Facebook Purchases 750 Patents from IBM

Monday, April 2nd 2012 by Andrew D. Hennessy-Strahs

Upon learning that facebook has reached a deal to purchase 750 patents from IBM, I initially rolled my eyes and assumed this is just another bit of facebook trivia – after all, I am sure most of us are still eagerly waiting for that facebook phone.  Then, I started asking questions.  Is it common for internet companies to do this?  What do other company’s patents do for a company, not to mention 750 of them?

After doing a little bit of research, I started to understand that this is a rather common practice for successful technology companies.  It is much like buying utilities in Monopoly.  Players hope that (1) someone lands on one of the Utilities and (2) once another player does, he pays more rather than less for doing so.  Purchasing patents is speculative.  The patents themselves are worthless until someone uses the patent to develop a technology.  The catch, however, is that “technology” is a rather nebulous concept.  The iPhone, for example, is a complex system of patents; Apple filed over 200 patents on the first iPhone alone.  Because patents can apply to any technology that is merely “useful,” including software, methods, processes, and machines, there is a natural incentive to patent even the smallest bits of technology, even if those technologies have not yet been integrated into a larger more useful form (e.g., an iPhone, or an iPhone application).

If a company ever incorporates the technology, for which there is an outstanding patent, then the patent holder can now sue for patent infringement and collect a licensing fee, much like the player in Monopoly, who happens to own “Water Works.”  The entire practice is pejoratively referred to as “patent trolling,” because the companies that collect these patents function much like the trolls in some fairy tales that guard bridges and charge a fee for those who wish to continue their journeys.  These licensing fees, in turn, provide a disincentive to innovate – a disincentive that looms heavy for small technology firms with shoestring budgets but great ideas.

” Purchasing patents is speculative. The patents themselves are worthless until someone uses the patent to develop a technology. The catch, however, is that “technology” is a rather nebulous concept.”

Curiously, the reasons behind facebook’s purchase  are probably more closely related to a pendinglawsuit brought by Yahoo!, in which Yahoo! alleges that facebook infringed ten patents in the development of its social network.  In several of its allegations, Yahoo! alleges that facebook used patents for enhancing the security of its online advertising.  In another allegation, Yahoo! claims that a patent covering “control for enabling a user to preview display of selected content based on another user’s authorization level” was breached when facebook created its “View As” feature.

A judge must decide whether the breadth of Yahoo!’s patents entitles the company to compensation from facebook for using these patents.  Facebook, which held only 56 patents prior to the deal with IBM, is trying to fight this current lawsuit much like a chess player would by simultaneously mounting a defense and counterstriking.  The deal with IBM will enable facebook to allege that both Yahoo! and facebook hold patents which cover the same territory, thereby negating Yahoo!’s infringement claims.  Presumably, facebook and Yahoo! could remove the issue from the table or enter into a cross-licensing agreement, in which they both “patrol the same bridge,” so to speak.  Facebook also wants to pressure Yahoo! into dropping the lawsuit or settling outside of court by countersuing Yahoo! for patent infringement on the newly acquired IBM patents.   Naturally, facebook has become a stronger “chess player” as its newly acquired arsenal of patents can stave off – and possibly initiate – future lawsuits in the same fashion.