of Nortel’s Patent Portfolio against the alternative of an IP licensing service and enforcement business (“IPCo”), a proposed business that Nortel began considering before the insolvency filings as set forth below. 103
*515 IPCo would monetize the Residual IP by licensing patents to technology companies that were suspected of infringing on them in exchange for the payment of royalties. IPCo would license the Residual IP by threatening patent infringement litigation and bringing such litigation if necessary. 104
Early in 2008, as discussed below, Nortel began to explore options for more effectively monetizing its intellectual property through developing a more robust licensing and enforcement business than it had to date. John Veschi was hired by NNI in July 2008 as Chief Intellectual Property Officer to “look at options for licensing.” 105 Veschi had extensive licensing and IP experience. 106
One possibility was for the licensing business to be a separate Business Line with direct reporting to Nortel’s CEO. 107 Veschi initiated a program to license group IP to infringing third-parties in four initial technology families or “franchises” — mobile handsets, internet search, TV/display/projector and video game/PC — with plans to license to additional franchises as the licensing business progressed. 108 Coordinating with the leaders of - Nortel’s Business Lines, in November 2008, Veschi and his team prepared notices of infringement. 109
Post-petition, Veschi’s team made presentations in the summer of 2009 addressing the options for monetizing the Patent Portfolio. 110 Several monetization alternatives were considered: the sale of patents, further developing and operating IPCo, or further developing and then selling IPCo. 111
Following these presentations, Nortel issued a request for proposals to find a firm to assist in the evaluation of the Patent Portfolio and the further development of IPCo. 112 Thereafter, Nortel jointly retained the Global IP Law Group (“Global IP”) in October 2009, 113 to provide advice on monetizing the portfolio, including exploring monetization “options for licensing as opposed to outright sale.” 114
On March 20, 2009, the U.S. Court entered an order approving the retention of Lazard Freres & Co. LLC as financial advisor to the U.S. Debtors (“Lazard”). The U.S. Court subsequently entered an order amending the terms of Lazard’s compensation to allow for a “IP Transaction Fee” if Nortel consummated “a restructuring and reorganization around all or substantially all of the Company’s intel *516 lectual property assets.” 115 Lazard was involved in evaluating the financial aspects of IPCo on behalf of all Nortel Entities. 116
As part of its evaluation, Global IP reviewed more than 11,000 patent claims, categorized patents by technology field, mapped claims to markets for potential enforcement and licensing and screened the patents for encumbrances. 117 Global IP confirmed that Nortel’s Patent Portfolio was valuable. 118 Global IP presented its initial findings to stakeholders of Nortel in December 2009. 119 Global IP and La-zard made a follow-on presentation to the boards of directors of NNC and NNL in January 2010. 120
The Debtor Estates weighed several options for monetizing the Patent Portfolio. Stakeholders from the EMEA, Canadian and U.S. Debtors seriously considered IPCo as an alternative to the sale of the Patent Portfolio. A. committee of representatives of Nortel and their advisors (the “IP Steering Committee”) was formed in January 2010, which led the evaluation process. 121 The IPCo option and the sale option were considered in parallel, so Nor-tel could determine how best to monetize the patent assets. In the words of the Monitor’s lead representative Murray McDonald, IPCo and a sale were considered “concurrently” as “parallel alternatives.” 122
In September 2010, the Monitor advised the IP Steering Committee that IPCo should remain an option for consideration. 123 In their 201010-K, filed with the U.S. Securities and Exchange Commission, NNC disclosed that “[w]e are seeking expressions of interest from potential buyers and partners regarding options that could maximize, the value of our intellectual property portfolio. No decision has been made as to how to realize this value, whether through sale, licensing, some combination of the two or other alternatives.” 124 IPCo remained a viable option into 2011. 125
As the Monitor’s representative testified, “[o]ver the course of 2009 and 2010, Mr. Veschi and his team, assisted by La-zard and Global IP, prepared various versions of a model that attempted to forecast the revenues that could be earned by IPCo *517 so that its potential economic benefits could be assessed. The initial IPCo Model had three different sub-models that forecast the revenues of IPCo based on different scenarios, in particular the amount of litigation that IPCo would engage in as part of its business model.” 126
The details of the IPCo Model were updated and refined in several revised versions. Later versions of the IPCo Model (including version 4.0) do not dissuade the Court’s view that IPCo was a viable option. 127
The IPCo revenue projections were included in the presentations and models circulated to stakeholders for comment. 128 The United States is the most profitable market for exploiting patents. 129 The IPCo Model did not separate North American revenue between Canada and the United States, but the vast majority of North American revenue from IPCo would have been earned in the United States. 130 This is consistent with where the patents in the portfolio were filed because the value of a patent comes from the right to exploit, license and enforce that patent and can only be extracted in the jurisdiction where that patent is filed. 131
Nortel assembled its IP into groups, or “technologies,” which represented an idea that was patented (or one for which an application was filed) in one or more territories. 132 97% of Nortel’s technologies (which includes all patents and applications in a family) were protected by patents filed in the United States. 133 73% of Nortel’s technologies were protected by patents *518 filed only in the United States. 134 Of the highest value patents that were in IPCo, as determined by Global IP, 99.5% of Nor-tel’s technologies were protected by patents filed in the United States. 135 Of the highest value patents that were in IPCo, as determined by Global IP, 77% of Nor-tel’s technologies were protected by patents filed only in the United States. 136
P. All Integrated Entities Expected to Benefit from IP Monetization
While the stakeholders were considering the alternatives for IP monetization, the expectation was always that the Licensed Participants, and in turn their creditors, would benefit from an eventual sale of the Patent Portfolio or running a business based off of the IPCo Model. As the Monitor’s representative noted at trial, the IEs cooperated to maximize the value of the Patent Portfolio, including developing the IPCo Model. 137 The expectation that the Licensed Participants would share in the benefit from the monetization of the Patent Portfolio is reflected by the financial burdens they shared in evaluating that option. The IEs jointly retained Global IP. 138 The IEs, in turn, jointly owned all “[djeliverables, including Intellectual Property rights in the Deliverables” created by Global IP. 139
Q. Residual Patent Portfolio
By the time that all of the Business Line Sales were completed in March 2011, Nor-tel had no remaining operating businesses. What it did retain was a residual patent portfolio, consisting of approximately 7000 patents and patent applications. 140 These were principally patents and applications that were not used in any of the Business Lines and therefore were not subject to licenses to the Business Line Sales purchasers. 141 In addition, the Residual IP portfolio included patents used by multiple Business Lines and licensed to the purchasers of those Business Lines. The costs to capitalize an IPCo Model were estimated to have been between $269 million. and $417 million. 142 Ultimately, the Canadian Debtors and the Monitor advised the representatives of the other Debtors and the other stakeholders that the Canadian Debtors would not provide any funding to establish IPCo. 143 ■
If any Debtor or other interested party wished to pursue IPCo, they would need to purchase the residual patents from NNL. 144 No Estate or other interested party ever sought to effect such a purchase. In *519 stead, all of the Estates agreed to pursue a sale process for the Residual IP and to terminate consideration of the IPCo option.
