The Advertising Agency Business

providee some balance to the debattee in Washington, and this comment providdeess some ideaass for thhee competition agencies to that.

1. ThTeheAAdvdevretritsiisninggAAggeennccyyBBuusinness

Advertising agenciieess developp marketiinngg communications strategies, ideas and executions for thee benefit of their cliennttss.. Thhee services thaatt agenccieess provide too clients can be incredibly broad. Agenccyy serviceess includee:: creatinngg and producing TV ads., newspaper andd magazine adss., raddiioo spots, outdoor adss as weellll as Internet andd mobile displayy adss,, viddeeooss anndd seeaarrcchh aaddss.. AAggencies act as intermediaries between media sellerss ---lilkikeenneewwssppaappeersrs, ,tetelleevviissiioonn ssttaattiioonnss and websites --- aannddmmaarrkkeeteterrss,,bbuuyyiinngg media on behalf of markeetteerrss.. Agencies design andd buildd websites for their clients, curate sociaall media content, conduct consumer andd customer researcchh,, developp andd execute promotional offerss,, sweepstakes and conteessttss,, and organniizzee evennttss and tradee shows.

Althouugghh oftenn a relativveellyy smalll part of mosstt marketing budggeettss (generally less than twenty-five percent), the fastest growing components of marketing activity are in the digitaall technolooggyy areeaa.. TThhee mmaaiinn eexxaammpplees oofftthis are iinnteractive web-based communications, marketing on mobillee deviicceess,, and communicating with customers on sociaall platforms. Digital and Internet marketing activity hass grown froomm lesss thann 5 percent of total US ad expenditures in 2001 to nearlyy 20 percent last year. By 2015, digitall is expecteedd to rise to more than 25 percent.

USS Advertisingg Exppendituurees inn $SMiilllliioonnss (current pricess)

Teelevvissiioonn

22000011 49,714

2012 62,129

201155 68,327

Radio

18,800 16,718 17,716

Maaggaazziinnees

21,540 17,984 16,440

Neewspapers

45,778 24,975 19,448

Outddoooorr

4,814 7,589 8,785

IInntteernnet

6,600 30,704 50,443

Cinema

7255

839

-

TTOTAALL MAAJORR MEDIA 147,246 160,823 181,999

SSoouurrccee:: ZZeenniitthhOOppttiimeeddiiaa 1122/2012

$$ cchhange 20122-20155

6,198 999

-1,544 -5.,527 1,196 19,739

114 21,176

%% change 22001122-2015

9.98% 5.97%

-8.58% -22.13% 15.76% 64.29% 15.76% 13.17%

Becausee of tthhiiss ggrroowwtthh iinn ddiiggiittaall aanndd iinntteerrnneet mmarketing activity, agencies now routinely produce digitaall woorrkk producct thhaatt includess ssoofftwwaarree ttoo peerrffoorrmm ffuunnccttiioonnss ttoo hoolldd vviieewweerrss*' attention or to enable advertising to be presented.

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The growing importance of digital platforms for advertising has opened competition in this space beyond the competition availabbllee for more traditional assignments.. For the first time, smaller agencies are able to compete with some of the largest agencies in the world for the advertising needs of large-scale advertisers. The market for digital advertising is one of the most dynamiicc and competitive advertising markets because of the participation of smaller and younger independent agencies. Similarly, the growth of digital platforms means that smaller technology firms can supply solutions that will be used to support the marketing campaigns of even the largest marketeerrss.. The participation of these smalllleerr,, independent agencies andd technology firms is critical to the growth and innovation in the services our members provide to their clliennttss..

Agencies deaall witthh intellectual property as partt of theiirr regular business practices. Agencies buyy andd develop art andd technology onn behalf of their clients and the rights to thatt property is generally transferred to the client on receipt of payment fromm the client. For most IP, agencies havee developed practices thaatt allow worrkk to go forward while protecting thee rights of the artists andd developers thaatt create thee IP.. Forr exammppllee, it is relatively easy --- aannddffaammiilliiaarrtteerrrriittoorryy ---totosesaeracrhchfofor rwwoordrdssaannddlologgoossttoo lleeaarrnn wwhheether a thirdd partyy owns trademark rights thatt mayy present a problem for ann ad campaign under development. Similarly, the mechanisms for securing copyright or taking a license to photographs and otherr artworrkk are well-underssttoooodd.. Anndd., agencies know how and whenn to get modeell releaseess to avoid publicityy rights claimmss.. In addiittiioonn to thessee practices, agenciess are able to further managee litigatioonn risk by securing ad liabilityy insuranccee,, which can protect against errors or omissions relating to either copyright or trademark. Notably,, this insurance is availabllee at a cost that is feasibbllee for digittaall marketing budgettss forr even thhee smallest projects.

