Anything You Can Do, I Can Do Better: Intellectual Property Analysis of Facebook, Inc. v Yahoo!, Inc.

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Thu, 04/05/2012

The fight to retain investors is on. In response to Yahoo!’s recent patent infringement suit, Facebook has filed a counterclaim using ten patents of its own. Well, sort of their own. Of the patents asserted, only two were originally assigned to Facebook, which further illustrates our point that Facebook's patent activity is indicative of a company desperate for patent protection. However, Yahoo!’s litigation indicates desperation for revenue, having recently announced plans to layoff 14% of its employees. Could this fight have been avoided, sparing both litigation expenses and JOBS? Yes, because NEITHER company was the first to patent social networking.

Patent infringement lawsuits can be problematic during a company's quiet period. In the two months since filing for its IPO in February 2012, Facebook has been the target of five such suits: three from non-operating entities, one from Mitel, and one from Yahoo!. With an EBITDA multiple close to 60 times, every dollar of lost profit hurts Facebook investors 60 times.

So it’s no surprise that Facebook has decided to fight back against Yahoo! with a counterclaim of its own. However, this action could prove problematic for both Facebook and Yahoo!.

As show in our previous report on Facebook’s upcoming IPO, Facebook has shown doubts in its patent portfolio. Over 65% of the company’s portfolio was not originally assigned to Facebook, and over 400 of its “503 pending patent applications” appear to have been filed in the past 18 months. It is significant that Facebook is only now, on the heels of its S-1 filing, seeking protection for so many elements of the technology it deploys.

Because of this relatively small, patchwork patent portfolio, Facebook is starting at a litigious disadvantage. As a defendant, it could choose an alternative path and defend itself with public domain patents. But gathering a piecemeal portfolio after the fact, with patents that may not quite cover the technologies Facebook deploys – is disadvantageous when the company chooses to exercise the very rights afforded by patents and assert ownership of its technology against others – say, Yahoo!. Facebook’s counterclaim against Yahoo! illustrates this point. We’ll look at this in further detail below. Facebook may be breathing new life into patents that may have never previously seen the light of commercialization, but at what cost to both companies involved?

We’ve said it before and we’ll continue to say it: over 30% of patents issued at the USPTO are “functional forgeries.” The patents Facebook is now asserting, and the patents Yahoo! was previously asserting, are NO EXCEPTION.

But we say this all the time. Why is now any different?

Maybe we could ask those 2,000 Yahoo! employees being laid off soon if their salaries – oops, Yahoo!’s operating expenses – are better spent on not one, but TWO lawsuits that never would have occurred had the asserted patents never been issued in the first place.

But what do we know? It’s not like issuing non-novel and obvious patents ever hurt anyone, right?

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