R. The Sale of Nortel’s Residual Patent Portfolio
When Google submitted a non-binding indication of interest of $900 million in February 2011, the proposed price was sufficient for the Estates to discuss a sale as a credible alternative to IPCo. 145 Negotiations with Google commenced in earnest in early 2011. 146
In the IP Stalking Horse Agreement, Google requested a provision pursuant to which Nortel definitively agreed to sell the Residual IP to a third party. 147 Nortel therefore agreed to terminate consideration of IPCo as part of the sale process. 148 However, the IPCo option could be pursued if done in the context of a qualified competing bid, such as a proposal by a third party to sponsor a transaction that would allow Nortel to retain 'the Patent Portfolio and operate IPCo. 149 Google insisted that the current licenses be terminated as part of the sale. 150
Extensive negotiations culminated with the signing of a stalking horse agreement dated April 4, 2011, between each of the IEs as Sellers and Ranger, Inc., a wholly owned subsidiary of Google for a purchase price of $900 million, (the “IP Stalking Horse Agreement”). 151 The U.S. and Canadian Debtors each filed motions seeking approval of their entry into the IP Stalking Horse Agreement and the related auction process. 152 The Monitor filed a report in support of the Canadian Debtors’ entry into the IP Stalking Horse Agreement in which it stated that title to Nortel’s intellectual property was held by NNL, but that each of the IEs had Exclusive Licenses to that intellectual property in their Exclusive Territories. 153
A joint hearing was held before the U.S. and Canadian Courts to consider these motions on May 2, 2011. 154 The U.S. and Canadian Courts issued orders approving the entry into the agreement for a purchase price of $900 million and the rules for the conduct of a subsequent auction for the Patent Portfolio. 155
*520 When the auction commenced on June 27, 2011, senior representatives of Apple, Microsoft, Intel, Sony, Ericsson, RIM (now Blackberry) and EMC, among others, assembled at the New York offices of NNI’s counsel. 156 Over the course of four days in late June 2011, vigorous bidding took place. 157
The final winning bid of $4.5 billion came from Rockstar and resulted in an agreement of sale (the “Rockstar Sale Agreement”). 158 As part of the Rockstar Sale Agreement, the relevant U.S. and EMEA Sellers executed a License Termination Agreement pursuant to which their license rights in relation to the residual patents were terminated and they would be granted a right to an allocation of a portion of the sales proceeds in consideration for such termination. 159 Through the Rocks-tar Sale Agreement and the License Termination Agreement, the Debtors agreed to transfer all of their rights in the Patent Portfolio to Rockstar. 160
S. The Rockstar Sale Approval Hearing
The Rockstar Sale Agreement was presented for approval to the U.S. and Canadian Courts at a joint hearing on July 11, 2011. 161 At that hearing, representations were made about the sale process and the substantial benefit of the result for all of the IEs. 162 Both the U.S. and Canadian Courts approved the sale. 163 The Monitor’s public report recommending the sale to the Courts represented that NNL’s legal title in the Patent Portfolio was “subject to ... intercompany licensing agreements with other Nortel legal entities around the world ... in some cases on an exclusive basis,” referring to NNI and the other Licensed Participants. 164
THE PARTIES AND THEIR ALLOCATION POSITIONS
The parties who participated in the trial and briefing are described below, together with their positions on allocation. The Court is merely reciting their arguments without comment.
A. The U.S. Interests
The U.S. Interests include NNI and certain affiliates as debtors and debtors in possession, the Committee and the Bondholders. The Committee and the Bondholders also participated in the trial and submitted their own briefs.
Allocation involves a two-step process. First, the Courts must identify and characterize the property or legal rights transferred or surrendered by each debtor— here grouped by interest. Second, the Courts must value the property or legal rights. The buyers of the Business Lines and Patent Portfolio paid fair market val *521 ue, determined through auctions for the assets. Allocation is therefore based on the relative value of the assets each debtor transferred. The Courts should apply standard valuation methods which courts have consistently followed, including in insolvency proceedings. Also, the Courts must take into account that in insolvency, equity takes last. Simply, NNTs position is that allocation must be the value of the assets it sold or surrendered.
Allocation must be premised on fair market value, the foundational valuation metric widely accepted in the law and economics throughout the world. See United States v. Cartwright, 411 U.S. 546, 550-51 , 93 S.Ct. 1713 , 36 L.Ed.2d 528 (1973); Pocklington Foods Inc. v. Alberta (Provincial Treasurer) (1998), 218 A.R. 59 , para. 197, 354 (Can.Alta.Q.B.), aff'd (2000), 250 A.R. 188 (Can.Alta.C.A.) (explaining that “the most common value standard is fair market value”); Phillips v. Brewin Dolphin Bell Lawrie Ltd, [2001] UKHL 2, [2001] 1 W.L.R. 143 (H.L.), 154 (appeal taken from Eng.). 165
Basing allocation on the fair market value of the assets each selling debtor transferred or relinquished in the Sales is consistent with the MRDA. The MRDA states that if a Licensed Participant becomes insolvent it may be required to surrender the Exclusive License, but only in exchange for the fair market value of the license. The MRDA, Schedule A, RPSM formula that the parties used to divide operating income for transfer pricing purposes when operating' as a functioning MNE does not control. MRDA at Arts. 1, 11. The MRDA explicitly provides that the RPSM transfer pricing formula does not apply to the sale of a line of business.
The RPSM formula was designed to shift income from the U.S. to Canada (within the confines of the arm’s length principle) so that NNL and Nortel as a whole could take advantage of the much lower effective tax rate for NNL in Canada rather than the effective tax rate for NNI in the U.S. Indeed, the IRS criticized and never approved the RPSM formula, which ultimately led to a settlement increasing NNI’s revenue and decreasing NNL’s revenue by $2 billion for 2001-2005. The RPSM formula is therefore inappropriate for use in connection with allocation.
Similarly, the parties’ transfer pricing formula is irrelevant because the buyers were in no way bound by and thus would not have been concerned with how Nortel divided operating profits for transfer pricing purposes among affiliated entities. None of the Debtors advocate an approach based solely on the manner in which Nor-tel divided up operating profits (or, in fact, losses) when it was an operating MNE (■ie., pursuant to the RPSM formula set forth in Schedule A to the MRDA).
In insolvency, a debtor’s assets must be made available to satisfy the creditors of that debtor before equity may recover. 166 *522 Each Selling Debtor is entitled to the value of the assets it sold and the allocated are Sales Proceeds. available for distribution to that debtor’s creditors. The key-drivers of the value of a business are revenue and cash flow. 167 NNI generated approximately $46 billion in revenue from 2001 to 2009, which amounted to 69.5% of the revenue generated by the IEs during that same period. 168 NNI generated 75.9% of the cash flow of the IEs during that period. 169
The vast majority of patents and patent applications in the Patent Portfolio were filed only in the United States. 170 This was a clear recognition by NNL that the U.S. market as to which NNI alone had the exclusive right in perpetuity to exploit — was the most valuable market for Nortel. It was the only market where NNL determined it was worth seeking patent protection for a majority of the inventions the IEs created and, consequently, the only market where those inventions have value (because filing in the U.S. but not in any other jurisdictions means that any third party may use these inventions outside the U.S. without fear of patent infringement suits). By designating the U.S. as the sole jurisdiction where the vast majority of Nortel’s Patent Portfolio was filed, NNL acknowledged that the U.S. is the most profitable market for exploiting Nortel’s IP and, accordingly, that NNI’s exclusive rights in the U.S. market were by far the most valuable.
The allocation of the Patent Portfolio Sales proceeds by debtor group is as follows:
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Each of the Business Lines was sold as a going concern in a coordinated auction *523 and sales transaction. Similar to the Patent Portfolio, the buyers of the Business Lines paid for the amount of value they expected to generate from the assets, not the value each Nortel estate may have derived from the assets in bankruptcy if they were not sold.
The U.S. Debtors contributed the majority of the value in the Business Line Sales. The U.S. Debtors relinquished 70% of the total value of the Business Line Sales. 171 By contrast, the Canadian and EMEA Debtors contributed 11.9% and 18%, respectively, to the Business Line Sales. 172
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A potential buyer naturally would be most interested in acquiring the Business Lines in the territories that are expected to generate the most future cash flows. Here, NNI was the only Nortel entity operating in the most valuable U.S. market. It was the only Nortel entity with the exclusive right to operate in the U.S. market ánd it had the customer relationships in the U.S. NNI had the exclusive right to convey and did convey those rights, and is entitled to be paid accordingly.
B. The Committee
The Committee participated in the trial and supports the U.S. Interests.
C. The Bondholders
The Bondholders consist of entities holding bonds which NNC, NNL, NNI and NNC issued or guaranteed. Pursuant to the Indenture dated as of July 5, 2006, NNL issued multiple series of senior notes guaranteed by NNC and NNI, including two series of fixed rate 10.75% senior notes in the aggregate principal amounts of $450 million and $675 million due 2016, and a series of floating rate senior notes in the aggregate principal amount of $1 billion due 2011. Pursuant to the Indenture dated as of March 28, 2007, NNC issued 2.125% convertible senior notes due 2014 in an aggregate principal amount of $575 million and 11.75% convertible senior notes . due 2012 in an aggregate principal amount of $575 million. The 2007 Indenture Notes are each guaranteed by NNI and NNL.
The Bondholder Group represents over half of the Nortel Entities’ bonds. It is the single largest creditor group of both the U.S. Debtors and Canadian Debtors. The Bondholder Group fully .supports the fair market approach which the U.S. Interests advocate and opposes the other parties’ positions in accordance with the arguments of the U.S. Interests.
