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Facebook Becomes The New Patent Punching Bag

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Yahoo may not be the only company looking to make a quick buck by targeting Facebook when it’s vulnerable – right before the IPO during its SEC mandated quiet period. Facebook has now become a new target for any company looking to generate some cash through patent litigation suits.

After Yahoo, it has now been sued by Mitel, a Canadian enterprise software company which alleges infringement of two patents for "automatic web page generator" and another for "pro-active features for telephony”. [1] The first one is so broad that it could be used to sue any of the current Internet giants who use dynamically generated web pages.

See our complete analysis for Facebook

More interestingly, even AOL may be looking to cash in on the Facebook IPO. It has filed a revised application for a patent which covers user updates based on content publication activity by other users, which is a feature used in most social networks. The timing of the application has led to speculation that it may be planning to sue Facebook. In response, Facebook has purchased patents from IBM to strengthen its patent portfolio in anticipation of future legal headaches.

We believe Facebook is likely to try to settle if a major suit gains traction as it would probably cost it less than the ongoing litigation, especially now when it is focused on its IPO. A settlement would also avoid the potential that a big patent suit could derail its IPO, which could happen if investors fear that these suits would weigh on the company's growth or potential earnings going forward.

We currently have a $74 billion valuation for Facebook based on the discounted cash flow valuation of its advertising and virtual good transactions businesses. It is expected to raise more than $5 billion at a $100 billion valuation in its upcoming IPO.

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Notes:

  1. Facebook Patents Developing: A Lawsuit From Mitel; More Patent Applications From AOL, Others, Techcrunch []

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