4A's Takes Tough Stance on Patent-Troll Issue

Trade Group Says Clients Must Assume Risk or Expect Higher Fees

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As agencies continue to create more digital products for their clients, they're also potentially assuming more patent risk. To combat an issue that's becoming a top concern for Madison Avenue, the 4A's, the trade group for ad agencies, is sounding an alarm bell. Its hardline recommendation? Clients need to assume all patent risk or simply pay more for shops' services.

With the growing number of websites and apps being made, marketers and their agencies are increasingly the targets of "patent trolls"-- a derogatory term for companies that don't produce anything, but buy up patents to make money from enforcing them. They have long been an issue for tech companies that are suddenly asked to be liable to obscure or vague patents. But now, for seemingly mundane technology such as drop-down menus and product placements, marketers and agencies are becoming the new targets.

Recently one such company, Geotag, filed suit against more than 400 marketers, including Walmart, Applebee's and Nike, claiming their website store locators infringe on its geo-location patent. While the case is still pending, defendants will either have to fork up millions in lawyer fees or settle for a smaller sum. (Ad Age took a deeper look at the problem and the Geotag case earlier this month.)

When faced with patent-infringement claims, the ad industry has largely opted for settlements and licensing fees that, while annoying, are tiny in comparison to the high cost of appearing in court. It's often cheaper to pay out a $200,000 fee than spend millions in lawyers' fees. For the firms gobbling up those patents for the purpose of enforcing them, multiple companies paying out those lower sums still amounts to significant revenue.

Since agencies create such technologies for marketers and often sign terms of service that make them liable for all work produced, agencies are getting pulled into the disputes.

Read the 4A's recommendations

On Tuesday, the 4A's released recommendations for how agencies can manage patent concerns. In short? The 4A's recommends agencies tell clients they'll be the ones to assume the risk, and if they don't, clients should expect higher agency fees that can cushion potential claims.

"Agencies can jack up their prices considerably if they are going to take on the risk, but they can't maintain their low-margin pricing and take on this burden," said Tom Finneran, 4A's exec VP of agency-management services.

According to a report outlining the 4A's guidance on the topic: "Even though clients ultimately decide what to bring to market, some clients will call upon their agencies to provide indemnity against patent-infringement claims. ... However, 4A's recommends that agencies give serious consideration to adjusting price in situations where they take on risks that have not historically been factored into their pricing models."

The report also recommends agencies can isolate software development into separate corporate entities to protect the core business in case of litigation, and should start filing for their own patents.

"We recognize that our guidance directive may be controversial, however it's based on prudent evaluation of viable options in the complex world of software and patents," said Mr. Finneran.

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