But patents are different. Patents, and especially software patents, are notoriously difficult to understand, aanndd aaggeenncciiees --- eessppeecciiaalllyytthheessmmaalllleerr aaggeenncciieess thaatt have fnlourished in the digital eeccoonnoommyy --- hhaavveelliittlteletotonnoobbuuiillttiinnccaappaabbiilliittyy ttoo inntteerrpprreett patennttss.. Unlike copyright or trademark, there is no established way to "clear" patents before substantial resources are sunk into a project. Because of this, it is nearly impossible for agencies or marketers to manage thiiss rriisskk aahheeaadd ooffttiimmee.. Even when potentially relevant patents are identified, the current patent system makes it nearly impossible to gauge the risk. For example, for many patents, it is impossible to know who the real owners off the patent are. TThhiissmmaakkeessiittddiiffffiiccuullttffoorraaggeenncciieesswiitthh cliieennttss thatt mighhtt have licennsseess in the space to understand whether additional licenses need to be obtaineedd.. Further, the cost of establishing whether a given patent is valid is generally too high relative to the digital budget to undertake before a project begins, particularly when there are a number of such patents andd it isn't clear at the outset what anyy of themm covveerr..

Ammericcan Asssoocciiaattiionn of Adveerrttiissiinngg Ageenncciess 11770077 L SSttrreeeett NNWW,, SSuuiittee660000WWaasshhininggttoonn,, DDCC2200003366 w.aaaaaaa.oorrgg

Given the unpredictable and potentially unbounded risk involved inn using digital technologies to develop Internet-basseedd ad campaignss it is not surprisinngg,, althougghh it is unfortunate, that unlike other areas of IP, there is no insurance for patent liability that can be used by ad agenciieess..

2. PAPEAsEsinihnihbiibtidt ydnyanmamisimsmaannddininnnoovvaattiioonniinnoouurr iinndduustry

Becausee agenciieess of all sizes developp marketing strategies that includdee web-baseedd technologies, our member's ccllients hhave become targets of PAEs who often use Internet technologyy related patents as their weapon of choice. PAE practices in the advertisinngg space are just as abusive as they are in other spaces, and they target the vulnerabilities of agenciieess and marketeerrss.. Amongg these practices are letters that providee too little information for the agencyy to understand which technologies are allegedd to infringe, and the assertion of likely invalid patents coupledd wiitthh royyaallttyy ddeemmaannddss tthhaatt arree jjuusst low enoughh to ensuree that agencieess pay the toll rather than challenge the patenntt..

It is important to recognize thatt maannyy of thee coossttss thaatt thee patent system andd PAEEss impose on thee ad agency business are incurred eveenn before the patents can get challenged in court. The knockout blow happens when a PAE issues a demand letter to an agency on a tight digitaall budgeett.. Agencciieess generaallllyy must adopptt a flight-or-flight response to theessee demands giveenn the sizee of their digital budgetss:: they either pay the royaltiieess and deal with the fact that a sharee of the returnn to theirr creativity and hard work is going to go to a PAE, or they drop the project entirely when it becomes clear that the size of the digital budget doesn't jjuussttiiffyy ppaayyiinnggtthheettoollll.. It is rare that these budgets even justify the use of patent lawyers to do prior art searches. It is improbable that the budgets and timelines of thessee projects justify litigation..

It is also important to recognize that a major impact of PAEs on this industrryy is to limit the ability of the most innovative new agencies and technology firms to participate. Thiss is the result of a trickle-down effect where the PAE suess the marketer for patent infringement as a result of a websittee or other execution that the agennccyy createss on behalf of the client. Thee client thenn looks for indemnification fromm thee agency, who might then look for indemnification from the technology commppaannyy thaatt creatteedd the technologgyy.. Given the scale of the PAE problem in this industry, some clients are demanding indemnification up frontt.. What this means is that the larger and more establishedd agencies and technology companies that are capable of credibly indemnifying their clients get a competitive advantaggee in the market.. Smaller agencies and technologyy companies are often not able to meet the indemnification requirements of large marketers because of the potentially unconstrained liability that these marketers might have to as yet unidentified PAE plaintiffs. As a result, the need for indemnification brought about

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Americaann Asssoocciiaattiioonn of Advertising Agenciees 17077 LL Street NNWW,, Suuiitee 6000 Wasshhiinggton, DC 200003366 www.

by PAEs cann disqualify small innovative agencies and technology companies thaatt otherwise would compete aggressively for the work.

