Just So We're Clear: Facebook Totally Demolished Yahoo In The Patent Fight That Just Ended

scott thompson yahooGuess I screwed up things pretty bad, eh?

Photo: Flickr/Yodel Anecdotal

Let’s be clear: Facebook absolutely wiped the floor with Yahoo in the patent fight that just ended.There is one reason why: In the end, Yahoo’s interim CEO Ross Levinsohn could not undo the screw-ups of his predecessor, Scott Thompson.

Before he was tossed for lying about his educational background, Thompson started a springtime war with Facebook over patents.

Claiming Facebook copied Yahoo innovations in social networking and online advertising, first he threatened to sue and then … he actually sued.

His plan, it seemed, was to quickly extract cash from Facebook, which was about to go through an IPO and would throw money at any problems to make them go away.

This plan did not work.

Instead of paying Thompson to go away, Facebook did what it always does in legal battles: it dug a trench, filled it with lawyers, a prepared for war.

Since the company was founded, Facebook lawyers have always been exceptionally aggressive. They bring nukes to a knife fight.  

Just ask the Winklevosses—or that woodchip salesman from New York who claimed he owned part of Facebook and soon found himself on the other end of a private investigator’s scathing report.

Instead of caving and writing a quick check, Facebook sued Yahoo back—claiming Yahoo was infringing on Facebook’s patents. 

Then came a sucker-punch from Facebook that really knocked Thompson on his butt.

Facebook went out and spent $550 million buying patents from Microsoft, which had purchased them days before for $1 billion from AOL.

The message from Facebook to Yahoo was clear—a clear screw you.

It was: We’ll spend hundreds of millions of dollars on patents, but you’re not going to see a dime of it; not after you said we stole your tech.

The transaction drew a brutal contrast between how one older tech company, AOL, successfully leveraged its patent portfolio in a non-threatening, lucrative way, while another, Yahoo, faced an alienating battle with no end in site.

Then came Thompson’s resume scandal – he said he had a major in computer science but he did not – and the Yahoo patent suit got swept under the rug for a few weeks.

Finally, Thompson got the boot.

Yahoo’s North American leader, Ross Levinsohn—who, reports say, was happy to see Thompson go—got the CEO gig on an interim basis. Yahoo also got a new board, thanks to activist shareholder Dan Loeb.

Levinsohn has a better relationship with Facebook management than Thompson had—that is to say, he has a relationship with Facebook management—so there was some optimism that he would be able to talk Facebook back from edge and maybe extract some cash in exchange for a patent deal, after all.

The overtures didn’t get Yahoo anywhere.

A source close to Yahoo’s side of the negotiations tells us that when Levinsohn and his team rejoined the Facebook talks they were shocked at how vitriolic things had become.

Forget getting cash out of the deal, Levinsohn and his team soon found themselves working to merely bring Facebook back off the brink of all-out sustained legal war between the companies.

A source familiar with Facebook’s side of things says Facebook was prepared to for “a multi-year protracted battle.”

That’s not something Levinsohn wanted, for a number of reasons. A big one: Thanks to a partnership struck the year before, Facebook is actually a huge referrer of traffic to Yahoo. 

From there, says the source familiar with Facebook’s view of things, Yahoo had to find itself “some kind of deal where it didn’t it look like we were backtracking.”

Here’s what Levinsohn got, in the end: Yahoo and Facebook are, according ot a source, “going to look for ways to work together on the sales side and find ways to work together on events.”

Sounds pretty vague and empty, right? 

That’s because it is.

The upside is that someday, Yahoo and Facebook might be able to share an advertiser. 

The sound you do not hear is Yahoo shareholders going “woo hoo.”

Since the deal was announced last week, Yahoo has made some noise about how it will be able to extract value from Facebook in the future, but we’re told the contract the two companies signed is 100% clear that there is not going to be any suits over patents in the future.  

Practically speaking both parties have a full portfolio patent licence.

So, for those keeping score at home, the final tally is: Scott Thompson, 0, Facebook, 1. Ross Levinsohn gets a pass because he inherited someone else’s mess.

Heck, call it a win for Levinsohn: He started with a clear loss and salvaged something from the situation.

Update: We added information about the circumstances of  Yahoo general counsel Callahan’s departure to this report.

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