Yahoo and Facebook Confirm Deal To Cross-License Their Patent Portfolios, Sell Ads Together

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Facebook and Yahoo are calling off their heated patent lawsuit battle, and in fact have just agreed to cross-license their entire patent portfolios to each other without money changing hands, sources directly familiar with the deal tell me. Sources also confirmed that the two web giants are entering into an ad sales partnership that will let Yahoo show Like buttons in its ads, as first reported by Kara Swisher of AllThingsD this morning.

Update 1:15pm PST 7/6: Facebook has just confirmed the patent portfolio cross-license agreement as well as the ad sales and distribution partnership in a press release.

However, Swisher noted the companies would only cross-license “some key patents”, and Facebook might have to pay to license others from Yahoo. The patent deal is actually much larger. It encompasses their entire intellectual property stockpile such that they won’t have to pay be able to use each other’s patents, and won’t be able to sue each other over them either.

In the press release Facebook confirms:

“Yahoo! (NASDAQ: YHOO) and Facebook (NASDAQ: FB) today announced that they have entered into definitive agreements that launch a new advertising partnership, extend and expand distribution arrangements, and settle all pending patent claims between the companies.”

Regarding the ad partnership, Facebook’s COO Sheryl Sandberg explained “Combining the premium content and reach of Yahoo! as the world’s leading digital media company with Facebook provides branded advertisers with unmatched opportunity.”

Today’s revelations should bolster investor confidence in both companies going forward, though Yahoo’s may have hoped for a big pay-out from Facebook.

A Mutually Beneficial End To The Patent War

Yahoo sprung the lawsuit on Facebook in the months leading up to its IPO in a move Swisher says was spearheaded by disgraced former CEO Scott Thompson. It sought to extort a massive settlement from Facebook before the IPO so it could avoid potential investors holding back in worry of the case’s outcome.

But rather than settle Facebook bought huge stores of patents from AOL / Microsoft and IBM and countersued with 10 patents, the same number it was sued by Yahoo with. I judged many of Facebook’s patents to be more concrete than Yahoo’s, setting up a formidable defense. That defense seems to have worked.

Swisher reports that interim CEO Ross Levinsohn reached out to Facebook COO Sheryl Sandberg after Thompson was deposed in hopes of coming to an agreement.

Today that agreement sees Facebook emerging without having to pay any direct settlement, though it did spend hundreds of millions of dollars on the patent caches to defend itself.

New Ad Sales and Content Partnerships

The ad sales partnership centers around the two companies working together to secure big ad buys and spread placements across their properties. This way, if say Ford was having a massive launch for a new car, Facebook and Yahoo could help the auto-maker distribute ads across Facebook.com, Facebook’s mobile site, and all of Yahoo’s news sites, portals, and utilities for maximum impact.

In the press release, Facebook explained:

“Yahoo! and Facebook will also work together to bring Yahoo!’s large media event coverage to Facebook users by collaborating on social integrations on the Yahoo! site. Going forward, Yahoo! and Facebook have agreed to work more closely and collaborate together on multiple tent-pole and anchor events annually over the next several years to provide unparalleled experiences for consumers and world-class sponsorship opportunities for advertisers.”

Facebook and Yahoo worked together on ads in during the social network’s early days, but haven’t had a sales partnership in place for years.

Though not specified in the announcement, sources tell me there will be some new partnership around allowing Yahoo to include Like buttons in their ads, but details haven’t been hammered out yet. That could let Yahoo sell ads for brands hoping to score more Likes (essentially subscriptions to news feed marketing messages) for the Facebook brand Pages.

Meanwhile, the long-standing contact sharing partnership between Yahoo and Facebook will continue, sources confirmed. It allows users that sign up for Facebook to automatically import that Yahoo Mail address book to make it easy to find and become friends with those they email with. Facebook and Google once had a similar partnership for allowing contact importing from Gmail, but Google famously cut it off because Facebook wouldn’t allow users the “data portability” to export their friends’ email addresses.

A Second-Chance For Yahoo

The ongoing patent battle was costly, both in dollars spent and attention fractured. Today’s agreement will help the two avoid big legal fees and let them concentrate on innovating, rather than who owns the rights to vague concepts around social networking and advertising.

The new ads partnership could help Yahoo, whose sales have been ailing. Last year, Yahoo signed a big ad sales partnership with AOL and Microsoft to allow them to sell placements on each other’s properties. Thanks to this new alliance with Facebook, Yahoo can now more firmly concentrate on beating Google…something Facebook is sure to be OK with.

However, Thompson promised Yahoo directors a huge pay out from a Facebook settlement — and that’s not what happened. Instead, Yahoo critically damaged its reputation by going on the patent offensive. And since today’s agreement comes with no pot of gold passed from Yahoo to Facebook, Thompson’s attack has proven much less fruitful than expected.

But at least Yahoo’s relationship with Facebook has been restored. That’s critical considering the volume of the traffic Facebook’s news feed and its Open Graph auto-sharing system send to Yahoo sites. A shut down of Yahoo’s Open Graph access could have been disastrous for the former portal’s many news properties.

Now eyes will be on Wall Street, which may boost Facebook for emerging without giving up a massive settlement, and may ding Yahoo for failing to produce a pay-day.