Yahoo! recently filed a patent infringement lawsuit against Facebook during Facebook’s critical strategic move to go public. Yahoo! claims that Facebook has infringed on several patents regarding advertising methods and systems. Perhaps Yahoo! hopes that Facebook will settle so as not to interrupt the IPO process. After all, it worked for Yahoo! in the past when it sued Google during Google’s IPO process and gained a significant amount of shares in Google’s stock for its efforts. But the real weapon that Yahoo! possesses is its ammunition of patents. The company owns thousands of patents compared to Facebook’s hundreds.
Patents are a means of defensive posturing. For example, companies may prosecute new patents to protect against competitors patenting technologies underneath them, thus blocking them from their own markets. Let’s look at Microsoft for instance. The impact of defensive posturing has been remarkably large for Microsoft. Historically, Microsoft has not filed for many patents. However, in recent years, Microsoft has increased its filing of patent applications and buying of patents from other companies, such as AOL, which recently sold 925 patents to Microsoft.
The main reason for Microsoft’s growth in patent activity is litigation. Between 2004 and 2009, Microsoft was party to more than 115 lawsuits regarding patent infringement matters. Over that same period, its patent activity grew 351% annually. Microsoft’s record in court exacerbates the pain of its increased litigation frequency. The number of cases that Microsoft litigates that reach final decision in court is greater than four times that of the general industry. Microsoft’s patent activity appears to have increased directly because of its increased patent lawsuit headaches. Therefore, Microsoft’s aggressive patent position appears to be out of necessity and for defensive reasons. In fact, there is remarkable validation in the procurement of IP as a defensive measure. In 2011, a consortium including Microsoft, RIM, Apple, Ericsson, and Sony outbid Google for a collection of over 6,000 patents and patent applications owned by the bankrupt Nortel Networks. To help bolster its own defensive posturing, Google bought more than 1,000 patents from IBM a short while later to build out its patent portfolio.
Therefore, Facebook’s recent purchase of 650 Microsoft patents to the tune of $550 million is probably a smart move as it faces the Yahoo! lawsuit and gears up to go public. Facebook will have more and better ammunition to face competitors and stand against a lawsuit.