D.The EMEA Debtors
The EMEA 173 Debtors are acting *524 through the Joint Administrators 174 for Nortel Networks UK Limited and certain of its affiliates in proceedings under the Insolvency Act of 1986, pending before the High Court of Justice of England. The EMEA Debtors’ position is that each party’s share of the Nortel asset sales proceeds should be determined according to its relative contributions to creating the value of what was sold. This approach is consistent with (i) the way the Nortel companies allocated the fruits of their business prior to the insolvency filings, (ii) the rights of the parties, and (iii) fundamental principles of justice and fairness.
In determining how to allocate the approximately $7.3 billion in proceeds from the sales of Nortel’s global businesses (the “Business Line Sales”) and pool of residual patents (the “Residual Patent Sale”) among the three estates, i.e., the U.S. Debtors, the Canadian Debtors, and the EMEA Debtors, it is first necessary to identify what classes of assets were conveyed in each of the sales, because the rights of the parties differ in relation to each class of assets. The largest portion of the proceeds from the Business Line Sales and the Residual Patent Sale is attributable to the value of Nortel’s IP, which had been the main economic driver of Nortel’s business. The biggest issue in the case is therefore how to allocate the asset Sales Proceeds attributable to IP.
The EMEA Debtors want allocation based on the relative contributions to the creation of the IP. The IP that was conveyed in the Business Line Sales-and the Residual Patent Sale was the product of collaborative joint R & D efforts by each of the five Nortel residual profit split (“RPS”) entities, ie., NNL, NNI, NNUK, NNSA, and NN Ireland. Each spent billions of dollars on R & D. The product of this R & D was a large portfolio of valuable technology in which the contributions of the individual RPS entities were integrated and indivisible. Prior to insolvency, Nortel allocated the fruits of exploitation of the jointly created IP based on the relative-financial contributions of the Nor-tel entities to the creation of that IP. The EMEA Debtors contend that the benefits of the sale of Nortel’s IP should be allocated among the estates using the same approach.
The contribution approach is consistent with the preexisting rights of the parties, as confirmed by how the parties behaved in sharing proceeds, agreements, dealing with third parties including the IRS and CRA, in allocating the proceeds from a prepetition sale and other indicia.
In their prepetition arrangements, the parties have themselves already created an objective formula for how to allocate the value of Nortel’s IP based on their respective contributions to the creation of that value: Because of the integrated and additive nature of R & D at Nortel, and the indivisible character of the IP portfolio that was the product of that R & D, the parties agreed that every dollar spent on R & D by any Nortel party had the same value as any other dollar. The parties therefore agreed that the value of IP should be allocated based on their relative R & D spending during the period when a particular commercially exploitable technology was developed, ie., during the useful (or economic) life of the IP. Accordingly, the task for the Courts in allocating IP value is to determine (i) the value of the IP transferred to the purchaser in each of *525 the asset sales, and (ii) the relative R & D spending of each of the five RPS entities during the period when that IP was developed. This was the approach taken by Nortel in allocating the proceeds of the one major prepetition asset sale, and it is the approach that would have been taken if the Business Line Sales or the Residual IP Sale had taken place prior to the insolvency filings.
E. The Monitor and the Canadian Debtors
' The Canadian Interests consist of the Canadian Debtors, NNC and NNL, and Ernst & Young who the Canadian Court appointed to serve as Monitor by Order, dated January 14, 2009.
In addition to the powers and duties set out in the CCAA Initial Order dated January 14, 2009, the Monitor’s powers were expanded by order dated August 14, 2009 (“the First Expansion of the Monitor Powers Order”). 175 The First Expansion of the Monitor Powers Order provides, among other things, the Monitor with the authority to cause the Canadian Debtors to take various actions in connection with the sale of the business units and to conduct, supervise and direct any procedure regarding the allocation and/or distribution of proceeds of any sale. 176 In its Eighty-Eight Report dated September 26, 2012, following the Business Line Sales and sale of the Residual IP, the Monitor reported that, in light of the cessation of public reporting obligations, the directors and officers of the Canadian Debtors indicated they would resign their positions. 177 By order dated October 3, 2012 (the “Second Expansion of. Monitor Powers Order”), the Court added to the powers of the Monitor by, among other things, authorizing and empowering, but not obligating, the Monitor to exercise any powers which may be properly exercised by a board of directors of any of the Canadian Debtors. 178 The Second Expansion of the Monitor Powers Order in no way limited the powers and protections provided to the Monitor under prior orders of the Court, the CCAA or applicable law. 179
The central question before the Courts concerns the basis on which approximately $7.3 billion in Sales Proceeds, realized on the sales of Nortel assets following the insolvency filings in 2009, should be allocated among the Estates. The'Monitor’s position on this question is that the proceeds should be allocated based upon the value of the property rights transferred or surrendered by each Debtor in connection with the Business Line Sales and the Rockstar Transaction. In the context of insolvency, it respects the legal rights of each creditor to recover, from the Debtor indebted to it, out of funds that represent that Debtor’s legal entitlement to a portion of the Sales Proceeds. This approach is, in essence, the one that the Courts would follow in a priority dispute over property or over funds derived from property — that is, to determine the priorities and how funds will flow according to the applicable legal rights.
The proper approach to allocation involves a two-step process. First, the spe *526 cific property or legal rights that were transferred or surrendered by each Debt- or must be identified and correctly characterized. The second step involves the valuation of those rights.
The Business Line Sales involved the transfer to purchasers of certain categories of assets, including, most importantly, IP. The Rockstar Transaction involved almost exclusively the transfer of IP. The identification and characterization of the property rights in, or legal rights to, the IP that was transferred or surrendered in the sales are at the center of the dispute between the parties.
The Monitor’s position is that the IP transferred in each of the sales was legally owned by NNL, the parent operating company of Nortel. It is also the Monitor’s position that the only legal rights related to the IP which were held by NNL subsidiaries who are certain of the U.S. and EMEA Debtors were not ownership of the IP, but were license rights that had been granted to them by the IP’s owner, NNL, pursuant to, in accordance with, and limited by, the terms of the MRDA.
This position follows from the clear words of the MRDA, most notably (i) the MRDA’s express provision that legal title to the IP is and shall be vested in NNL and (ii) the MRDA’s express grant of license rights by NNL (a grant which would be impossible if NNL were not the owner of the IP in question). It is consistent with the controlling Ontario law which governs the MRDA and which provides that a license grants no property interest, but is rather a contractual consent by an owner which gives rights that are limited by the terms of the license. It is also consistent with the history of NNL as the technology-rich parent of the U.S. and EMEA Debtors, the agreements that preceded the MRDA, the thousands of patent registrations which identified NNL as the owner of the patents, and the description, and inclusion as a plaintiff, of NNL as the patent owner in actions that were taken to enforce patent rights.
NNL’s ownership of the IP bears directly on the second aspect of the allocation question, namely, the value of the property rights transferred. It was ownership of IP that was transferred in the Business Line Sales and, accordingly, it was ownership for which the purchasers paid. The proceeds that are attributable to that transfer of ownership is allocable to NNL as the IP’s owner.
The characterization (including the scope) of the rights of the U.S. and EMEA Debtors as license rights, also bears directly on the second aspect of the allocation question, because it goes to the value of the rights that were surrendered. The license rights of the U.S. and EMEA Debtors were not transferred to the purchasers in any of the sales. They were non-transferrable rights, which were surrendered or terminated but not transferred. The question to be determined with respect to the terminated licenses raises a valuation issue: not one which inquires into what the purchasers paid for licenses (since the purchasers did not acquire the licenses), but rather one which inquiries into the value of what the U.S. and EMEA Debtors gave up. When a license is given up, what the licensee loses is the future opportunity to earn profit from using the license in accordance with its terms. A valuation of those license rights must be based upon the terms and scope of the license, in order to determine the profits, if any, that the licensees would have earned had they not surrendered their licenses but had operated under them in accordance with the licenses’ terms. To the extent that, in terminating their license rights in connection with the sales, the U.S. and EMEA Debtors gave up some *527 thing of value then the value of those license rights is properly allocated to the U.S. and EMEA Estates.
