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Paul Zimmerman

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Foisting Patent Assertion Entity Indemnity Risk on Agencies Ignores Economic Realities

Patent Assertion Entities (PAE’s), commonly assert ownership status of methods and technologies, and seek to enforce infringements when the alleged “infringer” has failed to attain proper authorization (i.e., paying licensing fees). Patent trolls focus on aggressive litigation tactics, often threatening to sue hundreds, even thousands, of companies and create shell companies so defendants find it difficult to even know who is suing them. Patent troll lawsuits constitute the majority of all patent infringement claims, and exploit the fact that it is often difficult to discern the difference between a new technology’s function, versus the method by which that function is actually accomplished. Hence, these assertions are frequently vague and tend to claim ownership over common marketing methods in online and mobile marketing. For good reason, patent trolls have been the source of discussion and concern in the technology, media and advertising industries for many years.

The FTC and Supreme Court: The Tides May Be Turning

Recent decisions by courts and regulatory bodies have taken power away from patent trolls. On November 6, 2014, the Federal Trade Commission (FTC) announced a consent order, settling charges that a PAE and its law firm used deceptive sales practices and claims, along with phony legal threats against alleged “infringers.” Similarly, U.S. Supreme Court decisions have offered additional help for those online and mobile marketers being trolled.[1]  For the first time in a long time it seems that patent trolling may be on the decline. One Supreme Court’s decision issued on April, 2014, made it easier for a defendant to recover fees and costs if a court sees the plaintiff’s lawsuit as frivolous. Two months later, the Court made it less difficult to challenge the validity of a vague patent. 

Finally, and most significantly, the Court held that you cannot patent the implementation of an existing business method on a computer. In this particular case, the plaintiff claimed that his company’s handling of escrow accounts on a computer was patentable. The Supreme Court ruled this practice was abstract, and dismissed the case. The implications of this result were twofold: first, the Patent Office has begun more sparingly issuing business method patents; second, the ruling makes it easier for plaintiffs to get patent infringement claims dismissed in these types of cases before costly litigation can ensue.

Contrary Guidelines by the ANA and 4A’s

This risk of patent troll claims against advertisers has been around for many years, and coalitions of trade groups—including the Association of National Advertisers (ANA) and the American Association of Advertising Agencies (4A’s)—have historically worked together to initiate legislation that seeks to hamper the risk of liability by patent assertion entities.

In June 2013, the 4A’s issued its Patent Guidance Recommendation, which suggests that agencies should not indemnify clients for patent claims as a general rule. Instead, and in very limited circumstances, if an agency does decide to contribute to a patent infringement settlement, the contribution should be an equitable and proportional share of the settlement cost. Additionally, the contribution should arise solely from the use of the work product developed entirely by the agency and only for a limited time of use. The rationale for this suggestion was based on the fact that settlements with patent trolls often entail a licensing fee for past and ongoing use of the “infringing” item. Since the advertiser controls usage of the agency’s work product, it stands to reason that the advertiser should shoulder the majority of the cost.

In sharp contrast, the ANA’s recent position articulated in the December 1, 2014, white paper, “Patent Troll Liability in Client/Agency Contracts,” recommends that, as a general rule, clients should not indemnify agencies for patent claims. Instead, the ANA asserts, agencies should assume the liability from their work product, including assertions of patent infringement.

The rationale employed by the 4A’s most closely reflects the economic realities of the advertiser-agency relationship. Foisting indemnity risk on agencies will be detrimental to both parties. In taking its ill-conceived position, the ANA disregards the fact that it is not realistic or practical for an agency to always vet patent infringement claims, considering the very business model for patent trolls’ claims center on costly litigation, and patents so broad they can often be interpreted to cover universally used methods and technologies. The inherent nature of patent trolling makes a patent analysis marginally helpful at best given the vague and shakedown nature of the infringement claims. Further, it is unrealistic to expect an agency to indemnify a client when the client’s economic benefit from its marketing efforts is so much greater than the advertiser’s agency fee. Lastly, advertisers want their agencies to be creative, but this creativity will be stifled if constant patent infringement considerations come into play.

Best Practices for Agencies

Agencies would be well advised to work with their legal counsel to push back on blanket indemnity obligations, or be strategic in assuming limited risks. They should have their standard contracts reviewed to ensure they are protected, and proper limitation of liability provisions should be drafted. Frequently, carve-outs are inserted in those provisions for indemnity claims; patent infringement liability should never be carved out of these provisions. Finally, following the logic of the 4A’s, if an agency should contribute to an infringement settlement, it should consider a cap tied to a fee paid by the advertiser (with the cap applying to both defense costs and settlements). 

[1] James Bessen, What the Courts Did to Curb Patent Trolling--for Now, The Atlantic, December 1, 2014

This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.