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Delaware House Passes Internet Gambling Bill

November 19, 2012 by David Klein

A couple of weeks back, the Delaware House passed an Internet gambling bill that, if signed into law, would greatly expand the range of legal online gaming options available to people physically located within the State of Delaware. If the bill passes the Delaware State Senate, the Governor has indicated that he would be willing to sign the current iteration of the bill into law.

The bill places online gaming under the purview of the Delaware Lottery, but several venues may be able to offer various online gaming options. Brick and mortar casinos would handle poker, table games and slot machines, while dozens of other locations will be able to offer keno to their patrons, and bars and restaurants may even be permitted to offer certain sports gambling propositions to customers.

Participation in at least some, if not all, of the contemplated gaming activities may initially require the purchase of prepaid debit cards that can be used to pay for chips, entries or other wagers.

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North Carolina Internet Sweepstakes Cafes

November 19, 2012 by David Klein

In March of 2012, the North Carolina Court of Appeals overturned a 2010 law that made certain online casino-style games – as featured in Internet sweepstakes cafes – illegal. These sweepstakes cafes usually feature rows of computer terminals that allow users to participate in several casino-style games in quick succession with the opportunity to win prizes. In exchange, users must pay the café proprietors for Internet access or prepaid phone cards. The payment element is what renders these sweepstakes cafes, or parlors, illegal in most states.

The North Carolina Court of Appeals ruled that the 2010 law was a violation of free speech, as protected by the First Amendment to the Constitution. The North Carolina Attorney General has appealed the ruling to the North Carolina Supreme Court, but the case has not been decided yet. While the Supreme Court’s decision will ultimately decide the legality of these types of games, for now various cafes are open for business in North Carolina.

If you are interested in learning more about this topic or pursuing a venture in this area, please feel free to contact us.

Privacy Is Good Policy

November 18, 2012 by David Klein

It is not uncommon for clients to inquire, skeptically, as to the necessity and importance of posting a privacy policy on their websites. While some clients might prefer to skip that step (and expense), my counsel is almost always the same: If you own or operate a website that collects personally identifiable information (“PII”) from end-users (name, e-mail/mailing address, phone number, etc.), it is crucial that you compose an easy-to-read, concise privacy policy that you make available to visitors via a hyperlink on your home page.

Letting website visitors know, via your privacy policy, what PII you collect, how you use that information, to whom you may disclose that information, the security measures taken to protect that information and whether the website uses cookies and/or other web-based tags to track user activity, is not only good policy from a customer-relations perspective, it is also required by state and federal law.

In addition to making sure that your online data collection activities are compliant with state and federal law, a well written privacy policy can form a key feature of your online business strategy. If proper disclosures are included in your privacy policy and elsewhere on your website, you can monetize user data through e-mail marketing, telemarketing and, where permitted by law and under narrower set of circumstances, mobile/text message marketing, to end-users.

On the other hand, if you do not properly inform end-users of your intention to use their data for marketing purposes, any attempt to do so (without obtaining separate and express consent) would almost certainly violate applicable law. You must provide specific disclosures for each intended use, and you cannot deviate from the stated purpose and range of options granted to you in the privacy policy. For example, stating your intention to send commercial e-mail marketing to visitor e-mail addresses would not grant you the right to telemarket to visitor telephone numbers.

If you want to change your privacy policy to allow for greater uses of the data than was permitted when your users provided the data to you, you must contact those users and receive additional consent or their data may not be used in such enhanced ways. For that reason, it usually makes sense to author your privacy policy such that you grant your business the greatest range of potential uses of the data from the beginning because, while you can choose not to use data in ways that you are authorized, you cannot decide to use the data in ways that your privacy policy does not allow for.

Even where you state up-front in your privacy policy that you can use all of your end-users’ PII in various ways, that does not always grant you the right to use that information in all of the enumerated ways. For example, more restrictive laws apply to the use of sensitive information such as Social Security Number, health-related information and financial data (such as credit card, bank account and other related information).

While properly collected end-user data may provide your business with a valuable revenue stream, collecting, storing and transmitting data also imposes a responsibility on your employees to safeguard such data. Various state and federal statutes require that you maintain and distribute to your employees a written manual on data handling and protection procedures, and that you notify end-users in case of any breach of security with respect to their data.