The scope of the license rights requires careful examination. That examination, conducted pursuant to the Ontario law of contractual interpretation, reveals that the license rights granted by NNL under the MRDA were not unlimited. They did not grant to the licensees the right to use, for all purposes, the IP that NNL owned; they granted only the right, exclusive in the designated territories, to use the IP for the purpose of making or selling “Products”, a term defined by the MRDA. The definition of “Products” is limited to those products, software and services that were developed or proposed to be developed by or for one or more of the signatories to the MRDA (each a Nortel entity), and no one else. In other words, the MRDA license grant only permitted the use of the IP in connection with Nortel Products made (or proposed to be made) by or for Nortel Entities. ■
Thus, with respect to the assets sold or surrendered in the Business Line Sales, the proper approach is as follows. First, tangible assets are valued based on their net book value, which approximates to their fair market value. Each Debtor should receive an allocation equal to the net book value, as identified in Nortel financial statements, of the tangible assets it contributed to each sale. Second, in-place workforce transferred to the purchasers in each sale is valued based on the cost that would be incurred to replace the employees in question. Each Nortel Debtor should receive an allocation equal to the replacement cost for the employees that were transferred to each purchaser in the Business Line Sales. Third, it is necessary to value the license rights the U.S. and EMEA Debtors had to the Nortel IP, which license rights were terminated in connection with the sales of Nortel’s then operating businesses. As with any other contract-based right, the value of the license rights is equal to the amounts that the licensees could have earned had the licenses not been terminated. Thus, the value of the license rights is equal to the present value of the future operating profit that could have been earned by the U.S. and EMEA Debtors had the Nortel businesses continued to operate. This value includes the value of any customer .relationships associated with the U.S. and EMEA Debtors, since the value of customer relationships is determined by the present value of the future cash flows that those relationships could produce — the very same cash flows that the licenses would have generated. Thus, a determination of the present value of the future cash flows that would have accrued to the U.S. and EMEA Debtors, if the Nortel businesses had continued to operate, gives them appropriate credit both for any interests they had in customer relationships and for the licenses they terminated. This approach takes into account the cash inflows (such as revenues) and cash outflows (such as the costs associated with earning those revenues, including the sharing of operating profits and losses required by the MRDA). Any Sales Proceeds that are in excess of the aggregate of the foregoing values (i.e. the aggregate of the value of the tangible assets, the in-place workforce, and the license rights) are attributable to the value of the IP (unencumbered by the license rights) owned by NNL and to the value of any customer relationships owned by NNL, being assets which NNL transferred to the purchaser. Those proceeds are properly allocated to NNL.
With respect to the sale of the residual patent portfolio, this involved the transfer of ownership of IP by NNL to Rockstar. There were no tangible assets and virtually no in-place workforce transferred as *528 part of this sale transaction. License rights were surrendered, but that fact does not imply that they were valuable. On the contrary, the License Termination Agreement for the Rockstar Transaction specifically provided that the termination itself would not affect the ownership rights that any of the sellers may have to any IP.
A valuation of the license rights surrendered by the U.S. and EMEA Debtors in connection with the Rockstar Transaction requires consideration of the scope of the license as it relates to two categories of patents that were sold:
(a) First, there were patents transferred in the sale that were not incorporated into any proposed or actual Nortel Products. Due to the terms of the license, properly construed, the license rights had no value in so far as they related to such patents.
(b) Second, with respect to the patents that had been incorporated into proposed or actual Nortel Products, the value of the license rights in so far as they related to those patents has already been accounted for in valuing the license rights surrendered in connection with the Business Line Sales. This is because the Business Line Sale purchasers acquired and paid for licenses to some of the IP later sold in the Rockstar Transaction.
Accordingly, since there is no value attributable to the U.S. and EMEA license rights over and above the value that has already been ascribed to them in the context of the Business Line Sales, the proceeds realized on the Rockstar Transaction are attributable to the transfer of NNL’s ownership of the patents and properly allocated to NNL.
The Monitor submits that the Courts should allocate the Sales Proceeds as follows:
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F. Canadian Creditors’ Committee
The CCC represents the interests of more than 20,000 Canadian creditors and includes pensioners, pension interests, and current and former employees who have approximately $3 billion in claims against the Canadian Estate. The Sales Proceeds consist of approximately $2.8 billion from *529 the sales of Nortel’s Lines of Business and $4.5 billion resulting from the Residual IP Sale.
The Sales Proceeds should be allocated to the owners of the assets sold. Nortel was a Canadian-based technology company and its most valuable asset was its intellectual property, which was owned by Nor-tel’s Canadian parent corporation, NNL. In contrast, NNL’s main operating subsidiaries in the U.S. and the Europe, Middle East and Africa Regions (EMEA), held limited licenses granted by NNL within a carefully circumscribed field of use. As the owner of the most valuable asset owned and relinquished, NNL is entitled to receive most of the Sales Proceeds.
In the alternative, the Sales Proceeds should be allocated to the Nortel Debtors on a pro rata basis so as to provide each creditor having a valid claim the same common dividend. A pro rata allocation is the only fair and equitable alternative to an allocation based on the legal rights of the Nortel Debtors in the underlying assets sold.
G. Wilmington Trust Company as Trustee
Wilmington Trust, National Association (“Wilmington Trust”), appears in its capacity as indenture trustee for the notes NNL issued namely NNL 6.875% Notes due 2023, issued pursuant to that certain Indenture, dated as of November 30, 1988 (as amended, supplemented or modified) between Nortel Networks Limited and the Trustee, as successor trustee to The Bank of New York Mellon (formerly known as The Bank of New York) as successor trustee to the Toronto-Dominion Bank Trust Company.
Wilmington Trust argues that the pro--ceeds from the sale of the Nortel IP should be distributed according to the legal ownership interests in those assets established by the unambiguous written agreement of the parties, and that NNL is the legal owner of the Nortel IP. The license rights, the only property interest of the Licensed Participants, as defined in the MRDA with respect to the Nortel IP, should be determined by analyzing the value of those licenses had Nortel continued operating. Once that determination is made, such value should be distributed to those respective Licensed Participants. The remainder of the proceeds, which Wilmington Trust expects to be the vast majority thereof, would then inure to the unquestioned title holder and the only party with a legally recognized ownership interest in those assets, NNL.
The U.S. Interests and EMEA Debtors as the Licensed Participants seek to have these Courts: (i) rewrite the clear terms of the MRDA so that they are more to the Licensed Participants liking and (ii) engage in a hindsight reevaluation of the propriety of the conduct of the parties and their respective disclosures in the sale process. The Licensed Participants post-facto arguments cannot change the plain meaning of the MRDA, or the fact that all of the parties acted in the best interests of all of the Nortel Estates when pursuing sales that undisputedly maximized value for all of the Estates and their respective creditors; while prudently setting aside what all knew could be protracted and heated disagreement about allocation.
There is no question that NNL owned the Nortel IP. The only source of fights of any of the parties to the Nortel IP arise from the terms of the MRDA. The MRDA could not be more clear that NNL owned the Nortel IP and licensed the use of specific Nortel IP in specifically designated territories to the Licensees. The Licensees owned beneficial interests in such license rights — but did not own rights to the Nortel IP itself.
*530 The MRDA does not address the rights of the Licensees to any share of the value of the Nortel IP, except as arising from the split of the profits and losses from Nortel’s operations and sales of Products (as defined in the MRDA). It does not provide terms for the allocation of Sales Proceeds from the ultimate sale of the Nortel IP.
If the Courts conclude that the MRDA is not clear with respect to the ownership of the assets that were surrendered in the sale, and choose to allocate the Sales Proceeds instead in a manner tailored to combat unfairness, Wilmington Trust submits that an approach based on the UK Pension Claimants’ and/ or the CCC’s “pro rata” theory leads to the most equitable result. Allocation theories that have been advanced by the parties, including the U.S. Interests’ “revenue” theory, the EMEA Debtors’ “contribution” theory and the Pro Rata Theory are not based on the actual ownership of the assets that the Licensed Participants claim is the key question for allocation.
H. UK Pension Claimants
The Board of the UK Pension Protection Fund and Nortel Networks UK Pension Trust Limited (together, the “UK Pension Claimants” or “UKPC”) represents over 36,000 involuntary creditors of Nortel who were former employees of Nortel. There is a deficit in excess of $3 billion in the pension plan of which they are members.
The UK Pension Claimants submit that the Courts should determine the Allocation Litigation on the basis of a Pro Rata Distribution Model which has the effect of allocating sufficient funds from the Lock-box to permit a distribution within each Estate to all unsecured creditors on a pro rata, pari passu basis, relative to the amount of their unsecured claim, irrespective of the entity against which they may have a claim. There are no secured creditors of Nortel, and only a small number of preferred or priority claims. The return to unsecured creditors from a pro rata distribution model would be dictated by a number of factors including the ultimate level of unsecured claims and equitable alternative to an allocation based on the legal rights of the Nortel Debtors in the underlying assets sold. Nortel operated prior to insolvency as a highly integrated multinational that derived significant benefits from operating as “one Nortel”.
