AGILEVC My idle thoughts on tech startups

March 13, 2012

Yesterday Yahoo! filed it’s much awaited lawsuit against Facebook for patent infringement.  New Yahoo! CEO Scott Thompson alluded to their plan a couple weeks ago but the IP lawsuit itself was only official late afternoon yesterday (and now public).

You can read the whole complaint in the embedded document here (from AllThingsD’s coverage).

I’m not a lawyer so I can’t provide a deep analysis of Yahoo!’s claims of IP infringement or offer a litigator’s perspective of Yahoo!’s chances in court.  I have some limited experience in dealing with patents though, both from my time as a VC and also back in my own startup days.  In the early days of LinkedIn we jointly acquired an issued patent of the defunct SixDegrees.com which directly pertains to social networking as well as acquiring a nascent startup in part for its in-process patent filings.  And at PayPal we were hit with a couple patent disputes while in the midst of our IPO process.

I skimmed the text of the Yahoo! complaint.  The bulk of the patents they believe Facebook is infringing pertain to things like A) display & targeting of online ads, B) online privacy, C) personalization of a user’s web experience, D) general online messaging (Yahoo! owns a bunch of patents around email, IM, etc), and yes E) social networking.

My layman’s reading is that Yahoo!’s claims are pretty lame.  Regarding social networking, Yahoo! holds a patent (USPTO #7747648) which essentially details a system of modeling people, places, and objects within a website.  It was filed in 2005 and issued in 2010 which means there was a good deal of prior art around SNS before Yahoo filed.  While it was still a college-focused SNS, Facebook of course launched in 2004 and there were plenty of other examples of social networking already… Friendster (2002), LinkedIn (2003), MySpace (2003), Orkut (2004).

All the other stuff Yahoo! claims (A-D above) could describe the vast majority of consumer-facing websites today, many of which incorporate elements of personalization, privacy, ad targeting, and messaging.  Ultimately a judge will have to sort all this out, unless Facebook & Yahoo! settle out of court or Yahoo! simply drops its suit.

So if the claims themselves are pretty lame, how about the timing of Yahoo!’s lawsuit?  On the face of it, that too seems pretty crazy.  It’s not as though nobody’s heard of Facebook before, yet Yahoo! only notified them of potential IP infringement two weeks ago on February 27, 2012 (as described in the lawsuit) and Facebook heard about it through the media rather than in private.  So Yahoo! hardly tried to deal with Facebook on this issue outside the court system.  But despite it’s tenuous merit, the timing of Yahoo!’s suit is actually pretty rational.

Patents and the threat of patent infringement lawsuits provide maximum leverage against a competitor when they’re in the middle of a strategic inflection point… a major financing, acquisition, or large product launch.  The threat of disrupting a strategic inflection maximizes the power a plaintiff holds, since the defendant may be more motivated to settle regardless of the merits.  With Facebook in the late innings of its IPO process, Yahoo! has essentially made the best play of what my estimation is a pretty weak hand.  At PayPal we made the calculated decision to settle a patent suit in early 2002 (for a minimal amount) which had little merit in order to minimize the disruption to our IPO process.  Yahoo!’s seeking a preliminary injunction in their lawsuit and I’m doubtful they’d seek a de minimus payment in any settlement process, but they might try to seek some other accommodation with Facebook that Yahoo! deems valuable.  That being said, it wouldn’t surprise me in the least if Facebook’s leadership takes a scorched earth approach to fighting Yahoo! in court if necessary even if it meant delaying their IPO slightly.

In addition to leverage, new Yahoo! CEO Scott Thompson clearly believes that proceeding with this lawsuit will serve as an external or internal signal.  New CEOs often like to take a bold step early in their tenure to establish their leadership, appease restless shareholders, or otherwise tell the broader marketplace that things are changing.  Thompson reportedly dealt with this IP lawsuit personally along with Yahoo!’s chief legal counsel, with few other senior Yahoo! execs involved.  So put in the context of Facebook’s IPO process and a new Yahoo! CEO at the helm, Yahoo!’s timing starts to make sense.

Again… let me be perfectly clear, I think this lawsuit is really lame.  If I were involved with Yahoo!’s leadership team, I personally would have vigorously opposed this move because I think any benefit which might accrue to the org would be overwhelmed by a range of costs.  Whatever few good people are left at Yahoo! are probably utterly demoralized that Yahoo!’s strategy and ability to compete in the marketplace has been reduced to the level of patent troll.  Whatever door might have been open for Yahoo! to collaborate with Facebook now or in the future has been slammed shut.  And whatever esteem the broader tech world might still hold for Yahoo! is being eviscerated.  But if Yahoo! was ever going to pursue patent infringement against Facebook, now is arguably the best time for them to have done it.

I remember when Yahoo! was my browser home page, easily my most frequently used site.  I didn’t use every Yahoo! property over the years, but certainly frequented not just search but also News, Yahoo! Mail, Sports, etc.  Maybe I’m just a fuddy duddy of the internet world… but it’s sad for me to see that it’s come to this a true pioneer and former pillar of the consumer web.