With all the rules and regulations governing the collection, security and use of the various forms of personally identifiable information – and given the potential financial benefits involved in utilizing a database of consumer information – it makes good business and legal sense to craft a privacy policy that is well-suited to the needs of your business, and that provides your website visitors with all the information they require to make an informed decision regarding the disclosure of their personal information.

Please note that this is only a brief overview of some of the legal issues associated with privacy policies. Remember to retain a licensed attorney to draft your website privacy policy.

Legal Issues Associated with Database Marketing

November 18, 2012 by David Klein

Customer databases are often not used to their fullest potential. Most companies are not aware of all of the ways that the information that they have collected from consumers can be used to increase or create revenue. Those that are aware of the ways that they can market to and monetize their databases are often hesitant to do so because they are unfamiliar with the various federal and state laws that govern database marketing. Such hesitation is justified considering the liability, including stiff fines, which can result from improperly marketing to consumer databases. Even if you are using, or planning to use, a third party to manage and market to your database, you should be familiar with the steps that must be taken at the time the information is collected to ensure that you are creating a database that can be marketed to lawfully.

This article provides a summary of two (2) of the most popular and effective marketing channels – email marketing and telemarketing – utilized in database marketing today. If you are interested in marketing to mobile phone numbers in your database, you should be aware that there are currently laws and other regulations in place that severely restrict your ability to market to mobile devices. As a result, you should obtain guidance from a licensed legal professional prior to engaging in any mobile marketing.

Email Marketing
The federal CAN-SPAM Act of 2003 (“CAN-SPAM”) sets forth specific requirements that must be followed when marketing via email, as well as penalties for those who violate the statute. Under CAN-SPAM, use of false or misleading header information is prohibited. In other words, you must indicate the identity of the sender in all email transmissions. Additionally, your subject line should accurately reflect the products or services that are being advertised in the email. Finally, you must clearly and conspicuously identify the e-mail as an advertisement, provide a valid physical postal address for the sender, and provide consumers with a mechanism for opting out from the receipt of future email. Industry best practices require that you obtain affirmative consent from consumers (i.e., that consumers “opt in” to receive commercial email). Therefore, you should always obtain affirmative consent at the time that you obtain the consumer’s email address. To obtain affirmative consent, it is necessary to state in explicit terms that appear directly above your website’s “submit button,” that by clicking the “submit button” consumers are providing their express, informed consent to receive commercial email from you. If third parties are also going to be marketing to your database, you must also obtain separate affirmative consent for the receipt of commercial email sent from such parties. In addition to placing “affirmative consent” language above your “submit” button, you must also set forth your policy regarding consent as it relates to the sending of email in the applicable website privacy policy. This agreement to the terms of the privacy policy and website terms and conditions should be obtained from consumers at the time of sign-up.

Telemarketing
In 2003, the Federal Trade Commission (“FTC”) amended the Telemarketing Sales Rule (“TSR”) and created the National Do Not Call Registry (“DNC Registry”). Consumers that do not want to be contacted by telemarketers or directly by sellers may register their residential telephone numbers, including wireless numbers, on the DNC Registry. Telemarketers are required to scrub against the DNC Registry at least once every 31 days.

There are, however, a few exceptions to the rule that telemarketers may not contact consumers even if their telephone numbers appear on the DNC Registry. For example, if a consumer has given you express written permission to be contacted via telephone, you, or a third party calling on your behalf, may call the consumer even if the consumer’s number is on the DNC Registry. If written permission is obtained online, the consumer’s signature may be in the form of a valid electronic signature. Permission must be provided affirmatively, such as by checking an unpopulated box, and the fact that consumers are affirmatively granting such permission, regardless of the fact that their numbers are listed on the DNC Registry or any state “do not call” list, should be explained in clear terms directly above the “submit” button and in the applicable privacy policy. In addition to the permission-based exception, a telemarketer or seller may call a consumer who is listed on the DNC Registry if an “established business relationship” exists with the consumer. Under the “established business relationship” exception set forth in the TSR, a telemarketer or seller may call a consumer for up to 18 months after a consumer’s last purchase or payment, and for up to 3 months after the consumer makes an inquiry or submits an application to the company.

