Yahoo suing Facebook

Sheryl Sandberg
Sheryl Sandberg
Sheryl Sandberg, Facebook's COO since 2008. | Facebook, Coo, Social Media,

A perspective of reality

In order to get at a perspective of reality, we should start with a perspective of imagination. Take a moment to imagine what the internet would look like if each identifiable feature could only be used by a single website. Imagine that the site you are reading now couldn't include its list of recent stories at the left side of the page or links to similarly-tagged ones at the bottom, because someone else had used that layout first. What would it look like if all the defining characteristics of the web were defined as unique and proprietary, and could not be utilized by upstarts even if new players developed the algorithms independently? Imagine it well, because that's the internet that certain litigious patent-holders are striving to create.

June saw the settlement of a dispute that began in March when Yahoo! filed suit against Facebook, accusing it of infringing on ten patents. Under the recent agreement, these patents are now co-licensed by the two companies, and although this has put the specific conflict to bed, there is a larger issue at hand that remains unresolved. Indeed, the fact of this settlement may in itself be indicative of the serious problems behind software patent laws.

Facebook is in no way unique with its decision to settle the suit. Nearly ninety percent of patent lawsuits are resolved via settlement. This is in spite of the fact that the evidence suggests that the vast majority of them stand on shaky ground and would be unsuccessful. The decision to settle is generally not so much a way to avoid losing as it is a way to avoid the extraordinary costs of litigation. Over the twenty year period from 1990 to 2010, patent lawsuits cost companies 500 billion dollars in lost revenue. During the same two decades software patents have comprised sixty-two percent of all new patent applications. Predictably, then, the number of lawsuits related to such patents is also growing.

Facebook responded with incredulity to Yahoo's lawsuit when it was first introduced. But denying the significance of the claims levied against them doesn't equate to denying the significance of software patent rights in general. Quite the contrary, Facebook eagerly embraces the importance of such patents to its industry, to the extent that in just the weeks immediately following the introduction of the lawsuit, Facebook went about purchasing 750 patents from IBM, and spent 550 million dollars to acquire 650 more that had originated with AOL and had formerly been purchased by Microsoft.

At the time, Facebook had only been issued fifty-six patents of its own, so these two purchases increased its stockpile by a factor of twenty-five, and it was presumably this that gave the social networking giant the opportunity to file counter-suit against Yahoo in April, exactly matching the number of patents that each company accused the other of infringing upon.

Given that the settlement entailed little more than a co-licensing agreement, it does well to illustrate the legal standoffs that are apparently necessary to making the internet and technology industries work. Without them, just the mere threat of a lawsuit can prompt companies to make financial settlements in order to avoid the higher costs of defending the case, even if that case is ultimately groundless.

And in fact, given the prevalence of technology and the typical ways of doing business in the twenty-first century, those threats aren't even limited to internet companies. According to Timothy B. Lee, an adjunct scholar at the Cato Institute, almost every medium or large company in the United States performs some function likely to infringe on software patents. And what's more, in addition to the scope of potential infringement, the sheer numbers of actual patents are essentially unmanageable. With 40,000 new patents being issued each year, Lee claims that just in order to find out whether a particular piece of software might infringe on prior copyrights, the required legal resources would exceed the entire revenue of the software industry.

Some serious questions about patent law ought to come to mind for anyone who recognizes that it is simultaneously impossible and necessary for every innovator to search through oceans of existing patents to see if his development bears unlawful similarity to some other piece of software. It's hard to see what effect this has beyond threatening to stifle or penalize creativity in the industry. And of course, it is a source of revenue for companies who hold patents and decide to leverage them against other businesses that have the capital to pay out substantial settlements.

mark zuckerberg
mark zuckerberg

Mark Zuckerberg, founder of Facebook. |
Plenty of commentators on Yahoo's suit against Facebook came to the conclusion that it was a cynical move to effectively extort money from them in advance of their highly anticipated IPO. No doubt some of them were skewed towards that conclusion by recollection of the fact that Yahoo had done it before. In 2003, Yahoo acquired numerous patents through a 1.6 billion dollar purchase of Overture, which at the time owned two of the five largest search engines. Afterwards, Yahoo sued Google just before it went public and, ten days before the IPO, reached a settlement that gave them millions of additional shares of Google stock.

