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270045, Are Yahoo's patents strong enough to topple Facebook? (swipe)
Posted by wallysmith, Mon Mar-19-12 11:05 AM

Are Yahoo's patents strong enough to topple Facebook?
By Jon Brodkin | Published a day ago

In its surprising patent infringement lawsuit against Facebook, Yahoo is taking advantage of several factors to pin its former partner into a position of weakness.

For one, Yahoo has existed longer than Facebook, giving it more time to obtain patents covering Web technologies, even if it didn't put all those patented innovations to good use itself. Second, Yahoo's lawsuit—filed Monday—was strategically timed to occur after Facebook's filing for an initial public offering, but before the IPO actually takes place. To satisfy investors, Facebook may be forced into a costly settlement rather than risk a long, legal battle that could harm the company's perceived market valuation.

Third, Facebook appears to have a tiny patent portfolio compared to Yahoo's. Facebook's patents or lack thereof have no direct impact on the merits of Yahoo's lawsuit, but a bigger and stronger patent portfolio could allow Facebook to file a countersuit against Yahoo, putting it into a position of strength in settlement negotiations.

If the lawsuit heads to a trial, Facebook can argue that Yahoo's patents are invalid, too broad, or simply aren't infringed upon by Facebook's technology. But arguing against every claim in each Yahoo patent will be a difficult task. The ten patents combined lay claim to 285 methods and technologies, and invalidating one portion of a patent doesn't necessarily invalidate the rest.

"Separate and apart from the question of the individual strength of any of these patents, there are still ten patents and a few hundred claims here," IP attorney Patrick Patras of Hinshaw & Culbertson LLP in Chicago told Ars. "It would be very difficult for an accused infringer to succeed against all of that."

Is this patent really valid? It'll cost you to find out

To see a full list of the ten patents Yahoo is asserting against Facebook, consult this previous story, in which we noted Yahoo's claim that "Facebook's entire social network model … is based on Yahoo!'s patented social networking technology."

Determining whether each patent will hold up in a court of law is something that can't be done simply by skimming the patent summaries and claims. Many of the technologies that may seem obvious now may not have been when Yahoo filed for the ten patents between 1997 and 2007.

"This is the issue with patent law, until we spend millions of dollars litigating these patents we really don't have a good sense of how strong they are, what they actually cover, whether they're valid or not valid," Penn Law Professor R. Polk Wagner told Ars. "Patents are merely hunting licenses and nothing more. They simply give you the ability to claim against somebody else and they're subject to attack on a number of grounds."

Yahoo's patents broadly cover privacy controls, advertising systems, customization of data streams and web pages, integration between e-mail and IM, and managing the view of a social network user's personal information.

"What the Yahoo patents appear to be doing looks pretty similar to what Facebook is doing," Wagner said. "On the other hand, patents like this that have pretty broad claims often have problems in terms of the amount of prior art that can be used against them."

Poking holes in Yahoo's patent claims

Patents can be attacked based on whether they cover innovations that were obvious at the time of filing. They can also be attacked on the question of whether the technology described is eligible for patenting at all. Patras notes that patents are more likely to hold up in court if they can meet the "machine-or-transformation test," which requires use of a specialized machine or transformation of something from one physical state to another.

Patras points out one patent in particular that Yahoo will have a hard time defending in court. This is patent #7,373,599, covering a method and system for optimizing placement of advertisements on a webpage. Importantly, the advertising placement is determined in part by user requests. Patras believes Yahoo is vulnerable on this patent because instead of merely alleging direct infringement—which can be proven even if Facebook had no knowledge of the patent—Yahoo also alleges that Facebook is "inducing infringement by its users." To be found guilty of inducing its own users to infringe a patent, Facebook would have to have knowingly violated the patent. And in order drive up the amount of damages awarded to Yahoo, Yahoo would have to prove Facebook knowingly violated the patent for years.

"One would not typically go to an indirect claim like inducement if you didn't have to," Patras said.

For the other nine patents, Yahoo alleges direct infringement, which is easier to prove. For all ten patents, Yahoo only notified Facebook of the alleged violations on Feb. 27, and filed suit two weeks later. Licensing negotiations typically take at least a few months, Patras said. The short time frame between the notification and lawsuit suggests Yahoo made little serious attempt to negotiate a license, and was simply planning to sue.

While the short notification time frame is problematic for Yahoo's inducement claim, Patras said the act of making that notification and detailing it in the lawsuit helps provide a basis for Yahoo's argument that damages should be tripled in the event that it wins the case. Yahoo claims Facebook "willfully infringed" the patents. At the very least, Yahoo can argue that Facebook knew of the patent infringement allegations before the suit was filed and did not enter into a licensing agreement.

Facebook's IPO provides incentive to settle

While Patras noted that he has no inside knowledge about the case, he said the request to triple damages seems designed to add a "shock and awe" factor to the lawsuit, and cause worry for investors looking into Facebook's upcoming IPO.

"What likely will happen in the short term is Facebook will make a decision as to whether it thinks this lawsuit is having a significant impact on its forthcoming IPO," Patras said. "If it thinks it is having a significant impact then I suspect Facebook will come to a relatively quick license agreement with Yahoo to make this issue go away. If Facebook concludes it's not having a significant impact they will fight on and get to the merits of these claims down the road."

One common tactic for companies in Facebook's position is to file a countersuit, giving itself more leverage in settlement negotiations, both Patras and Wagner said. Facebook, though, apparently owns just 21 patents, compared to 1,029 for Yahoo. Yahoo built up its patent portfolio over many years, telling employees that it was a strategy for fending off patent trolls, as former Yahoo employee Andy Baio now ruefully says.

Facebook has financial ties to Microsoft, which has a large patent portfolio, and is a member of the Open Invention Network, a Linux-themed group building a defensive patent portfolio to protect its members. But ultimately, Facebook will have to bolster its own portfolio to protect itself from more lawsuits like the one it faces now.

Facebook's future—expect a much more aggressive patent strategy

In terms of building a defensive patent portfolio, "it looks like Facebook is not there yet," Wagner said. "Given Facebook's funding and valuation I'm quite sure they are attempting to rectify that problem. My guess is they're filing enormous amounts of patents on any innovations they can come up with at this point."

Patras also expects a much more aggressive Facebook to emerge from this case. "I suspect Facebook might take a page from Google's book and get themselves some more patents by acquiring patents or acquiring companies with patents," Patras said. "Even if Facebook takes a license now to eliminate this issue, I wouldn't be surprised to see them somewhere down the road come back after Yahoo for patent infringement, whether they're patents Facebook owns now or later acquires, to try to get some of that money back."