Patent Problems Pending Over Web Apps?

NEW YORK The runaway success of OfficeMax’s “Elf yourself” upload-your-face-on-an-animated-character campaign attracted lots of attention, but not just from the millions of consumers who sent elves to their family and friends. In late 2007, an obscure New York company called PixFusion filed a lawsuit against OfficeMax and its agency, Toy, for violating patents titled “method and apparatus for producing an electronic image” that covers the process of uploading and cropping a picture online.

The parties quietly settled a month later for a six-figure licensing fee, according to sources.

Nearly two years later, the ad industry is worried about the precedent. The 4A’s is mounting a lobbying effort for a patent-reform bill under consideration on Capitol Hill, and agencies are warning that contracts with clients need to be changed to avoid potentially catastrophic liability from specious patent claims for common technology.

“It’s not a new phenomenon, it’s just manifesting itself in the marketing world as more campaigns are using software,” said Rick Kurnit, a lawyer at Frankfurt Kurnit Klein & Selz who represents several agencies.

The marketing industry, in fact, appears destined to face some of the same nettlesome problems that have plagued the tech world. One of the thorniest is the vast number of patents for what appear to be very simple mechanisms and processes, like uploading and cropping a photo. Those on the receiving end of these claims call the holders “patent trolls” for holding large numbers of patents and filing lawsuit after lawsuit.

To date, agencies have drawn intermittent attention from patent owners. Typically the lawsuits lead to quiet settlements with a licensing agreement.

The experience of one top digital agency is illustrative. It has been on the receiving end of two patent infringements suits for stunningly commonplace Web site applications. In one case, the agency was sued for making an e-commerce site that allows a consumer to click on a thumbnail image to display a larger image. In another, the owner of a patent for configuring a car online targeted the agency.

“It’s pure corporate extortion,” said an executive at the shop, which did not want to be named for fear of attracting more suits. “It’s like the mafia shaking you down.”

Standard agency contracts include language demanding the shop indemnify clients for any violations of trademarks and patents. That means a client hit with a patent claim can pass the liability to the agencies responsible for the work.

“The notion you could get sued for creating something innovative that unbeknownst to you was something patented is not a secure feeling,” said Adonis Hoffman, svp and counsel at the 4A’s, whose recently formed 4A’s Digital Board has held discussions on the situation.

What’s more, patent litigation is expensive, often costing $3 million or more, according to Kurnit. The high cost makes patent insurance an equally costly proposition. Even hiring an outside firm to do a patent search could add $35,000-50,000 to projects. Many hit with patent claims opt for a settlement or licensing agreement. In the case of the digital shop using the e-commerce technology, it paid a little over $120,000 of a $1 million settlement with the client picking up half the tab and other agencies making up the rest. Client relationships help: Toy didn’t pay any of the PixFusion licensing fee.

The problem is acute for smaller digital shops. For Fortune 500 companies, a $1 million settlement is pocket change. For some small businesses, it’s life-threatening.

Firstborn Interactive, a New York digital firm, had a scare in 2007 when it received notice of a lawsuit for a project finished two years earlier. The alleged infringement was the use of a rotating image on a Web site, a common feature. Firstborn president Michael Ferdman realized the contract he signed left the shop open to unlimited liability for patent infringement, putting it at risk. Firstborn escaped unscathed after hiring a law firm that threatened to fight the suit, which subsequently did not materialize. Since then, Ferdman insists all contracts cap the firm’s liability at two times its fees.