Based on the evidence; a pro rata distribution model is the most appropriate and just result for several reasons, including:
(a) Nortel was a technology company whose must valuable asset was its intellectual property assets;
(b) the assets that were co-developed, jointly used and collectively sold by the members of Nortel giving rise to the proceeds in the Lockbox were so profoundly integrated in creation, ownership and use that they should properly be considered as representing a common pool of assets of the Nortel as a whole;
(c) there exists no more credible, reliable, equitable or economically rational manner with which to disentangle those assets (most of which are intangible) and ascribe value to component parts rather than the Pro Rata Distribution Model; and
(d) in particular, and contrary to the allocation position of the U.S. Debtors and the Canadian Debtors, there was no ex ante agreement as to the distribution of the jointly used assets of Nortel when it ceased to do business, whether under the MRDA or otherwise.
The Allocation Litigation should establish a precedent for future international insolvencies involving integrated multina *531 tional enterprises, which eliminates territorial wrangling over what entity in a global insolvency involving a highly-integrated multinational enterprise whose assets are entangled should receive what recovery.
If the Courts conclude that ownership should not form the basis for allocating the Sales Proceeds, then the only fair and equitable alternative is to allocate the Sales Proceeds, taking into account approximately $1.7 billion in additional “Residual Assets” (cash and other assets in the possession of Nortel Debtors in various jurisdictions), among the Nortel Debtors so as to effect a pro rata distribution among creditors, such that each creditor receives a common dividend on its claim. A pro rata allocation is appropriate in light of the globally integrated nature of Nor-tel’s business. Pre-Petition, Nortel was an integrated multinational technology business operating along four interdependent Lines of Business that spanned borders and legal entities. Employees served dedicated Lines of Business for the benefit of the group as a whole.
The Business Line Sales reflected the integrated nature of the business. Purchasers bought Business Lines consisting of assets residing in various Nortel Entities scattered throughout multiple jurisdictions. Substantive consolidation, which contemplates the merger of the Estates under the supervision of a single court, is neither requested by the CCC nor necessary to effect an allocation that would yield a pro rata result. The Canadian Court and the U.S. Court each have equitable jurisdiction to order and direct that the Sales Proceeds be allocated in a manner that achieves a fair and equifable distribution to Nortel’s creditors, including the retired, disabled pensioners and other employees who relied and depended on the promise of pensions, health, disability and other benefits as part of their compensation for the significant value they contributed to Nortel. A pro rata distribution would result in all Creditors receiving an approximate 71% return on their Claims.
The Courts have an opportunity to set a precedent that will avoid the time and expense that has plagued the. Nortel proceedings for more than five years and has cost more than $1.3 billion in professional fees to date from occurring again in future. Territorial wrangling significantly diminishes value for stakeholders in a global insolvency involving a highly-integrated multinational enterprise whose assets are entangled, and ought not to be condoned or rewarded.
LEGAL ANALYSIS
The parties contemplated and agreed that it would be appropriate and necessary for the U.S. Court and the Canadian Court to confer. In the .Protocol which the parties presented and the Courts approved 180 the parties identified the “mutually desirable goals and objectives in the Insolvency Proceedings” as follows:
(a) harmonize and coordinate activities in the Insolvency Proceedings before the Courts;
(b) promote the orderly and efficient administration of the Insolvency Proceedings ■ to, among other things, maximize the efficiency of the Insolvency Proceedings, reduce the costs associated therewith and avoid duplication of effort;
(c) honor the independence and integrity of the Courts and other courts *532 and tribunals of the United States and Canada, respectively;
(d) promote international cooperation and respect for comity among the Courts, the Debtors, the Creditors Committee, the Estate Representatives (as such terms are defined in the Protocol) and other creditors and interested parties in the Insolvency Proceedings;
(e) facilitate the fair, open and efficient administration of the Insolvency Proceedings for the benefit of all of the Debtors’ creditors and other interested parties, where located; and
(f) implement a framework of general principles to address basic administrative issues arising out of the cross-border nature of the Insolvency Proceedings.
Debtors’ Motion for Entry of an Order Pursuant to 11 U.S.C. § 105 (a) Approving Cross-Border Court to Court Protocol, ¶ 13 (D.I.18).
The Courts have conducted the cases independently, while cooperatively. They are mindful that the parties expect them to communicate and determine whether they can arrive at consistent rulings. Thus, the Protocol further provides that:
The Judge of the U.S. Court and the Justice of the Canadian Court, shall be entitled to communicate with each other during or after any joint hearing, with or without counsel present, for the purposes of determining whether consistent rulings can be made by both Courts, coordinating the terms upon of the Courts’ respective rulings, and addressing any other procedural or administrative matters.
Protocol, ¶ 12 d(vi). The parties recognized the problems that could result were rulings by the Courts to diverge and one of the reasons the cases have progressed to date is that the Courts have communicated and have arrived at consistent rulings even while exercising their judicial independence.
The Courts have had discussions following the trial of the Allocation Dispute in an effort to avoid the travesty of reaching contrary results which would lead to further and potentially greater uncertainty and delay. Based on these discussions, the Courts have learned that although' their approaches to the complex issues differ, they agree upon the result. The Courts have different interpretations of the MRDA, but agree that the MRDA does not apply to or control the allocation of the Sales Proceeds for reasons discussed below. The Courts also agree that the self-serving allocation positions of the Canadian Interests, the U.S. Interests and the EMEA Debtors are not determinative or helpful.
It is incumbent upon the Court to determine a presumptive, baseline allocation approach which leads to an equitable result in the absence of some guiding law or agreement. The Court is convinced that where, as here, operating entities in an integrated, multi-national enterprise developed assets in common and there is nothing in the law or facts giving any of those entities certain and calculable claims to the proceeds from the liquidation of those assets in an enterprise-wide insolvency, adopting a pro rata allocation approach, which recognizes inter-company and settlement related claims and cash in hand, yields the most acceptable result.
There is nothing in the law or facts of this case which weighs in favor of adopting one of the wide ranging approaches of the Debtors. There is no uniform code or international treaty or binding agreement which governs how Nortel is to allocate the Sales Proceeds between the various insol *533 vency estates or subsidiaries spread across the globe.
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 MRDA does not include any provisions addressing the global insolvency or liquidation of the Nortel Group. The evidence at trial was overwhelming and undisputed that the MRDA was not intended to address that contingency:
a. Former Chief Legal Officer Clive Allen testified that the group-wide insolvency and liquidation of the Nortel enterprise was “inconceivable” and never a risk he addressed; 181
b. Former Sutherland Asbill & Brennan attorney Walter Henderson, who worked on transfer pricing for Nortel, testified that no consideration was given to how the RPSM methodology would work in the event of a liquidation of the Nortel entities “because we never thought about that eventuality coming to pass”; 182
c. Former director of transfer pricing at Nortel Michael Orlando testified that there is no provision in. the MRDA that deals with the insolvency of the entire organization; 183 and
d. Former director of international tax at Nortel Mark Weisz testified that the MRDA “was not intended to address [global] insolvency” and Nortel did not have any discussions about what would happen in the event of global insolvency. 184
Pursuant to an amendment executed in December 2008 to January 2009 and effective retroactive to January 1, 2006, proceeds from business sales are expressly excluded from global revenues within the RPSM calculation. 185 Mr. Orlando - confirmed that the MRDA did not address how to allocate proceeds from the sale of any Nortel business and that the third addendum made explicit that the MRDA did not apply to asset sales. 186 the MRDA was an attempt to allocate annual operating profits, and sales of assets were non-operating activities. 187
The U.S. Debtors, Canadian Debtors, and EMEA Debtors advance allocation positions which suffer from fatal, substantive flaws. EMEA fails to recognize that spending does not necessarily create value. The Canadian Debtors are nothing short of narcissistic in allocating the bulk of the Sales Proceeds to themselves and in their failure to recognize the contributions of the other Nortel companies and the realities of the manner in which the Nortel enterprise operated on a day-to-day basis. And the U.S. Debtors equate revenue to value without any regard to where the value-generating assets were developed or recognition of the fact that the $2.02 billion inter-company claim already accounts for their contributions as the primary breadwinner of Nortel. The Court’s determination to recognize inter-company and settlement claims as well as the cash in hand relegates the arguments raised against a pro rata approach to concerns for process *534 rather than substance. The Court has every confidence that the tribunals overseeing the Nortel insolvency proceedings across the globe will adjudicate the claims at issue therein in a just, efficient manner. The Court is prepared to act if they do not. In any event, such hypothetical, procedural hurdles simply do not persuade the Court against adopting the allocation approach which, clearly yields the most equitable result in these circumstances.
