With IPO looming, Yahoo lawsuit puts Facebook in awkward position

Struggling Yahoo uses timing to launch patent lawsuit against Facebook

With an aggressive new CEO at Yahoo's helm and Facebook looking ahead to its initial public offering, Yahoo's patent lawsuit may have Facebook in an awkward position.

Yahoo filed a lawsuit Monday in federal court in California, accusing Facebook of infringing on 10 of the search company's patents. The lawsuit claims that Facebook copied Yahoo's patents in technologies related to advertising, privacy, site customization, social networking and integrated communications in social networking.

Complicating matters for Facebook is that the world's largest social network is expected to launch its IPO in May. With potential investors looking closely at the company, now is not the time for Facebook to be facing a lawsuit. That could very well be part of Yahoo's plan.

Yahoo, which similarly sued Google before its IPO in 2004 and picked up a chunk of Google stock in return, is well aware of the scrutiny that Facebook is under. It may also be hoping that Facebook will want to resolve the lawsuit quickly.

That view could possibly mean a better deal for financially struggling Yahoo, analysts said.

"This [lawsuit] will put a cloud over [Facebook's IPO], putting extra pressure on Facebook to settle," said Rob Enderle, an analyst with the Enderle Group. "Basically, Yahoo is using the IPO as a lever to force Yahoo to settle when they otherwise wouldn't... That is why Yahoo is doing this now."

What is a surprising in the lawsuit is that Yahoo and Facebook have been on friendly terms. For instance, in 2010, the two companies partnered to bring Facebook games and status updates to Yahoo's search engine.

Facebook, noted that detail in its comment on the lawsuit. "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," said a Facebook spokeswoman in an email to Computerworld. "Once again, we learned of Yahoo's decision simultaneously with the media. We will defend ourselves vigorously against these puzzling actions."

Yahoo, for its part, contends it's only trying to protect itself.

"Yahoo has invested substantial resources in research and development through the years, which has resulted in numerous patented inventions of technology that other companies have licensed," said a Yahoo spokesperson in an email.

"These technologies are the foundation of our business that engages over 700 million monthly unique visitors and represent the spirit of innovation upon which Yahoo is built. Unfortunately, the matter with Facebook remains unresolved and we are compelled to seek redress in federal court. We are confident that we will prevail," the spokesperson said.

Corporate friends or not, Yahoo's new CEO Scott Thompson is playing hardball.

"Facebook and Yahoo have at least been friendly in past years, but with the fortunes of Yahoo heading in a drainward direction, is it any wonder that they're looking to maximize their value in any way possible?" asked Dan Olds, an analyst with The Gabriel Consulting Group. "The Yahoo of today isn't as strong as the Yahoo that held Google over the same barrel in 2004. But Yahoo does have a lot of technology patents, and it's hard to do anything in tech these days that isn't infringing on some obscure, or not so obscure, mechanism that someone has patented in the past."

It's also another aggressive move by Thompson, who took over Yahoo's top post in January. Since Thompson became CEO, the company's co-founder, Jerry Yang, its chairman Roy Bostock and three other directors have left the company.

About a week ago, reports began circulating that Yahoo executives are planning a major shakeup that could include thousands of layoffs. The changes could come as soon as this month.

"Thompson is willing to use every arrow in his quiver," said Enderle. "He is going to use an aggressive management style. He is far from done. He is one of the more aggressive CEOs we have seen to date to pull off either a turnaround or a sale. Yahoo desperately needs an aggressive CEO."

Sharon Gaudin covers the Internet and Web 2.0, emerging technologies, and desktop and laptop chips for Computerworld. Follow Sharon on Twitter at @sgaudin, on Google+ or subscribe to Sharon's RSS feed. Her e-mail address is sgaudin@computerworld.com.

See more by Sharon Gaudin on Computerworld.com.

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Sharon Gaudin

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