Using Patents to Thwart Competitors’ IPOs

Wired‘s Andy Baio reports that Yahoo has filed “a lawsuit against Facebook for allegedly infringing on 10 patents from their 1,000+ patent warehouse.” As Baio writes:

I’m no fan of Facebook, but this is a deplorable move. It’s nothing less than extortion, expertly timed during the SEC-mandated quiet period before Facebook’s IPO. It’s an attack on invention and the hacker ethic.

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Of course, this is nothing new. It’s a typical strategy used by patent wielders. As I wrote in Ideas Are Free: The Case Against Intellectual Property:

[Patent lawsuits are] also used in connection with IPOs (initial private offerings) of companies. Quite often one competitor will hold on to its patent, wait until their competitor files their S-1 to go public, and then they’ll hit them with a patent lawsuit because this has to be disclosed in the IPO, and it can damage or scuttle the IPO.

For example, a company called Optium went public in late 2006 and the company Emcore sued them for patent infringement as soon as they filed their S-1.¹

In another very recent case, which is ongoing now, a company called Neophotonics, which has recently filed its S-1 — they’re not public yet — has been sued along with three other defendants by Finisar for patent infringement. What’s interesting about this is that one of the patent claims — I’ve reviewed these — that is being asserted covers “a system and method for protecting eye safety during operation of a fiber optic transceiver.” So, in other words, so that the engineers working on the lasers don’t get their eyes burned, there’s an alarm set if you have too much power going to it. It’s something that has been used for years; it’s a common idea. Patents are supposed to be “nonobvious,” by the way. This is not.

And, of course, each of these defendants has countersued Finisar with their own patents. Now you have literally millions of dollars being spent by these five companies on legal fees because of this patent suit.

Patents are nothing but anti-competitive invasions of property rights.²

Update: now Yahoo is asserting patents against Facebook to f*ck with its IPO.

1. See this Optium 10-Q filed a short time later. [↩]
2. EU newsflash: patents are anticompetitive!; Intellectual Property Advocates Hate Competition; IP Rights as Monopolistic Grants to Overcome the Public Goods Problem; Ayn Rand’s Anti Dog-Eat-Dog Rule and Intellectual Property. [↩]