The Biggest News We’ve Yet to Hear of?

For many people, 1998 was a banner year, smack in the middle of the internet boom and graduates who knew programming were getting insane job offers. It was not a great year for Motorola. That was when they became the number two manufacturer of mobile phones, conceding the top spot to Nokia. The company almost made a comeback in the pre-smart phone days with their almost ubiquitous RAZR, selling north of 120 million units. Today, though, Motorola struggles for relevance, as they also look to stabilize year over year declining handset sales. Their widely praised Android phone, the Droid, has sold well, but it hasn’t been enough to move them out of the number 8th spot, yet.

If you haven’t associated Motorola with the Droid, you might have noticed their name come up recently for non-product news. They announced earlier this month that they have sued Apple for infringement on multiple patents. Their press release states, “Overall, Motorola Mobility’s three complaints include 18 patents, which relate to early-stage innovations developed by Motorola in key technology areas found on many of Apple’s core products and associated services, including MobileMe and the App Store.” Among other things, the suit would see “halting the marketing, advertising, demonstration and warehousing of inventory for distribution and use of such imported products in the United States.” As to why a suit, Motorola says that they “engaged in lengthy negotiations, but Apple has refused to take a license. We had no choice but to file these complaints to halt Apple’s continued infringement. Motorola will continue to take all necessary steps to protect its R&D and intellectual property, which are critical to the company’s business.”

Like many suits, to the observer there are two parts – a) the patents themselves and b) the timing of the suit. The latter of course is often the most interesting or at least the most accessible. It usually begins with, “Why now?” The cynic could say it’s a way out of competing. Can’t win the phone race, Motorola? Might as well sue in order to make the hundreds of millions expected through business operations. We see that all the time from aggressive law firms going after easy (in their eyes) settlement cases – Google with trademarks, Facebook with privacy, or, in our space that would be ringtones, spam, and acai – to companies going after other companies, which is the hallmark of intellectual property suits.

We’ve seen eager lawyers, representing consumers, go after the performance marketing space, but we haven’t seen too many company lawsuits, especially for intellectual property. The cpa networks, for example, might not all love each other, but there is a fair amount of collaboration. When they don’t love each other, they just try to out do each other, which creates a winning environment for the affiliates. But, what happened recently and is still happening is unlike anything the space has seen before – one of its own on the intellectual property lawsuit warpath. It’s one thing to go after advertisers and affiliates. It’s something completely different to challenge them off the court, or more specifically, in a court of law.

Outside of typical issues, like employees or ex-partners, legal threats had historically come from outside the space. That changed when Essociate filed suit against Clickxchange Corporation, Roi Rocket.Com LLC, Roi Rocket Inc, CX Digital Media Inc., KBJ Holdings LLC, and Capitall Marketing Network LLC. Didn’t hear about that one? We didn’t either, and it was filed in May 2009. On Feburuary 24 of this year, it appears a conclusion was reached prior the 2011 court date. There was a joint order for dismissal whereby it was, “ORDERED, ADJUDGED AND DECREED that all claims and counterclaims asserted in the above-captioned action by and between Essociate, Inc. and CX Digital Media Inc. are hereby dismissed with prejudice.” What this means is not exactly clear. It could imply everything from Essociate not having a strong case to a settlement being reached between two of the parties.

Unfortunately, Essociates’ suing of Clickxchange, et. al., was not the end of the story. They have filed two other patent infringement suits one in March 2010 against eight companies, and one in July against two more companies (two that were related to the eight named in March). A few of the eight companies are of decent size, one of them for example has decided to fight and has already countersued. The others, while earning appreciable revenues, do not all have the cash reserves to take on a lawsuit. The question only Essociate can answer is why these companies? There isn’t an obvious connection such as they all use DirectTrack or HitPath. It’s a mix of licensed and in-house. Some do arbitrage. Some don’t. The only connection is the notion of affiliate marketing, which leads us to the patent.

The patent, it was filed in 2001 and granted in 2004. Smarter minds than us have reviewed it, but this line sticks out, “The system of the invention enables the creation of an architecture of affiliate systems.” It sounds more or less like they’ve patented affiliate marketing. Were this Motorola, perhaps we’d here of licensing discussion that failed. That doesn’t seem to be the situation here. There were no negotiations. They skipped talk and went straight for the legal route. And, as others have intimated, they targeted companies with just enough money to pay some settlement but who wouldn’t have the resources or desire to go to trial, a mid to high six figure endeavor at the very least. Win some of these, and they would have a war chest to go after bigger networks who would surely fight.

Depending on Essociates ambitions and reasoning, it’s a potentially very scary time for the affiliate community. It’s a tough enough landscape externally, let alone for there to be concerns from within. Ultimately, we know it’s about money, but is it also to make them a more competitive network? To handicap others for them to gain market share? The more we ponder, the harder it is to find a business case outside of low hanging fruit revenue. It is a test of the industry in a way never faced before, and we’ll see the industry’s true colors. Is it everyone out for themselves or will the big guys preemptively help our their smaller competitors/partners in order to avoid litigation of their own. What will the affiliates think? Will they care? Will they boycott Essociate in order to show support for a more competitive landscape or just run what makes them money? I’ll try not to be too cynical.