Yahoo Sues Facebook For Patent Infringement, How Much Will Facebook Wind Up Paying?

As is being widely reported, Yahoo filed a patent lawsuit against Facebook today in US Federal Court in the Northern District of California. At the center of the litigation are a wide range of claims that cover advertising, the news feed, messaging, social networking and privacy, among others.

Here’s a key paragraph from the complaint:

It reads, “For much of the technology upon which Facebook is based, Yahoo got there first . . .” No dollar amount is specified in the damages portion of the complaint. Presumably Yahoo thinks this IP is worth hundreds of millions if not billions of dollars.

AllThingsD reports that the decision to sue was made chiefly by new Yahoo CEO Scott Thompson — over the objections of many Yahoo personnel internally — and signals a new more aggressive attitude at Yahoo. For its part Facebook says that it learned about the claims and the suit “in the media,” suggesting that it wasn’t approached by Yahoo before the litigation was filed. However the New York Times reported that the companies did meet “in person” at the end of February to discuss the claims.

What’s Motivating Yahoo?

Why is Yahoo suing Facebook? The prevailing suggestion is that Yahoo can no longer compete directly and so is suing to obtain “revenue” it is losing in the market. Or maybe it’s suing out of a kind of “resentment” that Facebook has usurped its position as the largest display advertising site online.

Neither is accurate. Yahoo likely sees a potentially large opportunity in the litigation. The timing is inconvenient for Facebook, which is about to go public. However I’m sure the timing is quite calculated by Yahoo.

You may remember that Yahoo sued Google and others for patent infringement over AdWords (based on the Overture patents granted in 2001). Google was also just about to go public and settled with Yahoo, agreeing to issue 2.7 million shares of stock in exchange for a perpetual license to the IP and an agreement to dismiss the case. Yahoo later sold the stock for a total of roughly $1.5 billion.

Lessons of the Google Litigation

That amount now seems like a pittance vs. the billions in revenues that Google is reaping off AdWords. Had Yahoo asked for and obtained an annual license fee it could be getting a substantial “annuity” from Google.

Yahoo also sued Quigo (now part of AOL) and FindWhat in the first half of the last decade using the same Overture patents.

So the Yahoo action against Facebook isn’t unprecedented and may have nothing to do with “sour grapes.” Many if not most of the claims probably have merit and there will probably be a settlement rather than a trial (just a guess).

The IPO puts more pressure on Facebook to settle in the near term. That’s undoubtedly something that Yahoo considered in the timing of this litigation. The question is really not whether Facebook will settle but whether Yahoo, having theoretically learned the lesson of the Google IP settlement, tries to get ongoing licensing revenue from the social network.