Yahoo vs Facebook War

By AMIR EFRATI And JOHN LETZING

Yahoo Inc. watched in recent years as Facebook Inc. stole the attention of Web users and grabbed a major share of the online-advertising market. Now it is fighting back in court. The faded Internet behemoth on Monday filed a suit against Facebook, alleging that the social-networking service got a "free ride" by violating 10 Yahoo patents covering technologies such as online advertising, privacy controls and messaging.

Bloomberg News

Scott Thompson, pictured last year before he became Yahoo's CEO. The move by Yahoo's new chief executive, Scott Thompson, came as Facebook moves toward an initial public offering of stock this year that could value the company at $100 billion.

Yahoo's suit follows recent disclosures that the companies have been talking privately for months to resolve Yahoo's claims, according to people familiar with the matter. "Unfortunately, the matter with Facebook remains unresolved and we are compelled to seek redress in federal court," Yahoo said in a statement Monday. "We are confident that we will prevail."

"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," a Facebook spokesman said. "We will defend ourselves vigorously against these puzzling actions."

Yahoo demanded unspecified damages, a trial and an injunction against further infringement by Facebook.

Some legal experts attributed Yahoo's decision to sue to the company's recent business struggles and the new strategies of Mr. Thompson, who has said publicly that the company needs to explore ways to generate revenue from new and underutilized parts of its business.

"It's common for older companies whose businesses aren't doing as well as they'd like to file suits like this" against newcomers that plan to go public, said Michael Barclay, a volunteer lawyer at the Electronic Frontier Foundation.

Tapan Bhat, a former Yahoo product strategy executive, said that while he didn't know the legal strength of Yahoo's patents, "a lot of the principles that Facebook is using to succeed are things that Yahoo had its pulse on" years earlier. He pointed, for instance, to Yahoo's claim in the suit that Facebook's "newsfeed" feature violates Yahoo's "customization" patent for "creating custom data streams and Web pages for users based on community and user preferences." Mr. Bhat said that "Yahoo's products didn't resonate with consumers the way that Facebook's did…but with this lawsuit Yahoo is saying they had the ideas first."

One patent cited by Yahoo—issued in 2010 in the wake of a 2005 filing—covers a method for people to communicate through a virtual entity, "enabling users to easily share their experiences," according to patent filings.

While the companies compete for the attentions of Internet users and advertisers, they also have worked together. After struggling for many years to develop services that compete with Facebook, Yahoo in 2010 began installing tools such as Facebook's "Like" and "Share" buttons on its popular news, sports and entertainment websites in order to help Yahoo users share articles with their contacts on Facebook.

Yahoo, like other big content providers, has sought to leverage Facebook's huge user base to draw more traffic back to Yahoo after readers click on the sharing buttons. The effort so far has borne some fruit, as tens of millions of Facebook users regularly interact with Yahoo content on the site, according to appdata.com.

Yahoo isn't known for aggressively defending its intellectual property, though it did settle a patent dispute it initiated against Google Inc. before the search giant filed for an IPO in 2004. To resolve the matter, which involved online-advertising patents that Yahoo acquired when it bought a company called Overture, Google gave Yahoo shares valued at more than $300 million. Yahoo's suit against Facebook also makes references to Overture ad patents.