Obviously, if consumers specifically request that you place their numbers on your internal do not call list, you may not call them, even if they have given you permission or if an established business relationship exists.

Please note that this is only a brief overview of some of the legal issues surrounding database marketing. Remember to obtain guidance from a licensed legal professional prior to marketing to your database or that of a third party.

Avoid Deceptive Internet Advertising Claims

November 18, 2012 by David Klein

The Federal Trade Commission (“FTC”) and state attorneys general across the country have made it clear that businesses that use advertisements considered to be “misleading” or “deceptive” will be subject to stiff penalties, including fines. If you use the Internet to advertise, you need to be aware of the laws governing deceptive advertising.

First and foremost, you must be certain that all claims that you make in your advertising materials are truthful and substantiated (for example, clinical studies that support health and beauty product claims are necessary). This will often require that you include certain disclosures in your advertising. All disclosures that are necessary to prevent an advertisement from being considered deceptive or misleading must be presented both clearly and conspicuously. When evaluating whether or not a disclosure is clear and conspicuous, the FTC advises advertisers to consider the following three factors:

placement of the disclosure in the advertisement;
proximity of the disclosure to the applicable claim; and
prominence of the disclosure

In connection with these factors (it may be helpful to remember them as the “3 Ps”), you should consider: (1) whether the design of the advertisement draws attention away from the disclosure; (2) whether the advertisement is so long that it requires repetition of the disclosure; and (3) whether the disclosure is easily understandable.

As far as the first two “Ps,” “placement” and “proximity,” are concerned, you should ensure that the disclosure appears directly adjacent to, or very close to, the relevant claim. However, there may be instances, such as when a lengthy disclosure is required, where consumers may need to scroll down to view the entire disclosure. In such cases, you should use explicit instructions regarding the need to scroll down, as opposed to a general statement, such as “see below for details.”

Hyperlinks may be used to communicate some disclosure information. However, any disclosures that are an “integral part of a claim” or “inseparable from it,” such as additional costs that apply to a transaction, should be placed directly next to the applicable claim.

Where consumers are able to purchase goods or services via the website on which you are advertising, you should never rely solely on a hyperlink to communicate pricing information. All pricing information, including any additional costs that may apply, should appear directly above the “submit” button. In addition, you should provide information, or access to information, above the “submit” button regarding how the consumer’s data may be used by you and your business partners. To this end, it is important that you communicate to consumers that by clicking the “submit” button, consumers are providing their express, informed consent to your disclosed billing and privacy practices.

Further, you must be careful when using the word “free” in connection with the product or service being advertised. Be sure that all terms, conditions and obligations upon which the “free” offer may be contingent appear in close proximity to the applicable offer presented in the advertisement.

Regarding the third “P,” “prominence,” the onus is on the advertiser to draw the consumer’s attention to the disclosures. Be sure that the disclosure does not get lost within the rest of the advertisement. The important thing to remember is that consumers should not have to go out of their way to hunt down the disclosure. To avoid this, you may need to repeat the disclosure.

Be aware that simply providing a disclosure may not be enough. The average consumer must be able to fully understand the terms of the disclosure. To accomplish this, you should use simple and easy-to-understand words and sentences. If consumers are unable to understand what is being disclosed to them, the entire advertisement may be considered deceptive.

In addition to the above, please note that advertisers that utilize e-mail marketing are subject to additional deceptive advertising laws. The federal CAN-SPAM Act of 2003, as amended (“CAN-SPAM”), sets forth specific requirements that must be followed when advertising via e-mail, as well as penalties for those that violate the statute. Under CAN-SPAM, the use of false or misleading header information is prohibited. In other words, you must indicate the identity of the sender in all e-mail marketing messages. Additionally, your subject line should accurately reflect the products or services advertised in the applicable e-mail. Finally, you must clearly and conspicuously identify the e-mail as an advertisement, provide a valid physical postal address for the sender and provide consumers with a mechanism for opting out from the receipt of future commercial e-mail.

Please note that this is only a brief overview of some of the legal issues surrounding deceptive advertising on the Internet. Remember to obtain guidance from a licensed legal professional prior to developing and publishing online advertising.

Going All-In: Is Internet Poker the Next Big Marketing Jackpot?