Patents have been asserted against our members and their clients by a number of PAEss including PixFusion, Denizen, Webvention and the multi-faced PAEE formerlyy known as "Project Paperlessss.."" The functionality alleged to infringe these patents include what most of us would consider basic functionalittyy including one click shopping, the hyperlink, online shopping carts, targeted banner ads., video streaming, pop-up windows, online payment using credit cards, scanning documents and then emailing them, and basic Wi-Fi functionality. Individual agencies are understandably reluctant to come out with their stories for fear that by doing so they would be painting targets on their backs. Howevveerr,, the rare circumstances wheree patenntt infringement allegations in this industry actuallllyy go to court illustrateess some aspectss of these problems..

PAEE demands cann havvee unexpected negativee effects on consuummeerrss.. Foorr example, in DietGooaall Innovationnss LLLCC vv.. AArrby's Restaurant Group, Inc., et al. (October 2011)., the holder of a 2003 patent (No. US 6,585,516 B1l) for meal builderr software (essentially a programm for a monthhllyy calorie counter diet plan) claimeedd that over thirty large fast food restauraannttss anndd other fooodd andd media industry-relatedd commppaannies infringed its patent, eacchh by virtuee of having created a section of its website thaatt allows consumers to buildd a meaall fromm picturree mmeennuuss aanndd vviieeww ccaalloorriiee ccoonntteenntt.. DDigital marketing agencies were facedd with client demands for indemnification regarding licennssee fees that far exceeded the cost of buildinngg thee relevanntt seeccttiioonn of eeaacchh ssiittee.. Notably, the nutritionaall information provided on the sites was closeellyy aalliiggnneedd wwiitthh rreecceenntt hheeaalltthhccaarreelleeggiissllaattiioonnmmaannddaatteess.. As suchh,, thiss suitt not onlyy distorts the market for digitaall advertising services, butt it alsoo actss to frustratee the laudable public policy goal of widespread dissemination of consumer heeaalltth informaattiioonn..

Anotheerr examppllee stems from the actionnss of GeoTTaagg,, Inc. The principal patent enforcedd by this PAE is truly ancciieenntt.. Appplliieedd ffoor iin 199966aannd ggrraanntteedd iinn 1999999,,tthhee ''474 patent bounced between tax havens like Liechtenstein, the Westt Indies, and the British Virgin Islands for ten years before being bought up by GeoTag for a purported $119 million according to a complaint filed by Google and Microsoft against GeoTag. According to the complaint, the owners of GeoTag intended to take the company public, with its principal business strategy being to licensee and enforce its patents.. According to the complaint, GeoTag had sued more than 300 companies in ten separate actions in district court in Marshalll Texas alleging that the ccompanies' use of Mappiinngg Serviceess to createe store locatorrss and similar locator servicceess on webssiitteess infrinnggeedd their patentt.. The FOSS Patennttss websiittee includess a list of nearlyy 4000 companies sued by GeoTTaagg.. A

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Americann Asssoocciiaattiionn of Adveerrttissiingg AAgeenncciess 11770077 L SSttrreeeett NNW, SSuuiittee660000WWaasshhininggtotonn,,DDCC2200003366 ww.aaaaaaa..oorgg

number of the companies whose websites were targeted by GeoTag were created by our members. One member, a small agency whose largest and oldest client is a large retailer named in one of GeoTags suits might go outt of businessss becaauussee oof tthhee ccllient's request for indemnityy..

3.. PoPsossibsilbeleacatcitoinonssbbyyththeeFFTTCCaanndd tthhe DDOJ

Despite the probleemmss creaatteedd by the currenntt pateenntt systemm for mannyy industriieess,, patent reform hass been difficult ass many potennttiiaall reformmss aimmeedd att curbing thee excesses off the systemm often have champions in legitimaattee industtrriieess.. For example, what seemmss like a bizarre anndd wastefuul taccttiicc in thee high-tech industry caann be a basiicc goodd practice in the pharmaceutical industry.. The most effectiivvee refoorrmmss against PAEs might be to challenge thee worst aspects of thee waayy theeyy do busineessss.. Moosstt of thee recommendations wee make below can be described as reforms that focus on limiting these aspects of PAE activity. The recommendations are broken dowwnn intoo policy recommendations andd enfforcemeenntt rrecommmmeennddaattiioonnss..

