Facebook Is Said to Buy 750 IBM Patents to Boost Defenses

By Brian Womack - Mar 23, 2012 5:48 AM GMT+0700

Facebook Inc. (FB) acquired 750 patents from International Business Machines Corp. (IBM), adding intellectual property that may help it counter allegations of patent infringement, a person with knowledge of the transaction said.

The patents cover various technologies such as software and networking, said the person, who asked not to be identified because the deal hasn’t been made public. The acquisition would swell the size of Facebook’s portfolio, which includes at least 56 issued patents and 503 filed U.S. patent applications.

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Facebook. Photogrpher: Frank May/DPA/Landov

Facebook, the world’s biggest social-networking service, is bolstering its legal defenses amid a standoff with rivals that have broader intellectual property portfolios. Yahoo! Inc. (YHOO) sued Facebook this month, accusing it of infringing patents covering critical website functions. Facebook may have shelled out hundreds of millions of dollars for the IBM patents, said Erin- Michael Gill, a managing director at MDB Capital Group LLC.

“This is a very big deal,” said Gill, who is chief intellectual property officer at MDB, an investment bank focused on intellectual property. While it’s not clear how strong the patents are, “Facebook is now where it’s supposed to be.”

The Yahoo suit involves patents covering Internet privacy, advertising and information sharing. Sunnyvale, California-based Yahoo asked for an order barring Facebook from infringing the 10 patents. It’s seeking triple damages.

Jonathan Thaw, a spokesman for Menlo Park, California-based Facebook, declined to comment, as did Ed Barbini, a spokesman for IBM.

Earlier Deals

Facebook already has been acquiring patents from other holders, including early social-networking site Friendster and computing company Hewlett-Packard Co. (HPQ), according to the U.S. Patent & Trademark Office. Yahoo, Google Inc. and Microsoft Corp. all have at least 1,000 patents, according to MDB, based in Santa Monica, California.

Facebook’s IBM deal could help assuage concerns that the company lacks the intellectual property it needs, Gill said. The social network filed for an initial public offering last month, increasing investor scrutiny of the business.

Facebook, which had almost $4 billion in revenue last year, announced earlier this month that it set up a new credit line of $5 billion, replacing a $2.5 billion revolving line, that will be used for working capital and other general corporate purposes. The funds also will help Facebook cover the potential legal costs of patent litigation with Yahoo, according to a person familiar with the matter.

Record IPO

Facebook also had 33 corresponding patents and 149 filed applications in foreign countries as of the end of last year, according to the IPO filing. The company is seeking to raise $5 billion in the offering, making it the largest Internet IPO on record.

Facebook expects more patent lawsuits in the future, according to the filing.

“We expect the number of patent and other intellectual property claims against us to grow,” the company said in the Feb. 1 document, prior to Yahoo’s actions. “We may introduce new products, including in areas where we currently do not compete, which could increase our exposure to patent and other intellectual property claims.”

Already, Facebook ranked No. 28 on the list of companies most frequently targeted in patent cases last year, with 22 suits, according to LegalMetric.com. That’s more than companies such as Cisco Systems Inc. and Yahoo.

‘Weapons in Arsenal’

“They need to have some weapons in their own arsenal,” Thomas Scott, a lawyer at Goodwin Procter LLP in Washington, said in an interview last week.

Acquired patents made up $51 million of Facebook’s goodwill and intangible assets in 2011, up from $33 million in 2010, according to Facebook.

IBM, meanwhile, has been offering portions of its patent hoard to Internet companies. The Armonk, New York-based computer-services giant has made a series of intellectual- property deals with Google (GOOG) over the past year.

IBM continues to add to its patent trove, receiving 6,180 new patents last year. The company has topped the list of U.S. patent recipients for 19 straight years.

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net