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March 14, 2012

Yahoo takes Facebook to court: Start of the software/internet patent wars?

After threatening Facebook with a lawsuit last month, Yahoo has now acted upon the threat filing a case and accusing Facebook of infringing on 10 of its patents. The alleged infringed patents include those relating to messaging, news feeds, advertising, preventing click frauds and privacy controls. 

Yahoo had contacted Facebook recently asking for royalties, but filed the case after Facebook refused to pay them. 

Yahoo had earlier sued Google in 2004 for patent infringement related to "pay per click advertising method", which Google settled for ~US$230 million.

Yahoo background — Great past, Faltering future
Yahoo, one off the early Internet giant, has been on the downward trend for some time. It lost its premier search position to Google before surrendering it to Microsoft. 

Yahoo has also been unsuccessful in building up a social networking property and tried to acquire Facebook in 2006, but failed.

Similar to handing search to Microsoft, Yahoo made a blunder by integrating Facebook across its sites from 2008. This significantly increased the reach of Facebook, while the importance of Yahoo diminished. 

Combined, this means that Yahoo is not a major player in its two most important business areas, which is reflected in its continuing declining value post-Microsoft offer to purchase Yahoo was rejected by its board.

Currently majority of Yahoo's value comes from its 35% stake in Yahoo Japan and 40% stake in China's Alibaba. According to a recent note by J.P.Morgan, Yahoo's US assets were valued at an enterprise value of US$6.9bn, stake in Yahoo Japan at US$5.7bn and that in Alibaba at US$9.9bn. Yahoo also has cash of , along with a cash of ~US$2bn. This means that the core operations contribute less than one-third to the total value, a clear sign of a dying company.

Yahoo — claims and potential settlement terms
According to Yahoo, nearly all the technology that Facebook uses is based upon its patents. Yahoo states that before Facebook incorporated its social networking technology, it was one of the worst performing advertising sites on the Internet.

Yahoo has not attached any value to its patents but has instead left to the courts or a future settlement with Facebook to decide. 

In the filing, Yahoo also say "Even if Facebook were to subsequently pay past due royalties, it would still enjoy a market share it has developed during its period of 'free riding' on Yahoo!'s intellectual property. Yahoo! would likewise lose its portion of the market share for this period. Due to the difficulty in predicting whether, if at all, such market share can be recovered, Yahoo!'s harm cannot be compensated by payment of past due royalties alone." Clearly Yahoo is trying to attack Facebook before its IPO.

It should be noted that according to USPTO Yahoo has 1,029 patents while Facebook has only 21. Though this does not include the patents bought by both of them have including the important patent #6,269,361 Yahoo bought from Overture, which so far has not been included in the case against Facebook, but could be added later.

Yahoo's patent case against Google
Before filing the case against Facebook, Yahoo had file a patent lawsuit only once, in 2004 against Google. At that time Yahoo had settled for 2.7 million shares of Google indicating a value of US$230 million (at IPO price of US$85/share), but the case was only limited to one Overture patent #6,269,361. 

At that time, it appeared that Yahoo settled for a very low amount as it had purchased Overture for US$1.6bn, whose only asset was the said patent.

Merit in Yahoo's position?
While Yahoo may appear to be a 'patent troll' to some and most of the blogosphere is certainly against it, Yahoo has a rich treasure trove of patents.
It had earlier sued and forced Google into a settlement, though it can be argued that Yahoo didn't gain much as compared to its investment.

IEEE had earlier given Yahoo the highest score in its 2011 Patent Power Scorecard in the Communication/Internet services category. While that itself is not an indication of the merits of this particular case, it does indicate that Yahoo has a high quality patent portfolio which it has not utilised, aggressively, so far.

One of the argument being used against Yahoo is that most of its patents are common and obvious today. But that could well work in Yahoo's favour as they were not generic when they were filed and hence their becoming generic today indicates good innovation. Though it remains to be seen how this argument holds up in court.

Another argument being used is that software and related patent should not be used for litigation. While this was largely practiced by the major companies till now, the law doesn't stop companies from enforcing them.

But the major sore point in this case, as well as in the case against Google, is that Yahoo has acted very opportunistically. Yahoo filed a case against Google when it was about to go for an IPO, similarly it has filed a case against Facebook when it is in the process of an IPO — Both, not the best times for a company to fight a legal case.

What next
Like other big software/Internet companies, Yahoo had not sued companies for patent infringement and it was more interested in improving its operations rather than generating revenues through litigation's.

This time the situation with Yahoo is different. Yahoo is on a decline and is looking to sell off its once crown jewels, Yahoo Japan and Alibaba, after which it will be left only with the under performing assets. 

The big danger of Yahoo winning a swift or significant judgment against Facebook is that it might become a patent troll either directly after selling of its other assets or selling the patents to a third part who will carry out its dirty work.

This will open a Pandora's box, and may drag the entire software industry harming all the players and what was once a (relatively) safer segment in terms of litigation's might turn a minefield.

Additional sources: Ars Technica

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