The outcome doesn't preclude the possibility that Yahoo's intentions were honest, but it's hard to recognize legitimate grievances in their case against Facebook. The text of Yahoo's complaint asserts that it must bear the cost of development of the technologies named in suit, and that Facebook has been able to increase its revenue in absence of those costs. This is about as legitimate as the patent complaints get because it speaks to the very purpose behind patents. They ostensibly encourage innovation by granting a period of exclusivity to the creators of a product, in order to allow them the chance to recoup development costs, which copiers would not have to contend with.

This intention becomes difficult to recognize when you're talking about software, though, especially given the often absurdly vague language of such patents. For one thing, parallel development is more likely in cases of the creation of similar software than it is in the case of, say, the invention of the telephone. For another thing, a particular patented piece of software is often not the commodity making money for the company that developed it. The ten patents over which Yahoo sued Facebook were shining examples of this.

Those ten patents were divided into five categories: advertising patents, privacy patents, customization patents, social networking patents, and messaging patents. In suing over social networking patents, Yahoo claims ' and this is right in the text of the complaint ' that Facebook's entire social networking model is based on Yahoo technology. That's an odd thing for a company that is decidedly not a social networking site to claim about one that is the unquestioned leader in that field.

The other four categories of Yahoo's lawsuit were prima facie irrelevant to the issue of fair competition, which is what patent law has always been regarded as defending. Even if Facebook had intentionally infringed on Yahoo's advertising, privacy, customization, or messaging patents, which in all likelihood it did not, the use of those technologies does not give Facebook an unfair advantage in competition with Yahoo because with the one being a social networking site and the other a search engine and aggregator, the two companies are not in direct competition with each other. Certainly, they compete for traffic on the web, but they serve entirely different functions. They're only directly competing with each other to the extent that a Thai restaurant and a sporting goods store are directly competing by virtue of being located in the same town. And by using similar software, Facebook was infringing on Yahoo only to the extent that the second business ever to install a phone system in its offices was infringing on the first.

Yahoo wasn't suing Facebook for stealing ideas behind actual end-user products. It was suing them for utilizing similar ideas within their existing business model, and doing it more successfully than the company claiming infringement. It's obvious why people visit Facebook, many of them on a daily basis. It's just as obvious why they don't go to Yahoo instead. It doesn't provide the same service. Nobody chooses to access Facebook for its methods of customization or its privacy features. (Obviously!) The software governing such things may make Facebook's unique service better, but they don't define its revenue stream. The nature of an online business is not the software that it's comprised of, but how that software is put together and utilized.

Unless the software is a product or a direct source of revenue, it doesn't fit any of the four categories of things that have traditionally been patentable in the United States, namely: processes, machines, manufactures, and compositions of nature. Things like customization, messaging, and privacy control are much better recognized as methods of doing business, and it is crucially important to realize that for about two hundred years of its history, the United States Patent and Trade Office had taken the position that business methods could not be patented.

It was actually the growing prevalence of computer software and internet commerce that led to the beginning of business method patenting, particularly after the Federal Circuit Court of Appeals decision in State Street Bank and Trust Co. v. Signature Financial Group, Inc. The courts and the patent office had by then come to realize that amidst conflicts over software it was increasingly difficult to determine whether a particular innovation counted as new technology or a business practice. Thus, they began allowing patent applications for business methods in general, essentially resolving the difficulty by refusing to resolve it. And with that there was widespread legal justification for the wildly overreaching lawsuits such as we saw on display earlier this year with Yahoo's likely attempt at surreptitious extortion of Facebook stock.

However, Yahoo is by no means the worst offender. In 1996, E-Data threatened to sue 75,000 companies over a 1985 patent that had been issued for a "system for reproducing information in material objects at a point of sale location." In its original context, this innovation had been applied to the copying of individual songs to cassette tape for customers to purchase in a music store. Its vague wording, however, allowed for it to later be interpreted as no less than a patent on the very concept of the sale of downloadable content. That interpretation has given E-Data the opportunity to levy further lawsuits in more recent years against pretty much any company that sells online without licensing the right to do so, prompting settlements from Apple, Microsoft, and others.