To be clear, the Court is not ordering cross-border, global substantive consolidation. The Court will respect the corporate separateness of the various Nortel operating subsidiaries by recognizing cash in hand and both the inter-company and settlement claims. The Court’s recognition of the inter-company claims and, in particular, the FCFSA $2.06 billion allowed claim, pays heed to the undeniable fact that NNI generated the lion’s share of enterprise-wide revenues. In other words, the fact that NNI is entitled to a greater share of the Sales Proceeds based on revenues is already baked into the case by virtue of the IFSA inter-company claim, thus making the U.S. Debtors’ revenue-based approach redundant. Further, the Court is not ordering a consolidated or coordinated global distribution to ensure that each creditor of the various insolvency estates actually receives a set, pro rata distribution. The Court is merely ordering that each estate be allocated a pro rata share of the Sales Proceeds based on the amount of claims against it, recognizing all inter-company claiins. Each Estate will distribute the funds as appropriate, through a plan process within the bounds of the applicable law.
The parties devoted great efforts to support their position on the MRDA. The Court and the Canadian Court do not agree on the meaning of the MRDA, but do agree that their respective analyses do not control the Allocation Dispute because the MRDA was never intended to govern the liquidation scenario which they are now deciding. The Canadian Court favors the ownership position which the Canadian Interests advocate for reasons the Canadian Court explains in its Endorsement. The U.S. Court finds that the U.S. Debtors’ and the EMEA Debtors’ positions that the factual matrix contravenes the “ownership” claim of the Canadian Interests is what the evidence shows. The Court’s discussion of the MRDA explains why the Court is fully satisfied that even in the MRDA, there is no basis to find that the Canadian Debtors owned all rights to the IP. Reading the MRDA in the manner required, the Court finds that the Canadian Debtors held bare legal title.
THE MRDA
A. Governing Law and Applicable Principles of Contract Interpretation
The Court and the Canadian Court have concluded that the MRDA does not control the Allocation Dispute. Nonetheless, because the MRDA is at the very center of the parties views of the Allocation Dispute, the Court must address the parties respective arguments. The starting point for the analysis of the MRDA is the law on contract interpretation.
All the parties agree that Ontario law governs the interpretation of the MRDA. Article 14(f) of the MRDA so provides. Such a choice of law provision is binding under both Ontario law and U.S. law. Hilgraeve Corp. v. Symantec Corp. 265 F.3d 1336, 1340-1341 (Fed.Cir.2001), cert. denied 535 U.S. 906 , 122 S.Ct. 1206 , 152 L.Ed.2d 144 (2002); Vasquez v. Delean Corp. (1998), 38 C.C.E.L. (2d) 230 at paras. 30-31 (Ont.S.C., Gen.Div.), citing Vita *535 Food Products Inc. v. Unus Shipping Co., [1939] A.C. 277 (Canada P.C.).
The goal of contractual interpretation is to give effect to the underlying objective intention of the contracting parties. See, e.g., Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 47; Consolidated-Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co., [1980] 1 S.C.R. 888 at paras. 25-26; Toronto-Dominion Bank v. Leigh Instruments Ltd., 1998 ONSC 14806, para. 415 (Can.Ont.S.C.J.). To determine the parties’ intent, a court examines two related components: (i) the words of the contract and (ii) their context. See G.R. Hall, Canadian Contractual Interpretation (Markham: LexisNexis Canada, 2d ed.2012) at 9; Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 50 (holding that “[contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix”). As the Supreme Court of Canada has recently held, “[t]he parole evidence rule does not apply to preclude evidence of the surrounding circumstances.” Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 60. The basic principles of contractual interpretation were clearly and concisely set out by the Ontario Court of Appeal in Salah v. Timothy’s Coffees of the World Inc. (2010), 74 B.L.R. (4th) 161 explained as follows:
The basic principles of commercial contractual interpretation may be summarized as follows. When interpreting a contract, the court aims to determine the intentions of the parties in accordance with the language used in the written document and presumes that the parties have intended what they have said. The court construes the contract as a whole, in a manner that -gives meaning to all of its terms, and avoids an interpretation that would render one or more of its terms ineffective. In interpreting the contract, the court must have regard to the objective evidence of the “factual matrix” or context underlying the negotiation of the contract, but not the subjective evidence of the intention of the parties. The court should interpret the contract so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity. If the court finds that the contract is ambiguous, it may then resort to extrinsic evidence to clear up the ambiguity.
See also In Kentucky Fried Chicken v. Scott’s Food Services Inc. (1998), 41 B.L.R. (2d) 42 (Ont. C.A.) stating the following regarding the interpretation of a commercial agreement at para. 27
Where, as here, the document to be construed is a negotiated commercial document, the court should avoid an interpretation that would result in a commercial absurdity. [City of Toronto v. W.H. Hotel Ltd. (1966), 56 D.L.R. (2d) 539 at 548 (S.C.C.) ]. Rather, the document should be construed in accordance with sound commercial principles and good business sense; [Scanlon v. Castlepoint Development Corporation et al. (1992), 11 O.R. (3d) 744 at 770 (Ont.C.A.) ]. Care must be taken, however, to do this objectively rather than from the perspective of one contracting party or the other, since what might make good business sense to one party would not necessarily do so for the other.
The “cardinal presumption” about the primacy of the language of the contract involves determining the parties’ intentions in accordance with the language that they have used. The court’s goal in *536 interpreting a contract is to determine the parties’ intent as expressed by the words that they have chosen. As the Supreme Court of Canada said in the seminal Eli Lilly v. Novopharm case:
[T]he contractual intent of the parties is to be determined by reference to the words'they used in drafting the document ...
Eli Lilly & Co. v. Novopharm, Ltd., [1998] S.C.J. No. 59 at para. 54 (S.C.C), See also Merck & Co. Inc. v. Apotex Inc., 2010 FC 1265 at para. 47.
Evidence of subjective inten tion — ie., evidence of what a party “understood” the contract to mean — is wholly inadmissible. A courts inquiry does not seek to determine what the parties actually intended or what they believed the words of their contract to mean. A leading text on contractual interpretation Canada provides:
[T]he exercise is not to determine what the parties subjectively intended but what a reasonable person would objectively have understood from the words of the document read as a whole and from the factual matrix.
Geoff Hall, Canadian Contractual Interpretation Law (2012) at para. 2.4.1; see also Ontario v. Imperial Tobacco Canada Ltd., 2012 ONSC 6027 at para. 29
The Ontario Court of Appeal in Dum-brell held that the interpretive exercise should focus on the words used, and not on the parties’ subjective beliefs:
Eli Lilly instructs that the words of the contract drawn between the parties must be the focal point of the interpretative exercise. The inquiry must be into the meaning of the words and not the subjective intentions of the parties.
Dumbrell v. The Regional Group of Companies Inc., 2007 ONCA 59 at para. 51; see also Eli Lilly & Co. v. Novopharm Ltd., [1998] S.C.J. No. 59 at para. 54
Courts simply must not consider evidence of what a party says he or she intended to agree to at the time of contracting, nor can courts consider evidence of what a party understands the words of the contract to mean. In Zaccardelli v. Kraus the Court explained that:
What [a party] thinks the documents mean is irrelevant and so not admissible What [a party] understood or intended is not relevant and so not admissible.
Zaccardelli v. Kraus, [2003] A.J. No. 442 at paras. 29-30 (Master).
Subjective understandings of the meaning of a contract do not become admissible by characterizing those understandings as forming part of the factual matrix. As the Court of Appeal stated in Primo Poloniato Grandchildren’s Trust (Trustee of) v. Browne:
While the scope of the factual matrix is broad,- it excludes evidence of negotiations, except in the most general terms, and evidence of a contracting party’s subjective intentions, [emphasis added]
Primo Poloniato Grandchildren’s Trust (Trustee of) v. Browne, 2012 ONCA 862 at para. 71 See also Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 57:
While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement.... While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement.
