When Yahoo! launched a patent infringement suit against Facebook last month, the attack couldn't have come at a worse time for the leading social network. Not only is Facebook trying to look good in preparation of its upcoming IPO, but the company was woefully unprepared for a high-powered patent fight. According to Bloomberg Businessweek, Facebook only owns about 56 issued patents and 500 filed applications.
So Facebook had to make a choice:
- Come up with a legal strategy based on Yahoo!'s patents not really applying to Facebook's business, or
- shop around for a hefty cache of defensive patents.
Bloomberg and Reuters report that Facebook chose option No. 2. The company has reportedly bought 750 technology patents from IBM (NYSE: IBM). That's how you gird your loins for some mutually assured destruction.
There's no word on exactly what technologies the acquired patents might cover, and as the most prolific patent filer in the world, IBM's treasure trove includes a little bit of everything. And with such a wealth of assigned patents, IBM is no stranger to patent sales. In perhaps the most famous example, Google (Nasdaq: GOOG) has bought more than 2,200 Big Blue patents in a series of transactions in order to defend its Android platform from legal attacks.
Facebook's ideal outcome would be that Yahoo! sees this influx of nuclear ammunition and settles everything before Facebook's IPO date. Removing risks and uncertainty is good for stock prices. But don't hold your breath waiting for this to happen.
More likely, Facebook and Yahoo! go to war with dueling infringement claims, as is the norm in the tech industry these days. Some duels end quickly but others drag on for years. In one extreme example, Micron Technology (Nasdaq: MU) and Rambus (Nasdaq: RMBS) have battled over patent infringement and anticompetitive claims for more than a decade, and that conflict still isn't completely dead. There are damages and penalties of more than $12 billion at stake in the Rambus-Micron fight, and Facebook's sheer size points to even higher stakes in the Yahoo! wars.
We can't even invest in Facebook yet, but the stock is sure to be a popular holding after the IPO. In the meantime, click here to grab a copy of our free report: "The Motley Fool's Top Stock for 2012." But hurry and grab it right now -- that special report won't be free forever.