In 2010, Microsoft co-founder Paul Allen got into this game of patent-holder versus the entire web when he filed suit against Google, Apple, Yahoo, Netflix, Facebook, AOL, eBay, and others over four patents held by Interval Licensing. These four patents governed three basic website features that are no doubt familiar to you: recommendations, links to related stories, and the display of separate information on an existing page.

Interval Licensing grew out of the remnants of Interval Research Corporation, which was founded by Allen in 1992 and shuttered in 2000. At that point, the company ceased to function as a research and development firm, and its new incarnation essentially exists just to own patents and make money off of controlling its rights to them. This makes Interval one of a large and growing body of business organizations formally known as Non-Practicing Entities. They are, however, more popularly known as patent trolls, and many of them, unlike Interval, exist solely to buy up patents that they had no connection to in the first place.

Patent trolls accounted for five percent of all patent lawsuits between the years 2000 and 2002, but the proportion had risen to sixteen percent in 2009. The growth of their influence in turn presents a growing volume of legal questions about the validity of the cases, implying that the problem of software patents and business methods, which was ignored in the State Street case, has by no means been resolved.

Eventually it will need to be resolved, because as long as ignorance of the problem leaves the door open for overreaching lawsuits, litigious patent-holders will continue to be relentless. In 2010, Paul Allen's complaint against all the internet's biggest players was thrown out by a judge for being too vague, but this only prompted Allen's lawyers to revise the language and refile the complaint. In 2011, the revised suit was put on hold so that the patent could be reviewed. The judge reasoned that the plaintiff could not be harmed by the delay because Interval doesn't compete with any of the defendants.

Social Media
Social Media

Some of today's most popular social media icons, including Facebook, Twitter, and Flickr. |
Exactly. So what business does Interval have suing them for using similar features on their websites ' features which do not directly impact their means of revenue gathering, and which absolutely do not have an adverse impact on Interval or the business of any of its representatives? Cases like these are so far removed from the intent of patent law that commentator Joe Mullin asserted that if the Interval case were to be successful, far from collecting fairly assessed damages, "Paul Allen would be essentially a tax collector for the internet."

And clearly, given the opportunity, he wouldn't be the only one. Yahoo more recently showed its interest in doing just the same, and it was almost successful. It was only by utilizing the exact same tactics that Facebook saved itself from having to pay dearly for the right to continue using some of its basic features, and features which the web almost certainly can share without damage to any of its entities. But those tactics are adopted by many of the internet's largest businesses, perhaps as a matter of outright greed or perhaps as sort of an online software arms race that no one can stop on their own. It is those tactics, for instance, which led to Google paying sixty-three percent above market rate for Motorola Mobility, which owned 17,000 patents, in August 2011.

To get at a perspective of reality with regard to software patent law, remember the reality of the internet as it used to be, when it encouraged a free exchange of ideas across the globe, and a market into which any small player could enter and fairly compete. A future web where patent trolls have remained unchecked is one that is full of tax collectors who give nothing of value back in exchange for their courtroom revenue stream. And they will rarely assess taxes on one another because of the mutually assured destruction that they come to enjoy after every threat is put down. Instead, this belief in the ownership of simple ideas and complex math promises only to stifle innovation at the lower levels, to consolidate power among those who have been online long enough to lay claim to substantial parts of the makeup of the web, and to shoulder out new entrants to that marketplace by limiting them to business methods that no one else is using, unless they're willing and able to pay to take a stand in court.

The big stories, like Yahoo suing Facebook, never need to have that outcome because the defendants in those cases have so far thought themselves better off to just settle when the law is used against them, and then evolve into trolls so they can leverage the same laws in their favor from then on. Such a pragmatic, cynical maneuver grows out of a perspective of reality. It's just that the reality that it's leading us to is one of a much smaller more inhospitable web.

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Updated Aug 12, 2017 12:17 PM EDT | More details


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