Recent Supreme Court Case Benefits Affiliate Marketing Industry in Patent Infringement Lawsuit

On February 11, 2015, a federal district court in California issued an important ruling on the patent eligibility of certain business processes underlying virtually every online affiliate network. Specifically, an affiliate network called Essociate, Inc. sought to enforce its patent on software that defendant, Clickbooth.com, LLC, argued merely enables “receiving and tracking referrals from referral sources.” The district court agreed with Clickbooth, handing a significant, though not unexpected, victory to Clickbooth and the affiliate marketing industry as a whole.  

Understanding the court’s decision and its significance to the affiliate marketing industry requires some context and recent history. The practice of what is derisively referred to as “patent trolling” has plagued Internet businesses (and other technology companies) for years. A patent troll uses patents not to protect real innovation but to extort cash, in the form of licensing fees, from legitimate businesses. Typically, a troll will start by purchasing a broad and ambiguous patent from a distressed business. Most of these patents should never have been approved in the first place, but the U.S. Patent Office is notorious for doing this. A favorite example is Intelligent Smart Phone Concepts, LLC’s patent for the “innovation” of plugging headphones into a mobile phone. This frivolous patent was the basis of a $3,000,000 claim against Apple back in 2012. In any event, after buying a patent, trolls then proceed to threaten infringement actions against businesses that arguably use the patented “invention.” Historically, most targeted companies capitulate, reasoning that the cost of litigation outweighs the cost of paying the troll’s “licensing fees.”

Recently, however, Congress and the courts have made the lives of patent trolls much more difficult, especially in the area of business method/software patents. For its part, Congress passed the “America Invents Act” in 2011 which, among other things, created procedural tools that help defendants defeat unfounded claims of patent infringement. Clickbooth used some of these tools in the Essociates case. But the biggest problem for Essociates came in the form of a U.S. Supreme Court decision, handed down in June of 2014. In Alice Corp. v. CLS Bank International, the Court essentially held that an unpatentable abstract idea (in the Alice case, this was a method for exchanging financial obligations) does not magically become patentable just because the idea or business method is effectuated in a software program. The Alice decision shook the software patent world to its core, virtually suspending the U.S. Patent Office’s approval of software patents and throwing into serious question a wide variety of software patent infringement claims.

Although Essociate appears to be an actual affiliate network, and therefore doesn’t fit the classic “troll” description discussed above, their claim has a lot in common with claims asserted by software patent trolls. Tracking referrals from referral sources is clearly a routine business function, and the mere fact that this routine business function is being enabled on a computer network should not elevate it to the level of an innovation worthy of patent protection. The district court properly applied the Supreme Court’s holding in Alice, finding that Essociate’s patent is invalid. This is good news for the affiliate marketing industry because it means Essociate cannot assert its claim against other networks. The court’s holding is also good news for the affiliate marketing industry because it makes it far less likely that other parties will attempt to assert similarly unfounded patent infringement claims.

Information conveyed in this article is provided for informational purposes only and does not constitute, nor should it be relied upon, as legal advice. No person should act or rely on any information in this article without seeking the advice of an attorney.

Disclosure: Counsel for Clickbooth in the Essociate case, Richard Newman, serves as a member of the Compliance Council of the Performance Marketing Association but did not participate in drafting this post.