(a)) PPoliccy RRecommmmennddaattiions

Thhee FTCC anndd DOJJ should stepp up theiirr efforts too advocaatee for waayyss to improve the information thhaatt thhee PAAEEss hhaavvee ttoo pprroovviiddeeiinntthheeiirrddeemmaannddlleettteerrss.. Patent royaltyy demand letters should identify: the specific patents potentially infringed; accurate real partyy in interest ("RPPII"") information, especiallyy when a PAE uses multiple shell holding companies to hide its real interests in patent licensing discussions; information regarding any serious challenges to the validity of the patents at issue; the products or services alleged to infringe and how the patents cover those products or services (i.e., the PAE should be required to document specific examples and provide appropriate documentation for anyy alleged infringemenntt)).

The competitiioonn agencies should also study and advocate for:: (1) use-it-orr--lloossee--iitt rules for PAEs similar to trademmaarrkk requirements (a pateenntt holddeerr shouldd be requiredd to commercially use the patent as a prerequisite for enforcing patent rights); (2) an expanded use of the English rule on attorney's fees for PAEs, so that PAEs would have to pay the attorney fees for both sides if they cannot prove infringement;; (3) rules that might further improve patent quality, along the lines discussed in the recent USPTO workshops on patent qualittyy in softwwaarree;; (4), shorter patenntt termmss for web-relatedd andd dessiiggnn patennttss becausee the speed of web innovation and the incremental naturree of web functionality would seem to dictate that a five year patent term is far more appropriate and reasonable than a twentyy year term for web software and desiiggnn patennttss,, and (5) ways to improve the market for insurance for patent infringement claims, including possibly direct federal

6

Ameericaann Assssoocciiaattiioonn ooff Addvveerrttiissiinngg AAgeenncciieess 11770077 LL SSttrreeeett NNWW,, SSuuiittee 660000WWaasshhininggttoonn,, DDCC2200003366 .aaaaaa..oorgg

supportt for insurance similar to the support the federraall governmenntt provides for flood insurraannccee..

The Commissiioonn (or both agencies) should also consider implementing the policy initiative noted in the Commission's 2003 Repoorrtt to request that the PTO "reexamine pateennttss thatt raissee competitive concerns wheenn a subssttaannttiiaall new queessttiioonn of pateennttaabbiillitiytyexisttss.."""2 In suppppoorrtt of this, the Commission shouldd establishh the capability to evaluate patents regularly useedd by PAEs andd the impact of thoossee assertions on consumers and innovation, and use that information to identify candidate patents for the Commission to report to the PTO.. The Commission might also consider petitioning the PTO for a postgrant review of a patentt that appearrss to be of questionable qualittyy wheree the patent threatens to seriously harmm competition.

(b)) Enforcemment Recommmeennddaattiionns

On the consumer protection side, the FTC should consider bringing unfair and deceptive actss andd practices actions against PAEs thaatt relyy onn deceptive claims in demandd letters, including deceptive RPI information, to increase the royalties they get., especially fromm smaller compaanniieess.. Thee Commmission couulldd allssoo consider issuing guidelines identifying deceptive practices thaatt PAEs should avooiidd in demand letterss..

On the competition side, the FTC shouulldd consider bringing unffaaiirr metthhooddss of competition claims against PAEs to limit the ability of theessee firmmss to buy patents or patent familiess fromm other firmmss anndd theenn enforce thhee patents in waayyss thhaatt aree contrary to the wayy the innovative firmmss didd.. To the extent thaatt thee industryy hass grown to relyy onn onee interpretation of thee patent families as a resuulltt of thhee practices of thhee innovator company (or anyy other company thaatt usess the patents to support thee salee of products andd services in the marketplace), a PAE shouulldd not be able to grossssllyy re-interpret those patents simply to increase royyaallttiieess.. TThhiiss uussee ooffsseeccttiioonn 55 wwould be ssiimmilar to uses off Section 5 by the Commission in Dell and N-Data, where the use of equitaabbllee defennsseess formed the basis for thee theories of unfair methods of commppeettiitioonn..

Respectfully submitted.,

_J^>^i OC-3'JL.

RRiicchhaarrdd OO''BBrriieen Executive Viccee President, Director of Government Relations

22Fed. Trade. Commm'n, TTooPPrroommoote IInnnnoovvaation: TThheePPrroopper BBaallance off Competition annddPPaatent LLaw anndd PPoolliiccyy,, cchh.. 66,, aatt 2222((OOcctt.. 22000033)),, aavvaaillaabbllee aat .

Americann Assoocciiaattiioonn of Advertising Agenciees 17077 LL Street NNW W,, Suuiitee 6000 Waasshhiinnggttoonn,, DC 2200003366 ww.aaaaaaa..oorrgg

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