Trolling for Dollars: Patent Practice Bedevils Ad Agencies

Industry Vexed by Companies Known as NPEs, Which Buy Mundane Patents and Demand Millions for 'Violations'

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What could get an adman to walk away from $40 million in new business? Fear of the patent trolls.

That's the derogatory term for people who buy up the rights to patents to make money litigating violations. While they've long been a headache of tech companies, recently they've trained their crosshairs on another sector: marketers and their ad agencies, which they go after for using such seemingly commonplace technologies as drop-down menus and placing product descriptions next to product images. Ad execs say the practice is costing the industry millions in settlements and licensing fees.

"The ultimate irony is that patent law was invented to foster innovation," said Bradley Gross, general counsel for Society of Digital Agencies, a trade group for small- to medium-size shops that's forging a plan to protect agencies from such lawsuits. "But what it's turned into is a system where overbroad patents are turned into to swords, not shields, to rob the industry on what should be public-domain technology."

The issue has gotten archrivals Google and Microsoft to jump into bed together. On March 1 the tech giants teamed up to file a legal complaint against one such company, Geotag. After Geotag sued more than 300 companies, primarily retailers and restaurants ranging from Applebee's to Zale's, because their store locators infringed on its "internet organizer for geographically or topically organized information" patent, Google and Microsoft stepped in to stop what it called the company's "baseless" claims. Geotag and its lawyers did not respond to calls and emails requesting comment.

If Google and Microsoft can prove the patent is invalid in court, Geotag would no longer be able to sue retailers or restaurant chains for infringement. It would be one victory in an ongoing battle, but not all targets have Google- and Microsoft-sized legal and financial wherewithal in their corner.

There are more than 300 companies like Geotag, according to Mr. Gross. Geotag's case isn't the first patent infringement cases to ensnare marketers and their agencies, just the latest in a practice that's snowballed over the past three years.

This is how it works: "Patent trolls," legally known as non-practicing entities (NPEs), are companies that don't sell products or services, but buy up patents from small inventors to make money off enforcing them. They cite an instance that could infringe their patent -- like the store locator on Zale's website -- and write a letter to the company or file a complaint, most often in the Eastern District of Texas, a locale that often requires a big trip for execs who choose to defend themselves. "It's a long drive from Dallas," said Cynthia E. Kernick, partner at law firm Reed Smith. The district also has a reputation for favoring patent owners. Not all NPEs make tech firms, marketers and agencies quake in their boots. Some invest in developing technology and then decide, for whatever reason, not to practice the invention -- universities often fall into this category. The distinction occurs when an NPE acquires a patent simply for purposes of suing on it -- a practice that lawyers on the agency side said does little to foster innovation or grow the economy (outside of many billable lawyer hours).

Fighting infringement claims in court is extremely expensive -- from start to finish, they run $3 million to $6 million on average in Texas. To avoid those costs, companies often settle for a lesser sum or agree to licensing fees for the technology under dispute. The NPEs collect their fees and move on to the next target . Some argue that they're just fighting for small inventors that can't afford to make claims on their own.

In 2007, a small company called PixFusion sued OfficeMax and the now-defunct agency Toy over the company's "Elf Yourself" campaign. PixFusion claimed enabling consumers to affix their pictures to elf bodies infringed on its personalized media patent. While the 1997 patent application cited the use case of importing scans of kids' heads into video recordings -- specifically, video tape in VCR -- the patent's scope is much broader. Office Max ultimately settled the case for a reported six-figure fee. PixFusion has since filed suit against viral agency Oddcast and custom e-card maker JibJab Media. JibJab didn't return request for comment. Oddcast chose not to comment on the suit; it now licenses PixFusion's technology. PixFusion didn't return an email seeking comment on the outcome of the lawsuit.

When an NPE comes suing, it's often the agency that has to foot the bill, if it created the website or mobile app under dispute and signed an agreement to accept liability when the work was contracted, as they often do. The American Association of Advertising Agencies also maintains that agencies face greater patent risks than ever, and spent more than half its board meeting last week discussing the issue. "We recommend that when a client says you have to have indemnity, that agencies just say no," said Tom Finneran, 4A's exec VP of agency management services. "There are too many systemic risks."

There's no blanket insurance for infringement either -- many general policies explicitly exclude patents. Agencies can purchase costly, custom policy for patent issues, but underwriters need to look at the technology that will be covered. However, most contracts and fees are determined way before either the marketer or agency even knows exactly what they'll be making.

Deciding who will take the risk if patent troubles arise is just one more potential wedge between clients and agencies. Recognizing the millions of dollars in potential risk involved, some agencies have refused to sign such agreements for, say, a $200,000 mobile app development project. One agency turned down $40 million in new business because it refused to accept terms the client requested, a SoDA spokesman said. In other cases, big advertisers leverage multi-million dollar accounts to get agencies to take on risk, said Association of National Advertisers General Counsel Douglas Wood. In a third scenario, both parties agree to cap agency risk at a certain amount, and advertisers take on the rest.

"The advertiser is in effect the end user -- the buck stops there ultimately," said Mr. Wood. "But you look up that food chain, and the agency is responsible for the materials provided."

There are also attributes of the patent system that make it difficult for agencies to protect themselves -- simply put, it's hard to find the patents that they may ultimately infringe.

"The issue for our clients and for agencies is that there are a ton of patents out there that are very difficult to research," said Lee Gaddis, chief operating officer of Austin-based independent digital shop T3. "Every day, you sit down at your computer and write code. How do you know if you are inadvertently stepping over a patent line?

The Federal Trade Commission agrees on the patent search problems. The commission issued recommendations last week and specifically cited the need for improved policies on how well patents notify the public of what exactly is protected. For the courts, the FTC also suggests capping damages to the market rate for purchasing the tech before the project -- but that recommendation would only apply when cases go to court. Only 2% to 4% of patent cases even make it to trial.

The Senate also passed a long-awaited patent reform bill last week, but its provisions largely address how patents are issued and don't directly affect this type of litigation associated with so-called patent trolls. Actually, some worry that with their demonstrated savvy in this area of the law, they might use the new "first to file" rules to obtain patents for emerging trends before startups or inventors can get to it.

Inventors, watch out: You may be next.

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