November 18, 2012 by David Klein

As the last days of 2011 came to a close, the Department of Justice issued a bombshell opinion changing its longstanding interpretation of the Wire Act of 1961 (“Wire Act”) that paved the way for the legalization of Internet poker in the United States. While industry insiders and players across the country had hoped for federal legislation ushering in a uniform, nationwide legalized Internet poker framework, the relevant bills stalled in Congress leaving local government bodies to make progress on a state-by-state basis.

Several states, from Nevada to New Jersey, are in various stages of exploring legalized Internet poker, opening up pieces of a market that already boasts upwards of 10 million players wagering approximately $35 billion annually – and that is before Internet poker has been sanctioned as legal. With a potentially friendlier legal environment and increasing popularity of the game itself, including highly publicized tournaments and celebrity poker stars, there is no telling just how big an industry Internet poker could become. Either way, online poker promises to be a windfall for an Internet marketing industry in desperate need of the next big thing.

However, due to the sensitive nature and moral uneasiness with respect to any form of gambling, including poker, when the green light comes on, the industry is likely to be highly regulated. Any marketing entity hoping to cash in on the substantial opportunities associated with generating customers and other traffic for Internet poker websites could incur substantial legal liability (including possible criminal sanctions) if it violates any of the subject laws and regulations. In order to help avoid industry-related legal pitfalls, it is essential to first understand the background of how the laws have evolved and, then, what to expect going forward.

Right Down to the Wire
For the past 50 years, the Justice Department has consistently interpreted §1084(a) of the Wire Act to “ban the interstate transmission of bets or information assisting in the placing of bets or wagers, even where the wire communication, such as a telephone call or Internet transmission, occurs between a sender and receiver in the same state but is routed out-of-state before the recipient receives the transmission.” In other words, it was illegal to use technology like telephones or, later, the Internet, to place wagers or engage in gambling activity, whether across state lines or within the same state.

However, in 2006, the Unlawful Internet Gambling Enforcement Act (“UIGEA”) created a carve out from the Wire Act’s seemingly extensive reach: the use of technology like the Internet would be permissible for gambling activity entirely within a given state even if communications are routed across state lines.

Because of the apparent tension between the Wire Act and the UIGEA, the States of Illinois and New York asked the Department of Justice, Office of Legal Counsel (“OLC”) for clarification. What came next was both unexpected and groundbreaking: the OLC concluded that the Wire Act applies to the transmission of bets or information assisting in the placing of bets or wagers relating “only” to sporting events or contests. Thus, any gambling activity that is not related to sporting events or contests, such as poker and other casino games, is not regulated by the Wire Act at all.

This letter opinion did not have the effect of legalizing non-sports gambling under federal law, but it did remove some prior restrictions which gave lawmakers on the state and federal levels more leeway to try different approaches.

The State I’m In
With the passage of the UIGEA opening up the possibility of intra-state Internet poker, and the new interpretation of the Wire Act removing past federal obstacles, several states have begun the process of establishing legal Internet poker within their respective confines. To clarify, state laws on this subject only permit residents of (or visitors to) a given state to partake in that state’s Internet poker offerings – they do not allow residents of one state to participate on Internet poker websites operated from another state.

The emerging consensus is that legalized Internet poker could provide a wellspring of economic activity that could generate much needed tax revenue in an era of lean budgets and fiscal uncertainty. The early leader, Nevada, has already passed a law and has begun accepting applications from various would-be operators. Expectations are that some of those Nevada-based ventures will go live by the end of 2012.

New Jersey is close on Nevada’s heels. Although Governor Chris Christie vetoed the last Internet poker bill that came before him, New Jersey State legislators believe the most recent iteration wending its way through both state houses has addressed Christie’s concern and could become law by year’s end.

California is similarly positioned with a bill that, if passed, would extend beyond just poker, allowing several traditional casino games such as blackjack and baccarat. Illinois already passed a law permitting the sale of lottery tickets online, but the state has been less active on the Internet poker front.

While states including Connecticut, Iowa and Massachusetts are slightly farther behind, there has been some legislative action to go along with strong indications of interest amongst lawmakers and constituents alike.

