Could a legal face-off with Yahoo shut Facebook?

14th March 2012

Legal face-off could shut Facebook

Facebook losing face could, of course, be good news for employers who resent the time staff spend on the site. But it's a major threat to the millions who depend on it as their umbilical cord to reality.

Either way, one group will be rubbing their manicured hands with glee.  From Silicon Valley to London's Inns of Court, the lawyers are counting even bigger paydays as technology companies go head to head in long running disputes over difficult to understand patent infringement allegations.

Lawyers' get-together

Last Autumn, legal publisher Butterworth organised a one-day conference on "International High-Technology Patent Litigation". 

It said: "The last few years have seen an explosion in the number of patent disputes in the high-technology area.  With established market leaders and ambitious new players vying for market share in an increasingly competitive environment, the number of litigation cases have (sic) rocketed. The conference takes a holistic look at the international litigation landscape with a focus on the commercial drivers and practical considerations of litigating in various jurisdictions around the world."  It was well attended.

Facebook said the cases it faces – including that from Yahoo –  "could have a significant impact on our business, financial condition or results of operations". But Yahoo's share price edged up ten to twenty cents from a six month low point.

And in what is widely seen as scare-mongering, Facebook added: "The terms of such a settlement or judgment may require us to cease some or all of our operations or pay substantial amounts to the other party."

Open season for shooting at patents

According to The Inquirer, it now "seems like an open season for software patent litigation in the US."

Yahoo has sued the social network in a California court alleging that it is infringing 10 Yahoo patents that pertain to advertising, online privacy management and social networking in a 19 page claim that says Facebook has infringed 10 patents that Yahoo obtained over the past decade for software used to create and sell online advertising as well as technology used in online messaging, customizing content for individual web site visitors and protecting visitors' privacy.

Yahoo complains that Facebook was one of the worst performing web sites in terms of online advertising until it began to use technology covered by the disputed patents.

"The suit also argues that Yahoo has suffered 'irreparable harm' by losing a share of the advertising market to Facebook while the latter was 'free riding on Yahoo's intellectual property'," Silicon Valley paper the Mercury News reported. In addition to financial damages, the lawsuit requests a court injunction to block Facebook from using Yahoo's inventions.

But is the legal move as much to do with Yahoo as with Facebook? Yahoo has been slipping from tech investors' radars for some time as it loses advertising revenue and customer share to Facebook and Google.

Yahoo gamble

This could be a gamble by Yahoo to persuade Facebook to settle quickly so as not to jeopardise the social media site's IPO. Facebook has previously had legal stand-offs with Amazon.

But litigation is not confined to Facebook, or Yahoo, or Amazon. Almost everyone is at it, urged on by the need to attack before being attacked, and the ministrations of ambulance chasing patent and intellectual property lawyers.

Here's a sample of recent legal actions from the Inquirer (there are many more elsewhere)

Ipcom sues German retailers for selling HTC phones

Apple sued by Cequint for alleged caller-ID patent infringement

Motorola is granted an injunction against Apple in Germany

Samsung will be 'more aggressive' in its patent battle with Apple

Apple countersues Samsung in the UK

Samsung sues Siemens' LED division over patents

Legal outcomes can be important, especially to companies with fading investor attraction. Last summer problem-hit Nokia won damages from Apple reputed to be a one-off payment of more than €800m (£700m) further royalties of €8 per iPhone sold in future after a long running patents action. 

Disputes have complex outcomes

Nokia then hinted that it may pursue makers of Android smartphones over other patent infringement allegations. Chasing Android makers such as Samsung and HTC would be positive for smartphone rival Apple. So the effects can be complex.

The settlement news sent Nokia shares up 3 per cent as the payment would be "a positi
ve financial impact". 

And last month,Apple came out tops in a patent row against Motorola Mobility over its smartphone "slide-to-unlock" feature, Apple's first such victory against Motorola in any jurisdiction.

The success must have seemed sweeter as Apple arch-enemy Google is acquiring Motorola Mobility

Motorola plans to appeal and stating the "judgement would have "no impact" on supply or future sales."

For most investors, the details of these disputes are largely incomprehensible. But firms ignoring the financial potential of suing will be punished by shareholders.

Perhaps the only safe course is to sell investments in tech companies and reinvest in law firms.


More from Mindful Money:

Is there a data leak in your pocket?

Facebook: The company other giant technology firms really fear?

Apple storms ahead – but is it unstoppable?

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