Yahoo and Facebook Agree To Cross-License Not Just Some Patents, But Their Entire Patent Portfolios

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. The deal’s details are getting final confirmation, and it will likely be formally announced later today. 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. Combined with the patent deal, these bring Facebook and Yahoo into a tight alliance.

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.

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 is to be announced, with 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.

Now both companies will gain the freedom to to employ technology covered by each other’s significant portfolios. In particular, the new patent access could help them improve their relevance engines for presenting more relevant content and ads.

New Ad Sales Partnership

Details on the advertising sales partnership are still scarce but sources say it will likely center 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.

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.

Sources tell me there will also 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 their 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.

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.

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. 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.