Facebook and Yahoo agree to settle patent dispute

Facebook and Yahoo have agreed to settle a patent dispute, averting a potentially lengthy battle over the technology running two of the internet’s most popular destinations.

In dropping the lawsuits, the companies agreed to license their patents to each other. They are also agreeing to an advertising alliance that expands their existing partnership.

The advertising alliance could help Yahoo recover some of the revenue it has been losing as marketers shift more of their spending to a larger and more engaged audience on Facebook’s social network.

Yesterday’s settlement involves no exchange of money and comes after a patent squabble that has ran over several months

The truce ends a conflict provoked by Yahoo’s short-lived CEO, Scott Thompson, who was dumped from the job two months ago after misinformation on his official biography raised questions about his integrity.

Under Thompson, Yahoo filed the patent lawsuit in March. The complaint alleged that Facebook infringed on 10 Yahoo patents covering internet advertising, privacy controls and social networks. Yahoo later added two patents to the lawsuit.

But Thompson’s attack on Facebook quickly turned into a public-relations disaster. Much of the technology industry railed against Yahoo’s tactics. Critics viewed the lawsuit as a financial shakedown by a desperate company whose well of innovation had run dry.

When Yahoo replaced Thompson in May with interim CEO Ross Levinsohn, it opened the door for the company to settle the dispute under a reshuffled board of directors. Six of Yahoo’s 11 directors joined the board after Yahoo sued Facebook on March 12.

Yahoo’s legal assault had exposed Facebook’s vulnerability to patent claims as it prepared to complete the biggest initial public offering of stock by an Internet company.

Facebook insulated itself by buying 750 patents from IBM and spending $550m (€448m) to acquire 650 more patents one of its biggest shareholders, Microsoft, had purchased from AOL. Armed with its own arsenal of intellectual property, Facebook signalled that it wasn’t backing down and filed its own lawsuit against Yahoo in April for patent infringement.