Well, so much for that eagerly awaited legal battle! After inching toward a historic court case in which ebook reader maker Barnes & Noble would finally test the validity of Microsoft’s Android-based patents, the two firms suddenly announced a sweeping settlement this week. Not only that, but Barnes & Noble and Microsoft are also partnering to help spin off the Nook ebook reader platform as a new company.

What?!

The sudden settlement of the Barnes & Noble patent-infringement lawsuit would be blockbuster news on its own. But with the two companies now partnering on a Nook spinoff—to be called Newco, of all things—all bets are off. The two one-time enemies are now ... partners.

“The shift to digital is putting the world’s libraries and newsstands in the palm of every person’s hand, and is the beginning of a journey that will impact how people read, interact with, and enjoy new forms of content,” Microsoft President Andy Lees said in a prepared statement. “Our complementary assets will accelerate e-reading innovation across a broad range of Windows devices, enabling people to not just read stories, but to be part of them. We’re at the cusp of a revolution in reading.”

Under the terms of the settlement, both Barnes & Noble and Newco have acquired “a royalty-bearing license under Microsoft’s patents” for the Nook ebook reader and tablet products, which was Microsoft’s goal in the first place: to get Barnes & Noble to pay a licensing fee for the infringing technologies used by the Android OS at the heart of the Nook. So Newco will indeed pay a royalty to Microsoft for each Nook device sold going forward.

And Microsoft now owns 17.6 percent of Newco, thanks to a $300 million investment in an entity that is valued at $1.7 billion. Barnes & Noble owns the remaining 82.4 percent of Newco, which will operate as a subsidiary and continue to supply the Nook devices to the firm’s retail locations. Barnes & Noble revealed its plans to spin off Nook in January, when the troubled bookseller revealed that future investments in the platform would be costly.

Newco will also develop a Nook app for Windows 8, as Amazon has done for its Kindle ebook reader platform. That said, one has to believe such an app would have been created regardless. The bigger deal, perhaps, is the possibility that Newco will abandon the use of Android in its Nook devices and move to Windows. A publicly presented Microsoft slide previously listed an ebook reader as a Windows 8 device type alongside traditional PCs, laptops and ultrabooks, tablets, and slates. At the time, it seemed like a curious inclusion. But the sweeping deal with Barnes & Noble might put that in perspective.