Handicapping the Yahoo/Facebook Patent Battle

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When Yahoo filed a patent suit against Facebook this week, it became as popular as Rush Limbaugh at a Planned Parenthood gathering. But many Yahoo investors will tolerate Silicon Valley’s scorn if the patent gambit actually works. Will it?

While a thousand insults are raining down on Yahoo right now, there are only a few ways this case could turn out. Here they are, including the (unofficial and speculative) odds for each outcome:

Yahoo Wins: A Court Decision or Forced Licensing Agreement (1 in 5 odds)

Yahoo’s dream scenario is to get an injunction that orders Facebook to stop using its patents. This would force the social network to license the patents at an extortionate rate to prevent going dark.

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While CEO Scott Thompson may have visions of the $612 million BlackBerry settlement dancing in his head, he’ll have a hard time getting a similar deal from Facebook. That’s because it became much harder for patent holders to obtain injunctions after the Supreme Court changed the law in a 2006 case called eBay v. MercExchange.

The second best outcome for Yahoo is a good old fashioned damages order that forces Facebook to pay millions for infringing the patents. While this is more likely than the first outcome, it is hard to imagine any eye-popping verdict. The case is taking place in a tech-savvy California court, not the troll paradise of East Texas where rural juries love sticking it to northern tech companies.

Yahoo Loses: Facebook KO’s the Patents or Wins a Counter Claim (3 in 10)

Facebook is no struggling start-up. It has an army of lawyers and is not shy about using them (see Winklevii or Ceglia, Paul). To fight back, it can tap its own patent portfolio or purchase third party patents in order to counter-sue Yahoo. Silicon Valley is awash in absurd patents so this would not be difficult.

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Many of the Yahoo patents seem abstract, anticipated or obvious so Facebook will likely ask the court and the Patent Office to declare them invalid. Tech sites are already holding up prior art and, damningly, the Yahoo engineer who “invented” some of the patents has disavowed their legitimacy. If Facebook needs more help, it could turn to a firm like Article One Partners which pays bounties to people who find documents that prove an invention is not really new.

But killing a patent is no walk in the park. Yahoo is asserting ten separate patents, each with multiple claims, so it has many bullets. To get the upper hand, Facebook will have to knock out as many claims as possible while also piercing Yahoo with patents of its own until the Sunnyvale company capitulates.

A Draw: Yahoo and Facebook enter a Cross-Licensing Agreement (even)

If Facebook can find patents of its own to assert, the path is clear for Yahoo to come to its senses (recall that it’s now claiming to have invented the social network). A discreet cross-licensing deal would allow the company to avoid calamitous legal costs (senior patent lawyers bill around $1000 an hour) and hire engineers, writers and marketers instead.

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One potential obstacle to a cross-licensing deal, though, is finding a way for Thompson to save face. Right now, the CEO is on a limb after pulling a macho move to show investors that he will do something—anything—to push the company in a new direction. Yahoo’s embrace of the patent path has already produced unprecedented cries of rage and betrayal from the tech community so Thompson may feel hard-pressed to double-down and avoid anything that looks like compromise. Plus, experts say success could allow the company to make a living as a full-time patent troll.

The Game Clock

While there’s an outside chance Facebook will get skittish and settle prior to its IPO, the company’s statements so far suggest the opposite. This means a court case that could last years or even up to a decade if appeals are involved. Facebook will probably still be around by then. As for Yahoo, who knows?

Republished with permission from paidContent, which writes about the transformation of the media-and-entertainment industries in the digital era, with a focus on emerging-business models and technologies.

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