Shares of Yahoo Inc. (Nasdaq: YHOO) rose more than 1 percent in premarket trading Tuesday after the Internet company threw a wrench into Facebook Inc.'s proposed $5 billion initial public offering by suing for patent infringement.
Yahoo shares closed up 6 cents at $14.55, Tuesday, giving back most of their earlier gains. The gain was less than half a percentage point.
Yahoo claimed Facebook has appropriated 10 patented technologies in a new filing in U.S. District Court in San Jose, Calif. Yahoo didn't put a monetary value on the property but said it wants Facebook to be enjoined from using them immediately.
Facebook, the No. 1 social networking site, issued a statement denying any infraction. We will defend ourselves vigorously against these puzzling actions, the San Francisco-based company said.
Yahoo sent Facebook a letter calling attention to its patent allegations 11 days ago and demanded the social networking site desist from the alleged abuse.
The lawsuit may reflect a new hardball strategy by the Sunnyvale, Calif.-based company's new CEO, Scott Thompson, installed only in January. The former president of eBay's PayPal unit is under pressure to restore Yahoo's earnings growth as well as facing a shareholder challenge by activist investor Daniel Loeb's Third Point Capital, which has built up its Yahoo stake above 6 percent.
Lance Lieberman, a lawyer with Cozen O'Connor in New York, said Yahoo had placed Facebook in tough spot and suggested the parties will settle before the IPO. He also suggested Yahoo, with a rich portfolio, may try to go after many other social media companies that may have allocated its intellectual property.
Yahoo also hired Quinn Emanuel Urquhart & Sullivan, the Los Angeles law firm that represented Tyler and Cameron Winkelvoss in their lawsuit against Facebook CEO Mark Zuckerberg. Facebook, which is usually represented by Fenwick & West, which has a strong intellectual property practice, hasn't yet filed a response.
Facebook filed its IPO statement Feb. 1, in which it reported holding 56 patents, with outstanding applications for another 410.
Yahoo is working with Goldman Sachs and Allen & Co. on selling interests in China's Alibaba Group and Yahoo Japan that could be valued as much as $20 billion.
Seeking funds from Facebook could be another move in the same direction. Before Google's 2004 IPO, Yahoo charged the Mountain View, Calif. rival had appropriated some of its IP for search advertising. Google awarded Yahoo 2.7 million shares which were valued at $230 million in the Google IPO.
Based on Tuesday's close, Yahoo's market capitalization is $17.6 billion.