Crakmedia Prevails; Judge Rules Essociate '660 Patent' is Invalid

PATENTVILLE—On October 12, 2004, The United States Patent and Trademark Office (USPTO) officially granted U.S. Patent No. 6,804,660 to inventors and longtime business partners Evan Horowitz and Michael Landau, aka XPays, who had filed an application for the patent three years earlier, on May 1, 2001. Referred to thereafter as the "660 patent," it's official title was, "System method and article of manufacture for internet based affiliate pooling." Yesterday, however, U.S. District Court Judge James V. Selna for the Central District of California issued a single ruling granting identical Motions for Judgment that had been filed by the defendants in co-pending cases, Clickbooth and Crakmedia, in the process invalidating the 660 patent for being an "abstract idea" that is patent-ineligible under 35 U.S.C. §101. In response, Essociate immediately filed a Notice of Appeal with the court, and in a statement to AVN expressed its continuing determination to get its patent reinstated. Clickbooth, a Florida-based affiliate and CPA network, had originally been sued for infringement of the 660 patent in December 2013; Canadian Crakmedia was sued in April 2014. Refusing to settle, Crakmedia pursued the case in court, and on January 14 of this year, Judge Selna issued a ruling granting the company's Motion to Strike Infringement Contentions on technical grounds. Shortly thereafter, according to a statement issued by Crakmedia today, "Crakmedia then teamed up with Clickbooth.com, which had also been sued, to challenge the validity of the Essociate patent under the United States Supreme Court's recent decision in CLS Banks v. Alice Corp. The District Court granted Crakmedia's motion, declaring Essociate's patent claims invalid. This is a significant case for companies accused of infringing internet patents that try to monopolize abstract ideas of doing business on the internet."  The statement also contains a quote from Crakmedia CEOs and co-founders Nicolas Chretien and Xavier Farooghi, who said of the decision, "Crakmedia respects and believes in intellectual property rights. But we were determined not to give in to a frivolous lawsuit. We did not infringe Essociate's patent and we never believed Essociate should have been allowed to patent the concept of affiliate pooling."  Indeed, if anything, this case represents yet another example of the profound impact the SCOTUS decision in Alice has already had on not only the number of patents invalidated by the USPTO, but the sharp fall in patent litigation since the ruling. Alice essentially codified the notion that patents should be found to be invalid if their "claims were drawn to an abstract idea," especially is the abstract idea is tied to "a fundamental economic practice and a method of organizing human activity." Building his argument on those conclusions, Judge Selna wrote in yesterday's ruling, "The claims at issue here are ... directed to an abstract idea. Without purporting to construe the claims, the Court holds that the ‘660 Patent describes steps for how a merchant can gain access to customers from a referring entity without having to compete with other merchants for those same customers. This process allows a merchant to avoid, or at least reduce, competition while also allowing it to still track which and how many customers the referring entity directs to the merchant. The Court agrees with Defendants’ characterization that these steps simply embody the concept of receiving and tracking referrals from referral sources. Like in Alice and Bilski, receiving and tracking referrals is a concept that involves the 'mere formation and manipulation of economic relations.' Regardless of whether a merchant is seeking customers on or off the Internet, it is a fundamental economic practice to (1) keep track of who is directing customers to one’s business, and (2) compensate or provide incentives to that referring source to ensure the continuing flow of customers from that source. The fact that the two affiliate systems that existed prior to the ‘660 Patent—the standalone system and the affiliate hub system—also received and tracked referrals further demonstrates how this concept is a fundamental economic practice." Essociate principal Evan Horowitz, in response to a request for comment on Selna's ruling as well as the decision to appeal, told AVN, "Alice is supposed to apply to abstract concepts. Essociate's Affiliate Pooling Patent is not abstract—it's very inventive. Our invention is so novel and innovative that at first experts said that we were crazy—a third party system like ours would never work. People asked, 'Why would anybody want to work through a third party affiliate network instead of direct?' "It turns out that our invention, which we created internally and also practice, changed the world," he added. "Our affiliates, virtual affiliates and advertisers quickly found Affiliate Pooling to be a profitable business model—even more so than working direct. They liked the scalability of our model, the variety of offers available, and the ability to get one check for promoting lots of different offers—even ones that had their own affiliate programs already. We helped the smallest mom-and-pop to the biggest affiliates support their families while working from home, and have helped scale affiliate programs for large brands, too. There's been a lot of great stories and experiences we have shared via our invention. "We look forward to continuing to lead innovation for our industry," concluded Horowitz. "We have filed our appeal regarding this Alice ruling. We look forward to the Federal Circuit bringing some sense to Alice rulings and reinstating our patent." An abstract describing what the "660" patent is for states, "The present invention provides a method, system and computer program for affording Virtual Affiliates access to an existing affiliate system. First, having been assigned a unique identifier within a source affiliate system, a Webmaster operates a web site. Next, a request for a target Merchant Web site triggers a correlation function, such that the source Webmaster unique identifier is correlated to a target Webmaster unique identifier functional within the unique identification system of the requested Merchant system. Next, a properly formatted entry mechanism URL is returned, enabling a hand-off to the target Merchant affiliate system and including the correlated target Webmaster unique identifier. The Virtual Affiliate system is notified of transactions that originated from a referring Webmaster. Referring Webmasters may be compensated for each completed transaction according to agreed-upon terms and conditions." Starting in mid-2009, Essociate began filing lawsuits against companies it alleged were infringing upon the patent. According to a 2010 article on Adotas.com, "In March 2010 Essociate filed a patent infringement suit against Blue Whaler Investments, W4, Blue Phoenix Media, Flexoffers.com, Max Bounty, Direct Roi, Shareasale.com, Synervation Global. This isn’t the first time Essociate has gone the legal route—the company filed suit against Clickxchange, Roi Rocket, CX Digital Media and others in May 2009, but the suit was dismissed with prejudice in February 2010." In 2011, Horowitz indicated that the 660 Patent had brought in $1 million in licensing fees. In its statement issued today on the ruling, Crakmedia said of Essociate's litigation, "For years, Essociate has claimed to own the concept of affiliate pooling, and it has used its patent to sue more than twenty companies in the affiliate networking space for infringing the '660' patent. According to industry reports, Essociate has obtained settlements from the companies it has sued simply because settling was more economically feasible for these companies than paying law firms to defend them." AVN also has reached out to Crakmedia for further comment on Essociate's decision to appeal yesterday's ruling, but had not heard back by post time. Judge Selna's Feb. 11 ruling can be read here.