Evidence of the parties’ post-contracting conduct by definition is not part of the factual matrix and is generally *537 inadmissible to interpret the contract unless a court finds ambiguity. Geoff R. Hall, Canadian Contractual Interpretation Law (2012) at para. 3.2.2; York Bremner Development Ltd. v. FHR Properties Inc., [2007] O.J. No. 3484 at paras. 31-32 (S.C.J.) A contract is not ambiguous merely because it is difficult to interpret. Geoffrey L. Moore Realty Inc. v. Manitoba Motor League, 2003 MBCA 71 at para. 25; Paddon Hughes Development Co. v. Pan continental Oil Ltd., 1998 ABCA 333 at para. 29. Rather, a contractual provision is only ambiguous if it is “reasonably susceptible of more than one meaning”. Geoffrey L. Moore Realty Inc. v. Manitoba Motor League, 2003 MBCA 71 at para. 25.
Introductory recitals in a contract may not alter the operative terms' of the contract, but may be used as an interpretive guide to the parties’ intent. See, e.g., Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129 at para. 57 (relying on recitals to determine whether an agreement was a sublicense); Sistem v. Kyrgyz Republic, 2012 ONSC 4983 (Newbould, J.) at paras. 25-26 (using recitals to find that a party had an equitable interest in the property at issue). Accord Time Warner Entm’t Co., L.P. v. Everest Midwest Licensee, L.L.C., 381 F.3d 1039, 1048 (10th Cir.2004) (relying on a preamble to determine the purpose of a licensing agreement); Blackstone Consulting Inc. v. United States, 65 Fed.Cl. 463, 470 (Fed.Cl.2005) (noting that “recitals may be read in conjunction with the operative portions of a contract in order to ascertain the intention of the parties” (internal quotations omitted)); see also Stowers v. Cmty. Med. Ctr., Inc., 340 Mont. 116 , 172 P.3d 1252, 1255 (2007) (“Recitals in a contract should be reconciled with the operative clauses of the contract and given effect as far as possible.”)
A contract should always be interpreted “so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity.” Downey v. Ecore International Inc., 2012 ONCA 480 at para. 38 (quoting Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673 at para. 16); see also Unique Broadband Systems, Inc. (Re), 2014 ONCA 538 at para. 88 (“[A]n interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result.” (quoting Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10(SCC), [1980] 1 S.C.R. 888 , at p. 901)); id. at para. 89 (“[Commercial contracts should be ‘interpreted in the way in which a reasonable commercial person would construe them.’ ”). Accord Pan Am. Realty Trust v. Twenty One Kings, Inc., 408 F.2d 937 , 939 n. 4 (3d Cir.1969) (“Business contracts must be construed with business sense, as they naturally would be understood by intelligent men of affairs.” (quoting N. German Lloyd v. Guar. Trust Co. of New York, 244 U.S. 12, 24 , 37 S.Ct. 490 , 61 L.Ed. 960 (1917) (internal quotations omitted))); see also Baldwin Piano, Inc. v. Deutsche Wurlitzer GmbH, 392 F.3d 881, 883 (7th Cir.2004) (“When there is-a choice among plausible interpretations, it is best to choose a reading that makes commercial sense, rather than a reading that makes the deal one-sided.”). In this analysis, courts may also consider objective manifestations of the parties’ intent. See Sativa Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 57 (holding that the purpose of examining the “surrounding circumstances” of a contract “is to deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract”).
*538 .Finally, the foregoing ordinary principles of contract law apply equally to the interpretation of a license agreement such as the MRDA. See, e.g., Merck & Co. Inc. v. Apotex Inc., 2010 FC 1265 (Can. F.C.); Hemosol Corp., Re, [2006] O.J. No. 4018 (Can. Ont. S.C.J. [Commercial List]); Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129 ; Walt Disney Co. (Canada) Ltd. v. Philhobar Design Canada Ltd.; (2008), 47 B.L.R. (4th) 306 (Can. Ont.S.C.J.); White v. E.B.F. Manufacturing Ltd., 2005 NSCA167; Verdellen v. Monaghan Mushrooms Ltd., 2011 ONSC 5820; see also Roger T. Hughes & Dino P. Clarizio, Halsbury’s Laws of Canada— Patents, Trade Secrets and Industrial Designs (2012 Reissue) at para. HPT-138 (QL).
B. The Valuable “Bundle of Rights” that a Patent Affords
A patent confers valuable exclusivity by providing the party holding rights to.the patent the ability to prevent others from making, using or selling the patented invention. See 35 U.S.C. § 154 (a)(1); Patent Act (Canada), § 42. Patents are territorial; thus, a patent filed in the United States, for example, excludes others from utilizing the patent or the patented invention in the United States or importing the patented product into the United States. See 35 U.S.C. § 271 (a). A Canadian patent likewise confers in Canada “the exclusive right, privilege and liberty of making, constructing and using the invention and selling it to others to be used, subject to the adjudication in respect thereof before any court of competent jurisdiction.” Patent Act (Canada), § 42.
A patent “is a bundle of rights which may be retained in whole or in part, divided and assigned.”' Morrow v. Microsoft Corp., 499 F.3d 1332 , 1341 n. 8 (Fed. Cir.2007); see also Patent Act (Canada), § 42; Harvard College v. Canada, [2002] 4 S.C.R. 45 at para. 64. The bundle of rights” that comprise a patent may also be transferred to another party through a license. See, e.g., McCoy v. Mitsuboshi Cutlery, Inc., 67 F.3d 917, 920 (Fed.Cir. 1995); see also Patent Act (Canada), § 50(2); Rite Manufacturing Ltd. v. Ever-Tite Coupling Co. (1976), 27 C.P.R. (2d) 257 at para. 20 (Can. Registrar of Trade Marks) citing National Carbonising Co., Ltd. v. British Coal Distillation Ltd. (1936), 54 R.P.C. 41 (C.A.) at 56-57 (noting that “a patentee is fully entitled to assign his rights under the Letters Patent to another”).
1. NNL’s Claim to Legal Title to the IP
The Canadian Debtors’ position in the Allocation Dispute is that the MRDA establishes that they own all of the IP and therefore are entitled to all of the IP Sales Proceeds less a relatively minor value attributable to what they view as limited licenses held by the U.S. Debtors and the EMEA Debtors. The Canadian Debtors rely on the words of the MRDA which support them.
NNL’s claim of legal title to the IP is reflected in the MRDA’s first recital, which states: “Whereas legal title to all NN Technology is held in the name of NNL.” Article 4(a) of the MRDA states:
Except as otherwise specifically agreed, legal title to any and all NN Technology whether now in existence or hereafter acquired or developed pursuant to the terms of this Agreement shall be vested in NNL.
The MRDA further provides that “legal title” survives termination of the MRDA:
The provisions of Article 4 (Legal Title to NN Technology) with respect to NN Technology acquired or developed pursuant to this Agreement from the Effec *539 tive Date of this Agreement up to an including its expiry or termination date ... shall survive notwithstanding the expiry of this Agreement, or any termination of this Agreement for any cause whatsoever.
The Canadian Debtors argue that with this language and the MRDA taken as a whole, legal title meant ownership. The Canadian Debtors point to other provisions of the MRDA describing the ownership rights of NNL which include:
(a) NNL’s sole and exclusive right (without the obligation to anyone else, including the Licensed Participants) to file and prosecute patent applications (in the absence of which right, intellectual property could not be protected in the form of valuable patents); 188
(a) Licensed Participants owed to NNL (but NNL did not owe to the Licensed Participants) obligations of confidentiality regarding the IP; 189
(b) If a Participant withdrew from the MRDA, its exclusive license would terminate and be cancelled and NNL would be able to exercise all rights in the former Participant’s exclusive territory, 190 ; and
(d) NNL granted license rights to that IP to the U.S. and EMEA Debtors, pursuant to Article 5(a)(i) of the MRDA. Under Ontario law, the right to grant a license is a right enjoyed by the owner of the IP.
