August 9, 2004

Google and Yahoo just finalized and out-of-court settlement, resolving two lenghty disputes, with Google tendering common stock to Yahoo.

The leaders -- and bitter rivals -- in search engine marketing services have decided against civil actions.

Google gave Yahoo 2.7 million shares of Class A common stock, which could be worth more than $280 million if Google's impending IPO garners at least the bottom of its suggested price.

In return, Google got out from under a two-year-old patent infringement suit and a dispute over stock warrants owed Yahoo for a 2000 services agreement.

A Yahoo spokesperson said the agreement grants Google a license to the '361 and several other patents owned by Yahoo.

"There is no ongoing licensing fee. It's netting out at a one-time share receipt for the life of the patents covered under the suit," she said.

The agreement also puts to rest the dispute over how much stock Google owed Yahoo. Yahoo had a warrant to purchase 3.7 million shares, but Google claimed the 1.2 million shares it issued to Yahoo followed a conversion provision in the agreement. Yahoo protested the lowered amount.

The companies didn't disclose what proportion of the shares Google parted with covered the patent licenses. A Google spokesperson would say only, "We are pleased to have resolved these issues and pleased with the terms of the agreement."

Yahoo now holds around 8.2 million shares in Google. The Yahoo spokesperson declined to say when settlement talks began or whether the judge handling the patent infringement suit directed them to talk turkey. But after simmering along on the back burner, the case was about to get hot.

Overture Services, Yahoo's subsidiary, sued Google in April 2002, claiming the latter's lucrative AdWords search marketing service infringed Overtures U.S. Patent No. 6,269,361. The discovery in the case was getting ugly: Google claimed that an Overture executive lied in his deposition. Also, despite Overture's success in keeping parts of its testimony out of the public record, the discovery process was bringing to light plenty of information about its business.

In the long term, the patent dispute could have had serious consequences: If its patents were upheld, Yahoo could have refused to license them to Google, bringing AdWords to a screeching halt. However, that day was at least a couple years down the road, according to Randy Lipsitz, an intellectual property specialist with the New York City law firm of Kramer Levin Naftalis & Frankel.

However, that might have changed. Both sides were awaiting one critical ruling: The Markman Order, which defines the terms at issue before the case can go to trial. The Markman hearing took place in March and the decision was expected any day -- perhaps before bidding on Google's IPO shares closed. While these rulings don't necessarily give much indication of how the case may be decided, anything that appeared negative to the public could have dinged the price.

"The big companies really don't like to bet the farm unless they are going up against a much smaller company, one they feel they can over-lawyer or overwhelm," said Konrad Trope, a patent and intellectual property specialist based in Los Angeles. In this case, he said, "You have two giants who in a sense could be doing more damage to themselves by beating up on each other than by settling."

"Most of these cases do settle," Lipsitz agreed. "At some point it may sound good to go after [a rival] and corner a piece of the market. But usually after a couple of years, clients see how much they've spent, how much time, the disruption to the business and its executives, and they realize a settlement wouldn't be so bad."

In the short term, the dispute seemed to have little impact on the market. "There were so many other nuances in the whole situation that no one really focused on the consequences [of the suit] -- anyone relevant at least," Lipsitz said.

Google set the extraordinarily high price of $108 to $135 for IPO shares, although the Dutch auction system being used is designed to determine the price the market is willing to pay. The Mountain View, Calif.-based company's revised S-10 filing that included details of the previously disclosed plan to offer a buy-back program for shares and stock options it failed to register with the SEC gave rise to concerns about its internal governance.

"They were more interesting to read about than an arcane patent infringement lawsuit," Lipsitz said.

Ironically, Google's stock is putatively worth as much as nine times more than Yahoo's. In the last year, YHOO has traded between $14.05 and $36.51. The stock was selling at $25.70 at close of today's trading.

Source: Internet News.com

        

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