Yahoo's link-up with Google faces threat of litigation

Yahoo's life-saving advertising alliance with Google could be under threat, after it emerged that the US Justice Department has hired a top competition lawyer to advise on a potential litigation to stop the deal.

The department's anti-trust division, charged with ensuring competition and blocking monopoly practices, has turned for consulting advice to Sanford Litvak, who was its anti-trust chief under president Jimmy Carter.

The news, revealed yesterday, signals that the DoJ is seriously considering a legal challenge to the pact, under which Google will take over the sale of search-based advertising on Yahoo's network of websites.

Google already controls 60 per cent of the market for adverts which appear alongside internet search queries, and adding Yahoo will take that to 80 per cent. Microsoft, which has a 10 per cent market share through its MSN internet business, raised an objection on competition grounds, and major advertisers are up in arms about a deal they say dramatically reduces their choice of where to buy online ads.

Yahoo turned to Google – which has a bigger and more efficient advertising business and has been able to make more money per search query – after spurning Microsoft's $44.6bn (£25.2bn) takeover approach in June.

Jerry Yang, the Yahoo chief executive, said shareholders would ultimately profit from the company's outsourcing of search advertising and remaining independent. Its stock, however, currently languishes at five-year lows, at around half the value of Microsoft's offer.

Mr Litvak is one of the best-known litigators in the US. He resigned last week from Hogan & Hartson, the law firm where he was a partner in the New York and Los Angeles offices. He has been reviewing documents and testimony gathered so far by anti-trust lawyers at the DoJ, with a view to building a case against Google and Yahoo.

The department has previously hired outside counsel for major cases such as its pursuit of Microsoft's anti-trust violations in the Nineties, but such a move is rare.

The Google-Yahoo alliance is scheduled to go into effect next month, but last week the Association of National Advertisers petitioned the DoJ to block it. The trade group, whose 400 members include Procter & Gamble and General Motors, said it would drive up ad rates and hand too much power to Google.

Yahoo said it remained confident that the pact was lawful, and Google said that blocking it would be a "premature" move. "While there has been a lot of speculation about this agreement's potential impact on advertisers or ad prices," a spokesman said, "we think it would be premature for regulators to halt the agreement before we implement it and everyone can judge the actual impact."

The two Silicon Valley giants have argued in the past that outsourcing Yahoo's search advertising was akin to General Motors using Toyota's hybrid technology, which does not lessen the ferocity of competition in the car industry. Google will also not be able to raise prices for advertisers, as prices are set by an auction.