The State of Utah, on the other hand, frowns upon gambling and has taken an alternative approach by passing a law that specifically prohibits Internet poker – even if the federal government was to pass a law permitting it nationwide.

Because so many states have been quick to draft legislation that would legalize, regulate and tax online poker, key members of the US Senate and House of Representatives now have a sense of urgency to get a federal law on the books. Any such federal action would likely have to wait until some time after the conclusion of the presidential election this November.

Getting a Piece of the Action
In many ways, the shifting Internet poker legal landscape represents the ideal opportunity for Internet marketers: a very large and growing pool of customers that is known to spend significant amounts of money on the product and that is, as of yet, unattached to any of the soon-to-be legal online casinos. Further, while online casinos do have knowledge of the gaming industry (many proposed state laws, such as Nevada’s and New Jersey’s, only allow brick and mortar casinos to operate Internet poker sites), they unlikely have a thorough understanding of the world of Internet marketing and what works in terms of generating traffic and customers.

The newly-minted Internet poker outlets will be looking to attract as many customers as possible, in as short a period of time as possible, in order to gain first-mover advantage and a dedicated customer base ahead of the inevitable next waves. This could potentially inspire large payouts to marketers capable of helping to generate those end-users.

However, due to the stigma attached to gambling, and the resulting heavy regulation that accompanies its official practice, there are several potential legal ramifications facing the uninitiated – including the specter of criminal liability. Given the stakes, a careful and conservative approach would be the most prudent way to proceed. For example, it is essential that any entity performing marketing activity on behalf of a legal gambling operation in a given state avoid marketing any type of gambling activity that could be considered illegal in that same jurisdiction. Similarly, the marketing entity should take precautions to avoid marketing Internet poker in any state in which it remains illegal.

Compliance will not be easy. Given the state-by-state patchwork of laws, it is likely that marketers will need to familiarize themselves with the particular requirements of each participating state and try to adhere to all at once. This type of due diligence will only be possible when more states finalize their regulations in coming months and years. But with a pot that size, it may just be worth being dealt in.

Please note that this is only a brief overview of some of the legal issues surrounding Internet poker and associated marketing activity. Remember to obtain guidance from a licensed and experienced legal professional prior to entering this space.

Sweepstakes and Promotions: Winning the Marketing Grand Prize

November 18, 2012 by David Klein

The use of promotional contests, games and sweepstakes can be a dynamic and cost-effective way to increase conversions, build a database of engaged and responsive consumers and otherwise increase brand awareness and buzz – all valuable commodities in the social media and performance marketing space. The logic is simple, if undeniable: consumers are more easily attracted to your marketing message or brand by the opportunity to win prizes than with more mundane advertising that offers little in the way of incentive. When you are competing with the multitude of players vying for attention in the increasingly cluttered social media marketing arena, it pays to have an edge.

Despite the allure of the sweepstakes model, there are very specific state and federal laws that apply to promotional games and sweepstakes, as well as rules for operating and marketing on social media websites such as Facebook®, Google+® and Twitter®. You could incur substantial legal or pecuniary liability if these laws and web platform rules are not followed closely. Also of importance, to the extent that you intend to use a sweepstakes to build a database of customers, you must include the proper disclosures in your privacy policy and associated marketing material. In order to navigate the legal maze associated with promotions, it is essential to first identify the nature and purpose of the game itself.

There are, generally speaking, two overarching categories of promotional games: games of “skill” and games of “chance.” Games of skill are typically easier to operate because they have fewer legal obstacles, but it is harder to set up a pure game of skill (regulators take a narrow view of what constitutes “skill,” and even slight elements of chance can change the way a game is viewed). Further, some games of skill can run afoul of anti-gambling laws depending on the structure of the prizes awarded and the level and degree of participation of the entity that is running the game. In addition, some states require that the proprietors of games of skill register beforehand with applicable state agencies.

Games of chance, on the other hand, can face an insurmountable legal obstacle: they are generally considered illegal lotteries in each state, unless one of the following three elements that comprise a lottery is removed: (1) there is a prize awarded to the winner; (2) there is an element of “chance” involved in determining the winner; and (3) there is consideration required from contestants for entry in the game. Because removal of the prize feature undermines the promotional aspect of the game (and thus diminishes the effectiveness of the game as a marketing tool), and because chance is hard to eliminate entirely (as mentioned above, many states find that even a small trace of chance in determining the winner satisfies the “chance” element), consideration is the element most frequently removed.

