Yahoo! Hits the Great Wall of Litigation

Tough break, Yahoo! (Nasdaq: YHOO). The portal giant that is working through Alibaba.com to grow its presence in China was dealt a legal blow yesterday, when a court ruled that Yahoo! China's music search site promotes piracy. By linking to a site that offers unauthorized downloads, the court ruled in favor of the 11 record companies pressing charges in the case.

The awarded sum isn't much -- the $27,000 penalty is a rounding error in Yahoo!'s cavernous coffers -- but it sends a clear message. Foreign companies have often feared introducing intellectual capital into developing countries because piracy is often rampant. Even the mighty Microsoft has had to wrestle with the issue in the past.

China is trying to shake that tag, but the ruling is still a surprise as Baidu.com (Nasdaq: BIDU) -- a more notorious haven for illegal song file downloads -- was cleared of a similar case back in November.

The irony behind the ruling is that it comes just as Yahoo! struck a stateside deal with Gracenote to be one of the few sites to offer legal access to accurate song lyrics. The same company that is now hailed as the protector of intellectual capital domestically is being blasted for allowing that same intellectual capital to be trampled on in China.

Yahoo! plans to appeal the ruling, just as the labels appealed the November ruling in favor of Baidu. Again, it's not the money, which Yahoo! and Alibaba clearly have. It's the principle. It's the precedent. It's the need to do away with stifling boundaries before the lawsuits come, yes, like a broken record.

Yahoo! is a Motley Fool Stock Advisor newsletter selection. Microsoft is an Inside Value recommendation. Baidu is a Rule Breakers stock pick. All three newsletters are currently beating the market, and you can find out why with 30-day trial subscriptions.

Longtime Fool contributor Rick Munarriz still collects songwriting royalties, so he understands the value of intellectual capital in the music industry. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.