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Yahoo sues Google for patent infringement
June 8, 2004
Google could end up paying hundreds of millions of dollars to Yahoo, if it loses a little-noticed patent lawsuit, unfolding in a San Jose courtroom.
The case pits Google against Overture Services, an Internet advertising company bought by Yahoo last year. Overture claims it patented an online bidding system for ads seven months before Google introduced a similar system.
Patent attorneys who have reviewed the suit said Overture's patent claims can't be easily dismissed.
``I think there is merit based on the breadth of the claims,'' said Dave Ashby, a patent attorney with the IP Strategy Group in Cupertino. ``I took a look at it and said, `Yep, Google does that. Yep, Google does that.' ''
A key ruling in the 2-year-old case -- which could determine whether the two sides settle or forge ahead to a jury trial -- is expected at any time, say patent attorneys who have reviewed the suit.
Advertising made up about 95 percent of Google's $1 billion in revenue last year. If the company loses the patent suit, it would probably have to pay damages, license technology from Yahoo or alter how it manages its ad system.
Overture, then known as GoTo.com, filed its patent in May 1999 for a ``system and method for influencing a position on a search result list.'' The 43-page patent application details a system in which advertisers would be able to bid for better placement of ads in search-engine results and manage their accounts through a Web browser.
The U.S. Patent Office awarded the patent July 31, 2001. In February 2002, Google introduced its AdWords program -- a system that would eventually help reshape Internet advertising and legitimize search engines as a viable business. With AdWords, advertisers bid for the right to certain keywords. When a Google user types in that keyword as part of a search, the advertiser's pitch shows up near the results.
A tour operator in Hawaii, for example, might buy the terms ``Hawaii,'' ``vacation,'' ``volcano'' and ``beach,'' and its ads will appear next to Google search results for those terms. Advertisers bid against one another for keywords, with higher bidders getting better ad placement.
In its suit, filed in April 2002, Overture says Google is ``willfully'' and ``directly infringing'' on its patent. The company is seeking triple damages.
Google, which is in a mandated ``quiet period'' leading up to its IPO, declined to comment on the suit, as did attorneys representing both companies.
But in court documents, the company denies Overture's allegations. Among other things, Google is claiming that Overture was using its advertising system for more than a year before it filed for its patent. Patent law gives people a year to file patents after inventing something; a late filing automatically invalidates the patent.
Patent attorneys who have reviewed court documents have mixed views on Overture's chances of prevailing.
Mitchell Rosenfeld, a patent attorney with Capstone Law Group in San Mateo, said Google has submitted substantial evidence to show that Overture missed the one-year deadline.
Rosenfeld said a key issue in the case could end up being whether Overture was testing its technology or using a finished product.
On the other hand, Overture needs only to prove that Google infringed on one of the 67 claims in its patent. Also, Overture's patent application appears to have been well-researched by both the company and the patent office, said Bruce Sunstein of Bromberg & Sunstein in Boston.
``This is going to be a patent that is relatively difficult to knock out,'' Sunstein said.
Since late March, U.S. District Judge Jeffrey White, a former patent attorney, has been analyzing the scope and meaning of Overture's patent, poring over each word and studying terminology such as ``database'' and ``search result list.'' It's a crucial step before a jury can be asked to decide whether a company has infringed on a patent. A ruling could come any day.
Known as ``Markman'' rulings, these decisions are often tipping points in patent cases, said patent attorney John Ferrell, co-founder of Carr & Ferrell in Palo Alto.
If the judge does not agree with one side's interpretation of the patent language, it will often push to settle the suit, he said.
The case is especially intriguing now that Internet search engines have become big business. When the suit was filed two years ago, Overture was suing an up-and-coming search engine with an unproven business model.
Today, Google is considered the king of Internet search. And Overture's stature increased when Yahoo acquired the company for $1.83 billion in stock and cash, incorporating its advertising technology and patents into its services.
``It's one of those things that two or three years ago wouldn't have been an issue,'' said Andy Beal, vice president of search marketing for WebSourced. ``But it just goes to show you how big search is.''
About half of all patent verdicts are overturned on appeal. And the stakes are high. Ultimately, the two sides will have to weigh the costs of a prolonged legal fight -- attorney bills in a case like this could reach $1 million a year -- against the possibility of losing.
``My observation is that there is this big lawsuit between two enormous players,'' Ashby said, ``and no one is paying attention to it.''
Google is no stranger to advertising, having had paid listings on its site since "text banners" debuted in December 1999. However, last month the company introduced a new pay-per-click payment option for its "AdWords" program that may make Google more attractive to some advertisers -- as well as establishing the company as serious competitor with Overture.
Google AdWords, introduced in October 2000, is a self-serve program that lets advertisers create paid listings that appear in boxes running along the right-hand side of the Google search results page. Until now, these ads were sold on a "CPM" basis, where the advertiser pays each time the ad appears, regardless of whether someone clicks on it.
In contrast to Google AdWords, Overture has always operated on a "CPC" or cost-per-click basis. Regardless of how often your Overture ads appears, you only pay Overture if someone clicks on it. That's why Overture is sometimes called a "pay per click search engine" or "PPC search engine," for short.
CPC Dominant, In Paid Listings
There are pros and cons to both CPM and CPC pricing. However, when it comes to paid listings, CPC has reigned supreme due to Overture's success. Anyone beginning with search engine advertising is likely to open an Overture account, because of the huge distribution Overture offers.
Overture is not the only company selling paid listings, of course. However, advertisers who decide to go beyond Overture have already been made familiar with CPC pricing and may wish to work within that model. This is exactly why Google has added CPC pricing to its own program. Its existing advertisers were demanding it, and the company expects to pick up new advertisers if they can easily compare how much they pay per click with Google versus Overture.
"We keep the benefits of the previous program but open it up to a much wider set of advertisers," said Omid Kordestani, Google's senior vice president of worldwide business development and sales.
Google's particular implementation of pay per click pricing has a number of strikes against it, however (see the sidebar article, Up Close With Google AdWords). The new AdWords Select program costs advertisers much more to bid on some terms than at Overture, due to minimum bid pricing that varies depending on the terms popularity.