Way back in the pre-publicly traded days of Google, the search advertising company settled a patent case with Yahoo. Four years later, that settlement may be key to Microsoft’s interest in Yahoo’s paid search business.

The paid search/bidding for placement technology patent known as ’361, developed by the company that became Overture (later acquired by Yahoo), loomed out of the past. It spurred a lengthy post about the Microsoft and Yahoo discussions from past to present, and a perquisite conspiracy theory remark by Valleywag.

The long post by Usman Latif hit Slashdot and other points around the Internet. His contention: Microsoft’s proposed acquisition of Yahoo gives it control of that valuable patent. While that doesn’t threaten Google’s business, it could expose some nebulous deal Google and Yahoo made when the two sides settled a dispute about the patent, just ahead of Google’s IPO and subsequent stock market rise.

Google and Miva both challenged Overture in court over the ’361 patent, even as Microsoft, Yahoo, and others licensed the technology. Amid the development of rival technology, and despite owning the patent, Latif contended Overture wanted to be bought out by someone.

Microsoft said no, but Terry Semel at Yahoo said yes, in a $1.63 billion stock deal. That gave Yahoo control over Microsoft’s paid search efforts in a way, pending an outcome of the Google/Miva litigation against Overture.

Google settled with Yahoo, as Miva did later, but Latif alleged only a portion of Google’s settlement actually applied to the ’361 patent. He cited Google’s annual report from 2004:

On August 9, 2004, the Company and Yahoo entered into a settlement agreement resolving two disputes that had been pending between them. The first dispute concerned a lawsuit filed by Yahoo’s wholly-owned subsidiary, Overture Services, Inc., against the Company in April 2002 asserting that certain services infringed Overture’s U.S. Patent No. 6,269,361. In its court filings, the Company denied that it infringed the patent and alleged that the patent was invalid and unenforceable.

The second dispute concerned a warrant held by Yahoo to purchase 3,719,056 shares of the Company’s stock in connection with a June 2000 services agreement. Pursuant to a conversion provision in the warrant, the Company in June 2003 issued 1,229,944 shares to Yahoo. Yahoo contended it was entitled to a greater number of shares, while the Company contended that it had fully complied with the terms of the warrant.

As part of the settlement, Overture dismissed its patent lawsuit against the Company and has granted the Company a fully-paid, perpetual license to the patent that was the subject of the lawsuit and several related patent applications held by Overture. The parties also mutually released any claims against each other concerning the warrant dispute. In connection with the settlement of these two disputes, the Company issued to Yahoo 2,700,000 shares of Class A common stock. The Company used the $85.00 per share price of the initial public offering to arrive at total settlement consideration of $229.5 million.

Google derives virtually all of its revenue from online advertising, and a substantial chunk of that comes from its paid search business. Compared to Google’s multi-billion dollar revenue stream, that $229.5 million settlement is on par with Bill Gates getting IBM to license DOS on a non-exclusive basis decades ago. It’s a remarkable value for Google.

Latif suggested Yahoo’s control of ’361 continued to impact Microsoft, which has struggled for years to approach Google and Yahoo in paid search business. "It is quite possible that the size of the royalties Microsoft is paying to Yahoo are forcing Microsoft to neglect its paid search operations in order to minimize payments to Yahoo, and to minimize the size of an eventual settlement with Yahoo," he said.

It’s been known for years that Microsoft and Yahoo have discussed possible deals from time to time. Nothing’s ever come of them, but Latif’s theory suggested why the two sides continued to meet over the years.

This also highlighted why Microsoft made an alternative bid for Yahoo’s search assets, something which they publicly reconfirmed interest in this week, should Yahoo’s board receive a makeover favorable to Microsoft. A deal puts an end to license fees, and any restrictions Microsoft may feel it has with its AdCenter paid search service.

Latif also made a veiled suggestion in another post that Google’s widely-publicized firing of Mark Jen in 2005 for blogging about the company was somehow connected to Google’s deal with Yahoo. Our followup request to Latif for more information had not been answered by press time.