In support of its ownership claim, the Canadian Debtors look to the licenses under the MRDA. Article 5(a) grants two licenses: an exclusive license and a nonexclusive license. Those two licenses confer rights to perform the same activities, with those rights being granted on an exclusive basis to the Licensed Participants in their respective “exclusive territories”, and the rights being granted on a nonexclusive basis in the designated “non-exclusive territories”. Article 5(a) states as follows:
To the extent of its legal right to do so, and subject to the rights of relevant third parties, NNL hereby:
(i) continues to grant to each Licensed Participant an exclusive, royalty-free license, including the right to sublicense, which except as hereinafter provided shall be in perpetuity, rights to make, have made, use, lease, license, offer to sell, and sell Products using or embodying NN Technology in and for the Exclusive Territory designated for that Licensed Participant, and all rights to patents, industrial designs (or equivalent) and copyrights, and applications therefor, and technical know-how, as necessary or appropriate in connection therewith (“Exclusive License”); and
(ii) grants to each Licensed Participant, as of January 1, 2009 (the “NonExclusive License Effective Date”), a non-exclusive, royalty-free license, including the right to sublicense, which except as hereinafter provided shall be in perpetuity, rights to make, have made, use, lease, license, offer to sell, and sell Products using or embodying NN Technology in and for the NonExclusive Territory, and all rights to patents, industrial designs (or equivalent) and copyrights, and applications therefor, and technical know-how, as neces *540 sary or appropriate in connection therewith (“Non-Exclusive License”).
NNL granted a license to make “Products” that use or embody such IP. Article 5(a) states that the license is “to make, have made, use, lease, license, offer to sell, and sell Products ...” and “rights to patents ... as necessary or appropriate in connection therewith”. The definition of “Products” at Article 1(g) of the MRDA states:
“Products” shall mean all products, software and services designed, developed, manufactured or marketed, or proposed to be designed, developed, manufactured or marketed, at any time by, or for, any of the Participants, and all components, parts, sub-assemblies, features, software associated with or incorporated in any of the foregoing, and all improvements, upgrades, updates, enhancements or other derivatives associated with or incorporated in any of the foregoing.
The license rights thus consist of a right to make, use or sell products, software or services that used or embodied Nortel IP and that were made or sold (or proposed to be made or sold) by, or for, any of the parties (“Participants”) to the MRDA, and the use of certain Nortel IP as necessary or appropriate in connection with the making, using or selling of “Products”. The license also included a right to sublicense.
The MRDA also granted Licensed Participants the right to assert actions and recover damages in their respective territories for infringement or misappropriation of NN Technology by others.
The Canadian Debtors’ reliance on a strict interpretation of the MRDA ignores both the factual matrix from which the MRDA arose and a reading of the MRDA as an integrated whole. The MRDA simply does not capture the economic reality that the non-Canadian participants, and the U.S. Debtors in particular, were generating the majority of the value of the Nortel Enterprise. The U.S. Debtors’ interpretation of the MRDA accurately incorporates the MRDA as a whole.
As discussed earlier, the Court is required to review the MRDA in the context of the factual matrix which aids in determining the meaning of the words against the relevant background. Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 48. Indeed, a court should consider the factual matrix even if a contract is unambiguous. Sattva, 2014 SCC at 53. While the evidence of the factual matrix may not include the subjective intent of the parties, it does include “the genesis of the transaction, the background, the context [and] the market in which the parties are operating.” Kentucky Fried Chicken Canada v. Scott’s Food Services, Inc., [1998] O.J. No. 4368 at para. 25 (Can. Oct. C.A.)
Contrary to the arguments of the Canadian Debtors, the MRDA establishes the Participants’ shared ownership of the Nor-tel assets which are now the Sales Proceeds. The facts make it clear to the Court that the U.S. Debtors and the EMEA Debtors held an economic and beneficial ownership interest in Nortel’s assets and thereby are entitled to an equitable allocation of the Sales Proceeds.
2. The Factual Matrix Surrounding Transfer Pricing, Historical Business Practices and Custom of the Industry
The MRDA grants the Licensed Participants all valuable rights to and beneficial ownership in NN Technology in their respective territories. The Court looks to the purpose, rules, and representations underlying Nortel’s transfer pricing agreements, including the R & D CSAs and the *541 MRDA; Nortel’s pre-petition business practices; and custom in the industry. 191
Transfer pricing rules and regulations require that each entity in an MNE “price its related party transactions as if the entity were at arm’s length from its parent and affiliated entities within the MNE.” 192 Transfer pricing regulations emphasize economic ownership that arises from the actual functions, assets, and risks of each entity rather than the holding of legal title. 193 The OECD (Organization for Economic Co-operation and Development) Guidelines state that each party to a CSA must be “entitled to exploit its interest in the [CSA] separately as an effective owner thereof and not as a licensee.” 194 If a CSA participant’s “contribution entitles [that party] to obtain only a right to use intangible property ... and the [party] does not also obtain a beneficial interest in the intangible property itself,” then that contribution “would constitute a royalty for the use of intangible property.” 195 Similarly, CRA Information Circular 87-2R affirms these principles, providing that “each participant in a [CSA] is not required to be a legal owner of [intangible] property, but each participant must enjoy substantially similar rights, benefits, and privileges as a legal owner (effective or beneficial ownership).” 196
Nortel’s transfer pricing agreements satisfied these principles:
(a) The final R&D CSAs, the cost-sharing agreements that preceded the MRDA, provided that each CSP other than NNL held an “Exclusive Royalty-Free License to NT Technology” in the geographic territory assigned to that CSP, while “legal title to all NT Technology whether now in existence or developed pursuant to the terms of [the] Cost Sharing Agreements” was vested in NNL. 197
(b) The third recital of the final R&D CSAs provided that the CSPs “wish[ed] to share the costs and risks of research and development services or activities in return for interests in any NT Technology that may be produced by such services or activities.” 198
(c) Article 7 of the final R&D CSAs provided that each' licensed CSP held “the primary right and obligation to bring and defend in and for [its exclusive territory], at its own expense, and for its own benefit, any proceedings relating to alleged infringement of its rights to the NT Technology by a third party or the alleged infringement by Participant’s use of the NT Technology *542 of the rights of third parties,” with NNL having the right to enforce only if the licensed CSP failed to do so. 199
(d) Article 10 of the final R & D CSAs established that upon the expira-' tion or termination of the agreement, each licensed CSP acquired “a fully paid up license” permitting it to continue to exercise its rights in its exclusive territory, without being subject to any further cost sharing payments to NNL. 200 The Licensed Participants maintained their effective ownership of NN Technology under the MRDA. See, e.g., supra Findings of Fact, Section III.C.l (explaining how tax authorities would have required NNL to make “buy out” payments had the Licensed Participants’ rights to Nortel technology been diminished during the transition from the 1992 R & D CSA to the MRDA).
Nortel personnel represented to tax authorities that each Licensed Participant enjoyed economic and beneficial ownership of Nortel IP in its exclusive territory under the R & D CSAs and the MRDA. See, e.g., The Canada Trust Co. v. Russell, Browne et al., [2012] ONCA 862 at paras. 21-23,83-88 (ruling that correspondence with the CRA regarding the potential adverse tax consequences of a proposed amendment to a contract, as well as a CRA advanced ruling on that subject, must be considered to discern the parties’ intent). For example:
(a) In March 2002, Nortel reported to the IRS, CRA and Inland Revenue that from an' economic standpoint dating back to the previous R & D CSA, each IE “could be considered to ‘own’ the [Nortel] technology as it related to its specific region.” 201
(b) This echoed Nortel’s previous representation to Inland Revenue that “although Nortel Canada has legal ownership of Nortel’s Intellectual Property, each participant [in the R & D CSA] has beneficial ownership, within their’ country of incorporation.” 202
(c) In July 2003, Nortel wrote in its Transfer Pricing Report that the parties to the R & D CSA each “contribute to the development of the intangible, and as such share in its ownership.” 203
(d) In 2003, in response to questions posed by the relevant taxing authorities, Nortel stated that all IEs were “owners of the intangible property.” 204
(e) In November 2004, in a response to an IRS Information and Document *543 Request for Functional Analysis, Nortel explained that the IEs “have agreed to continue participating in the future benefits of new IP” under the RPSM because they were “responsible for ongoing entrepreneurship and risk-taking functions with respect to the IP arising from their collective R & D efforts.” 205
(f) In 2008, in a joint request for a new APA to cover the years 2006-2011, NNL and NNI told the CRA and IRS that although IP was “registered” in NNL’s name, “[e]ach IE maintain[ed] an economic ownership in the IP.” 206
Nortel’s enforcement and sublicensing practices prior to the bankruptcy confirm the Licensed Participants’ exclusive economic and beneficial ownership and rights. For example:
(a) NNI exercised its enforcement rights with respect to Nortel IP by suing third parties for infringement of Nortel patents in the United States, even when NNI was not in the business of making anything similar to the third party’s infringing products. 207
(b) Nortel’s legal department recognized that NNI, as the exclusive license holder in the United States, held substantially all rights to Nor-tel’s U.S. patents, and therefore had the righ

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/8498397. Public record. Not legal advice.