Patent Trolling or Legitimate Issue? Yahoo’s Patent Lawsuit Against Facebook

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With Facebook becoming "Where the world checks in every day," can Yahoo's patent suit change that?

Yahoo shook the tech world this week when it filed a 19 page patent lawsuit against Facebook. Some observers found the timing suspicious, with Facebook on the doorstep of its IPO offering, and the methods repetitive (after all, Yahoo sued Google over a patent dispute in 2004, forcing a settlement to the tune of 2.7 million shares of stock). But suspicions aside, the lawsuit is filed in Northern California, and the business and tech world will be watching closely.

Whether or not this is a legitimate complaint, however, remains to be seen. Certainly, some of the patents described in Yahoo’s suit seem similar to the features Facebook users have long been familiar with. But what exactly is Yahoo alleging here? And what does it mean for investors?

The Patents in Question

Yahoo alleges that Facebook is infringing on ten patents that deal with social networking and customization. “Facebook’s entire social network model,” the suit suggests, “is based on Yahoo’s patented social networking technology.”

Broken down, nearly half of the patent claims are related to personalized ads, while the rest deal with customization, social networking, privacy, and messaging.

But, it’s the advertising patents that are the most important part of Yahoo’s suit. Although three are described identically in the suit as the “method and system for optimum placement of advertisements on a webpage,” they deal with separate patents held by one of the internet’s oldest giants.

Yahoo’s messaging patent deals with all manner of communication on social networking websites, not simply email in general.

Fundamentally, Yahoo’s concern surrounds Facebook’s ability to generate personalized ads — ads that include which of the user’s friends “liked” the content.

Yahoo alleges that Facebook’s “Like” and “Share” infringe on a pair of existing Yahoo patent that generate a more customized user experience. The social networking claim is similar, with Yahoo alleging that Facebook infringed on a patent which allowed users to share their own information, join groups of like-minded users and share information.

The last claim is about privacy, more specifically privacy controls (an area where Facebook has gotten into hot water before). Yahoo’s existing patent allows users to customize how their information is shared.

How the Lawsuit Affects Facebook’s IPO

Who will stock traders place their bets on?

As far as the timing of Facebook’s IPO, it doesn’t. Nobody is predicting that the world’s most trafficked social network will delay it’s Initial Public Offering in response to the suit. But if Facebook, like Google, settles this suit, we should fully expect the sum to be at least nine digits.

Still, Facebook’s IPO could raise a full 5 billion dollars. So the lawsuit, though serious, will not cripple Zuckerberg who is not backing down.

“We’re disappointed that Yahoo, a longtime business partner of Facebook and a company that has substantially benefited from its association with Facebook, has decided to resort to litigation,” said Johnathan Thaw, a Facebook spokesman.

If history is any guide, the companies will settle this most recent patent-war spat out of court. Yahoo has retained Quinn Emanuel Urquhart & Sullivan, a law firm specializing in tech patent cases who counts Google (ironically) as one of their larger clients, and Facebook’s focus is surely on its IPO, not a long, dragged out patent fight.

What will be interesting is what this suit does to Yahoo’s value with investors. While Facebook’s strategies seem to be working, Yahoo is sometimes seen as rudderless, recently going through multiple CEOs, certainly not growing at the rate of Facebook, Twitter, Google, or other the online behemoths. Will an infusion of cash give them the capability to switch courses and implement new strategies?

That’s a question some investors might answer with their wallets.

About Charley Moore

Charley is the Publisher of Article 3, as well as Founder and CEO of Rocket Lawyer Incorporated. Prior to founding Rocket Lawyer, Charley advised early stage companies, large enterprises and their investors on strategic partnering and corporate development strategy. Charley has been at the forefront of Internet corporate development since beginning his career as an attorney at Venture Law Group in Menlo Park, California in 1996. He represented Yahoo! (IPO), WebTV Networks (acquired by Microsoft) and Cerent Corporation (acquired by Cisco Systems) at critical early stages of their success and was the founder of Onstation Corporation. Charley graduated from the United States Naval Academy (BS), San Francisco State University (MS) and the University of California at Berkeley (Juris Doctorate). He served as a U.S. Naval officer and is a Gulf War veteran.
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