Yahoo! Sues Facebook Over Patents Related to Advertising

Facebook Inc. (FB) was accused in a lawsuit by Yahoo! Inc. (YHOO) of infringing patents covering functions critical to websites, including Internet advertising, information sharing and privacy.

In a complaint filed yesterday in federal court in San Jose, California, Yahoo asked for an order barring Facebook from infringing the 10 patents and for triple damages. The patents cover tasks required to “build a successful website,” such as information customization, social networking and messaging, according to the complaint.

Yahoo, owner of the most popular U.S. Internet portal, said in February that Facebook must license its technology, pointing out that other Web companies have done so. Yahoo is looking for ways to revive growth after losing ground to Facebook in the display advertising market and trailing Google Inc. (GOOG) in Web searches.

“Even technology companies who acquire their patents for purely defensive purposes may change their mind as they do less well in the marketplace,” Mark Lemley, a Stanford Law School professor who isn’t involved in the case, said in an e-mail. “Yahoo! isn’t a patent troll, but they are the latest example of a company that sues for patent infringement in hopes of supplementing a failing revenue base.”

Market Share

Yahoo lost its No. 1 spot to Menlo Park, California-based Facebook last year in the U.S. market for display advertising, which includes video and graphically based marketing messages, according to EMarketer Inc. In January, Yahoo, based in Sunnyvale, California, reported fourth-quarter revenue of $1.17 billion, excluding sales passed on to partner sites. That fell short of analysts’ estimates of $1.19 billion.

“For much of the technology upon which Facebook is based, Yahoo! got there first,” the company argued in its complaint. “Facebook’s entire social network model, which allows users to create profiles for and connect with, among other things, persons and businesses, is based on Yahoo!’s patented social networking technology,” Yahoo said.

‘Longtime’ Partner

“We’re disappointed that Yahoo, a longtime business partner of Facebook and a company that has substantially benefited from its association with Facebook, has decided to resort to litigation,” Facebook said in a statement.

“Once again, we learned of Yahoo’s decision simultaneously with the media,” Facebook said. The company said it would defend itself against what it called “these puzzling actions.”

Yahoo said in an e-mailed statement that its patented technologies attract more than 700 million unique visitors each month.

“Unfortunately, the matter with Facebook remains unresolved and we are compelled to seek redress in federal court,” Yahoo said in the statement.

Facebook, which filed for an initial public offering last month, could seek a valuation of $75 billion to $100 billion, people familiar with the matter have said.

Brian Wieser, an analyst in New York at Pivotal Research Group LLC, said Yahoo’s chances of extracting a settlement from Facebook will be enhanced by Facebook’s reluctance to have the pending suit “hanging over” the IPO.

Stanford’s Lemley said data he collected shows that the number of patent suits against a company rises around the time of its IPO.

‘Short Run’

“In the short run, Yahoo! may stand to make money by suing Facebook,” Lemley said.  “But in the long run it’s not a good sign for them as a technology company.”

In 2004, Yahoo agreed to drop an infringement lawsuit against Mountain View, California-based Google after Google agreed to license Yahoo’s patents. Google issued shares of its stock to Yahoo as part of the settlement of that case and a dispute over a Yahoo warrant to buy Google shares.

Separately, Yahoo is also grappling with demands from Third Point LLC, a shareholder, to make changes to its board and assuage concerns about the company’s growth prospects.

Third Point, founded by Daniel Loeb, sent a written demand for a list of Yahoo shareholders, according to a filing with the U.S. Securities and Exchange Commission yesterday. Third Point also increased its stake in Yahoo to 5.8 percent from 5.7 percent.

Yahoo (YHOO) rose 1 cent to $14.50 at 2:56 p.m. New York time in Nasdaq Stock Market trading. The stock has declined 10 percent this year.

The case is Yahoo! Inc. (YHOO) v. Facebook, 12-cv-01212, U.S. District Court, Northern District of California (San Jose).

To contact the reporter on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net Brian Womack in San Francisco at Bwomack1@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net; Tom Giles at tgiles5@bloomberg.net

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