Affiliate Networks: Death by Patent Infringement?

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Is a patent infringement lawsuit in your future? While litigation has become all too common in the industry, very few companies consider patent infringement to be a prospective topic of litigation. For affiliate networks, times certainly have changed.

A previously relatively unknown company by the name of Essociate Inc. (“Essociate”) recently became known through a slew of patent infringement actions filed predominantly in federal court in California against a number of affiliate networks. How did this come to pass? On October 12, 2004, the U.S. Patent and Trademark Office (“PTO”) issued US Patent No. 6,804,660 to inventors and Essociate co-founders, Evan Horowitz and Michael Landau, for their “invention,” which they then assigned to Essociate. This invention, according to the Patent Abstract, provides a method, system and computer program for affording “virtual affiliates” access to an existing affiliate system.

According to Essociate, it allows advertising partners to cross existing affiliate network borders, combine resources and monitor all of their affiliate relationships via one account with Essociate. Is this really a novel and non-obvious invention (as is the required standard to obtain a patent)? The PTO was convinced, but some companies strongly disagree and are fighting back. Many others have chosen to settle rather than face what is often very costly litigation.

In June 2010,, Inc. (“ShareASale”) sued Essociate in Illinois Federal Court for declaratory judgment (a formal declaration by the court) on two grounds: (i) ShareASale did not infringe Essociate’s patent; and (ii) Essociate’s patent is invalid because, among other reasons, it is obvious to one of ordinary skill in the art. The case was transferred to California Federal court and eventually consolidated with Essociate’s pending case against Blue Whaler Investments, LLC (“Blue Whaler”), ShareASale, and a number of others. Blue Whaler has counterclaims pending against Essociate (on grounds that the patent is invalid and unenforceable and that Blue Whaler did not otherwise infringe the patent). Defendants in other actions have made similar arguments, only to settle with Essociate and be dismissed from the action prior to obtaining any decision by the court.

On June 28, 2011, ShareASale filed a motion for sanctions and to strike (or dismiss) Essociate’s complaint against it. ShareASale argued that Essociate’s complaint is frivolous and that Essociate failed to conduct a pre-filing investigation into the infringement allegations against ShareASale. According to ShareASale, had Essociate performed the investigation it was required to do before commencing the action, it would have discovered that ShareASale could not be liable under any theory of infringement. The crux of the argument is that the subject ShareASale website does not contain a “TWID,” a unique identifier for an affiliated webmaster, which is associated with the patent. Rather than being a TWID, ShareASale alleges that its code is static, not unique, and included in every click-through to the website from all ShareASale affiliate members. Thus, unlike Essociate’s unique identifiers, ShareASale’s code remains the same so that the referring affiliate member cannot be uniquely identified. According to ShareASale, it brought this and other facts to Essociate’s attention on numerous occasions and requested that Essociate dismiss it from the action. Essociate declined to do so and ShareASale’s motion is now pending before the court.

While ShareASale’s motion, if decided in its favor, would not invalidate Essociate’s patent, it would send a message to other defendant companies in similar Essociate-instituted “shake down” lawsuits: Fight it out, rather than settle and pad the pockets of Essociate.

Blue Whaler’s claims, on the other hand, could greatly impact the industry as a whole. If it proceeds full speed ahead towards a decision on its claims, the very validity of the patent would be at issue and determined by the California Federal court. If invalidated, affiliate networks will be able to rest easy – at least for the time being. However, no such decision is likely to come down anytime soon due to the length and complexity of the litigation process. That leaves the ground quite fertile for similar patent infringement lawsuits in the near future. Are you at risk? Take a close look at your affiliate business and then discuss this issue with legal counsel experienced in Internet marketing.

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