Facebook Boosts IP Defenses With $550M Microsoft Patent Buy (Law360)

By Ryan Davis

Two weeks after spending $1 billion to acquire 925 patents from AOL Inc., Microsoft Corp. agreed to sell most of them to Facebook Inc. on Monday for $550 million in cash, potentially giving the social networking giant added ammunition in its patent dispute with Yahoo Inc.

Hot on the heels of Facebook's purchase of hundreds of patents from IBM Corp. last month, the deal with Microsoft, which holds a 1.6 percent stake in Facebook, will help the company fend off infringement allegations, Facebook general counsel Ted Ullyot said in a statement.

"This is another significant step in our ongoing process of building an intellectual property portfolio to protect Facebook's interests over the long term," he said.

Facebook's aggressive acquisition of patents from IBM and Microsoft make it far better-positioned in patent litigation than it was even a month ago, when Yahoo filed suit, according to David E. Mixon of Bradley Arant Boult Cummings LLP.

"It should make a great deal of difference," he said. "They're now on the verge of acquiring such a significant portfolio that they'll be able to fight back and have a good deal of leverage in settlement negotiations."

With Facebook's initial public offering expected within weeks, the company is under a great deal of pressure to resolve the Yahoo suit, he added.

While there may be some patents in the AOL portfolio that are specifically useful to Facebook with regard to the Yahoo case, the purchase is part of a broader defensive strategy, said Patrick L. Patras of Hinshaw & Culbertson LLP.

"The Yahoo litigation opened Facebook's eyes about what could happen if you don't have a patent portfolio," he said. "That spurred them to go out and get a portfolio to defend themselves."

On April 9, Microsoft bought 925 patents and patent applications from AOL and licensed an additional 300 patents.

Under the terms of Monday's deal, Facebook will acquire 650 former AOL patents and applications outright and will license the other 275 AOL patents for which Microsoft will retain ownership.

Microsoft executive vice president and general counsel Brad Smith said in a statement that the deal with Facebook "enables us to recoup over half of our costs while achieving our goals from the AOL auction."

Microsoft and AOL did not officially disclose what types of technology are covered by the patents in AOL's portfolio. Karl Renner of Fish & Richardson PC, an attorney for AOL, told Law360 earlier this month that they cover a wide range of important technologies, including instant messaging, streaming media, Web browsing, search, online advertising, e-commerce and social networking.

Many were acquired when AOL purchased the early Web companies Netscape and CompuServe in the late 1990s, Renner said.

Facebook announced its plans to go public Feb. 1, and it was hit with a patent suit by Yahoo in California federal court March 12. The search company claims that Facebook infringes 10 patents related to advertising, privacy and social networking.

Facebook then bought 750 patents from IBM on March 22, in a move that was widely seen as an attempt to bolster its defenses in the Yahoo suit. Prior to that purchase, the price of which was not disclosed, Facebook reportedly had only 56 patents to its name, while Yahoo reportedly had over 1,000.

Facebook responded to Yahoo's suit on April 3 with counterclaims alleging that Yahoo has infringed 10 patents owned by Facebook for social networking and advertising technology. Facebook claims that Yahoo's home page, Flickr photo sharing service and advertising services infringe the patents.

With Monday's purchase of the AOL portfolio from Microsoft, Facebook now owns 1,400 more patents than it did a month ago.

The spate of recent patent transactions has illustrated a contrast between the strategies of established companies like Microsoft and relative upstarts like Facebook, Patras said.

Microsoft already has a significant patent portfolio, so competitors know it can strike back if it is sued, Patras said. Therefore, the company is motivated to buy more patents mostly to keep them out of the hands of rivals who might assert them against Microsoft, he said.

Because they didn't have a large portfolio of their own, Facebook and Google Inc. have been purchasing patents to use as defensive weapons and a way of fighting off and deterring future patent suits by others, Patras said.

"Microsoft has a huge portfolio and companies like Google and Facebook are trying to get to that point," he said.

Because it doesn't necessarily need more patents for defensive purposes, Microsoft may be able to pay a premium to purchase patents, since it knows it may be recoup its costs by licensing them to companies seeking to boost their defenses, as happened with the Facebook deal, Patras said.

Mixon said the timing of Monday's deal means that there was likely a strategic agreement between Facebook and Microsoft before Microsoft bought the AOL patents.

"These types of transactions are not done very hastily. There has to be due diligence," he said. "This indicates that there's a burgeoning alliance between Microsoft and Facebook, which is very interesting."

Microsoft paid $240 million for its 1.6 percent stake in Facebook in 2007. Among other collaborations between the companies, Facebook features search results from Microsoft's Bing search engine.

At the same time, Yahoo's search is powered by Bing under a 2010 agreement between Microsoft and Yahoo.

Microsoft was represented in both the purchase from AOL and the sale to Facebook by Covington & Burling LLP. The firm's team on both deals was led by corporate partner Bruce Deming, and included corporate partner Ken Ebanks, tax partner Robert Heller, intellectual property partners Evan Cox and Amy Toro and antitrust partner Miranda Cole.

Facebook was represented in the deal by both Fenwick & West LLP and Cooley LLP. The Fenwick team was led by corporate partner Douglas Cogen, co-chair of the firm's mergers and acquisitions group. The Cooley team was led by Adam Ruttenberg, head of the firm's technology transactions group, with senior counsel Michael Stern also playing a key role.

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