Consideration can be eliminated by offering a free, alternative means of entry that does not require a purchase or other costly action (the frequent use of this method leads to the ubiquitous “no purchase necessary” language appearing in most sweepstakes marketing material). However, in order to qualify as an elimination of consideration, the free, alternative entries must be afforded the same opportunity of winning as entries from consumers that made purchases, paid to enter the contest or otherwise took an action that is so involved that it is considered a form of consideration. So, if you can gain ten entries in a sweepstakes from making ten purchases, you must offer the public the opportunity to enter free up to ten times by, for example, mailing in a postcard with certain contact information or calling a toll free number.

After you have decided on the basic structure of your promotional game, it is crucial that you determine all key aspects of the contest (duration, prize amounts, number of prizes, etc.) ahead of time when drafting the all-important contest rules, because once a promotion commences, and the rules are published, it is next to impossible to legally alter material terms. The key with respect to rules drafting is: do not overextend in terms of time or the number or value of prizes.

Shorter contest durations with fewer prize commitments are easier to manage. If a shorter contest proves successful, nothing prevents you from conducting another one immediately after the first one ends – but if you are committed to a year-long contest with prizes handed out each month, you can not simply stop after the first month or two if the contest is not meeting your marketing expectations. By conducting several shorter-lived contests, rather than one long-lived variation, you will not be obligated to waste time and money continuing to operate a game (and, possibly, hand out prizes) for the full duration set forth in the rules if the particular game is not serving a useful function. In this instance, a bit of extra time spent in the planning stages can pay dividends and prevent costly obligations that outlive their utility from a marketing perspective.

When drafting the rules, there are also several specific legal requirements that, while seemingly minor, are important to address. For example, the proprietor of the contest must maintain a list of winners – with some states requiring that such list be filed with the applicable state agency. Also, it is advisable to obtain an affidavit from prospective winners verifying their identities prior to issuing a prize. In addition, if you intend to publish the names or likenesses of winners in order to promote your sweepstakes, you must obtain proper authorization from the winners well in advance of any such publication.

It is also vital that you ensure that your marketing approach complies with applicable laws and guidelines. For example, you must at all times comply with trademark and intellectual property laws, as well as the marketing guidelines of social media websites and search engines, when promoting your sweepstakes. This is especially true when you are offering the opportunity to win a prize that carries a registered trademark, such as an iPhone®, or marketing your contest within a social media environment, such as Facebook®, and wish to use the Facebook® name in your marketing material.

The nature and amount of the prize(s) to be awarded, and the process of awarding those prizes, can also present challenges. It is advisable to have an unaffiliated, independent and respected third party conduct the applicable drawing or winner selection in order to ensure the appearance of fair play should any contestant or regulator question your practices. Further, where offering non-cash prizes (such as merchandise), many states require that a cash equivalent be offered as an alternative.

For prizes above certain cash (or cash equivalent) thresholds, three states – Florida, New York and Rhode Island – have specific sweepstakes registration and bonding requirements. If the aggregate value of the prizes in a given contest exceeds a certain limit, Florida and New York require that the game be registered and bonded. In Rhode Island, the prize threshold for registration is lower than in Florida and New York (and only applies for certain contests), but there is no bonding requirement. To avoid having to adhere to these requirements, you can bar residents from any or all of these states from entering the applicable contest. In addition, you should always prohibit employees of your business, and relatives of those employees, from participation.

Despite the occasional hurdle, with the proper planning and knowledgeable legal guidance, promotions and sweepstakes can be valuable marketing tools in the social media world. This is true for new businesses looking to create initial brand awareness in certain demographics, as well as for established brands looking to maintain interest and engagement with the public. Just make sure you take the time and effort to ensure that your promotional contest is a winner!

Please note that this is only a brief overview of some of the legal issues surrounding game promotions. Remember to obtain guidance from a licensed and experienced legal professional prior to conducting your promotional games.

Affiliate Networks: Death by Patent Infringement?

November 18, 2012 by David Klein

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, ShareASale.com, 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.