Jack Ellis

Despite the buzz surrounding Facebook’s IPO last week, the company’s position at the top end of the highly dynamic online social networking market is delicate. Some have cautioned that its product and business model are too monochrome to survive in the long term, and that users may well migrate elsewhere as more specialised offerings grow in popularity. Additionally, it has been noted that with its flotation, Facebook is opening itself up to a potential squall of patent infringement litigation. As a result of the public filing, its IP assets become common knowledge to the marketplace. That this leaves you more open to attack is something that will be all too familiar to other major online businesses, including Groupon, LinkedIn and Zynga, which were hit with a sharp increase in patent litigation after their IPOs. 

Not that high-profile cases will come as a shock to Facebook. The company is already embroiled in some widely-reported disputes. An infringement suit filed in 2010 by Interval Licensing, a company controlled by Microsoft co-founder Paul Allen, is ongoing; while Facebook’s ‘friending’ capability – a central concept of the platform - is the subject of a claim brought by Walker Digital. 

As we await possible further suits, the strength of Facebook’s patent portfolio comes into question, as well as what it might do to improve its position. Its S-1 form reveals that the company has 56 US patents with another 503 applications pending. Of course, patents are about quality more than they are about quantity; but unless what Facebook currently has is incredibly fundamental, it is just not going to provide enough protection should infringement claims begin to flood in. 

Nonetheless, Facebook does seem to have a decent IP asset base to build upon. According to a report by Bloomberg, several leading hi-tech companies are currently offering products and services that may use its inventions. Apple, Microsoft, Sony, Nokia and Oracle are among those which could end up requiring a licence from Facebook, if they don’t have one already. Additionally, the company has begun to purchase IP. In 2010, it reportedly spent $40 million on 18 patents and applications from social networking pioneer Friendster. Applied Materials, Hewlett Packard and BT are other companies that are said to have assigned IP assets to Facebook. 

However, if it is to become embroiled in large-scale patent warfare, Facebook will need coverage across a range of areas. “I expect they’re going to be making purchases,” said Kevin Rivette of 3LP Advisors, in the Bloomberg piece linked to above. He suggested that due to its rapid rise, Facebook won’t have had the time to accrue the necessary breadth of patents to ensure it can compete as a top player in the high-tech space. “You’re going to see them buy patents,” said Rivette. “You’re going to see them buy them in a lot of different areas, is my suspicion. They’ve grown too quickly to not have the patents that are underlying a billion dollar-plus business.” 

We know that Facebook has plenty of money to spend, and there are patents out there which are looking for a buyer. However, the flipside of the IPO is that Mark Zuckerberg can’t just open his chequebook for whatever he wants. Although the S-1 filing makes it clear that he will retain a lot of control over the company, there will be a greater range of shareholders to answer to from now on. And they, like Facebook’s founder and guiding light, will need to ensure that the company has access to both in-house and outside expertise as it seeks to stock up on the IP rights it requires. 

But whoever does the job will be starting in a fairly good place. Unlike Google, which only got into patents relatively late in the game, Facebook has already begun building a portfolio. It also has access to the cash necessary to do a whole lot more. Regardless of its current patent strength, Facebook can implement a sophisticated IP strategy now that will continue to protect its bottom line into the future. And riding on the wave of that $5 billion public offering is a great time to start. If it doesn’t, Facebook will only have itself to blame for what will inevitably happen further down the line.