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Google's Ad Technology Tussle

Google's potential $3.3 billion IPO is based on the billions it rakes in from search engine advertising. But there's one huge risk factor: Overture Services, its fiercest rival, claims a patent covering paid search. The two companies are poised to duke it out in court.

As Google prepares to go public, this two-year-old patent infringement suit, set to go to trial in San Francisco, calls into question the very basis of Google's advertising business.

Overture, the Yahoo search engine marketing division, began life as GoTo.com, a search service that let advertisers bid for placement at the top of the listings. Advertisers' listings were clearly marked, along with how much they'd paid to be there. In 2001, GoTo.com was awarded U.S. Patent No. 6,269,361, known as the '361 patent.

The patent abstract describes the invention as "a system and method for enabling information providers using a computer network such as the Internet to influence a position for a search listing within a search result list generated by an Internet search engine. The system and method of the present invention provides a database having accounts for the network information providers. Each account contains contact and billing information for a network information provider. In addition, each account contains at least one search listing having at least three components: a description, a search term comprising one or more keywords, and a bid amount."

Google, of course, operates AdWords, its own version of bid-for-placement ads.

Google's S-1 filing foreshadows the worst-case scenario: "We may have to pay damages or stop using technology found to be in violation of a third party's rights," it reads. "We may have to seek a license for the technology, which may not be available on reasonable terms and may significantly increase our operating expenses. The technology also may not be available for license to us at all."

In fact, Overture, like any other patent holder, would have no obligation to let Google continue AdWords if it wins its suit.

Overture also is suing FindWhat, a company that started as a search service with paid listings, then morphed into a pay-per-click advertising service that distributes ads through its network -- a lot like Google's AdSense contextual ad program. That patent infringement suit, filed in January 2002, has been tangled in legal maneuvering and isn't due for trial until 2005.

Intellectual property attorneys caution that a patent abstract is just a summary that can't be used to evaluate what the patent really covers. Infringement battles typically are fought word by word, as the litigants argue about the interpretation of a word or phrase.

As Google's IPO approaches, the rivals are waiting for a critical ruling by Judge Jeffrey White of the U.S. District Court for the Northern District of California. His so-called Markman order will define key words in the patent, drawing lines of battle.

"[A] Markman ruling defines the terms in the claim, which in turn define the scope of the invention, how broad or how narrow it is," said Lee Bromberg, an intellectual property attorney with Bromberg & Sunstein. "It's customary for each side to try to pick out certain important terms and to argue for their view of how they ought to be defined," he continued. "It's the judge's job to decide what those terms mean. Sometimes the judge can define a term in a way that either establishes infringement or makes it impossible for infringement."

In this case, the Markman hearing focused on two key terms: "database" and "search result list."

According to its legal briefs, Overture wants to define "database" as "a collection of related data, organized in such a way that its contents can be accessed, managed, and updated by a computer." Google has a counter-argument for that, but it asked the court to hide its argument from the public, citing trade secrets.

As far as what a "search result list" consists of, Overture claims that search result lists can include banner ads. This interpretation would draw AdWords into infringement territory.

Google argued that a search result list is an ordered series of entries and "inherently excludes banner ads and other items that are not responsive to the searcher's search."

The judge must decide whether AdWords are more like banner ads or more like search results, since they are delivered in response to the searcher's search.

Along with the semantic struggles, Google is fighting back by saying the patent is invalid. According to U.S. patent law, a claimant must file a patent application within one year of actually making the invention. Google said in its counterclaim that GoTo.com operated a pay-for-placement search engine by April 28, 1998. At that time, according to Google, GoTo.com had more than 1,000 advertisers and an average of 7 million page views per month.

Google also claimed that Darren Davis, who is named as the inventor, lied in the application declarations when he claimed that the invention didn't exist as of May 1998, and therefore the patent is unenforceable.

Overture responded by saying that in April 1998, it did operate a beta version of the system it was developing, but that system lacked some of the features that are claimed in its '361 patent.

"It's a factual determination that will depend on the actual evidence and the credibility of the witnesses," said Randy Lipsitz, a partner in Kramer Levin Naftalis & Frankel who specializes in IP cases. "The jury will make that determination as to whether the system was in public use more than a year before the patent was filed."

Lipsitz said that there is an "experimental use exception" for an invention that wouldn't be counted as part of the one-year limit on applying for a patent. However, he said, that experimental use must not be commercial. "It has to be in conjunction with developing the invention itself. It's to find out, 'Will this work,' not 'Will this generate income?'"

The case may come down to epistemological issues about the nature of databases and what all search listings actually encompass. Google will have to prove that its method for ranking ads is different than Overture's, and Overture will have to prove that the search service it provided in 1998 was different than what it patented.

Google's S-1 filing also warns investors, "We may also be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for the infringing aspects of our business, we may be forced to limit our product and service offerings and may be unable to compete effectively."

However, this may not be the kind of problem a technical work-around can solve. "I'd call [Overture's] a business method patent," said Lipsitz. "It's not directed to a particular machine or structure."

Business method patents are meant to cover ideas about how to accomplish things, rather than the nitty-gritty of the means of making things happen. So, even if Google's technical infrastructure and code were very different from Overture's, it still could infringe the patent.

Google already has seen its AdWords business nipped by copyright gaffs. AdWords is an advertising format that provides self-service search marketing in which advertisers can buy key words -- including other companies' trademarks.

For example, a retailer might show an ad saying, "Get discounts on Calvin Klein here" whenever someone searched for the term "Calvin Klein." If Calvin Klein complained, Google would make the advertiser delete the term in the text but allow an ad that said "Get discounts on designer brands here" when someone searched for "Calvin Klein."

The service is embroiled in trademark infringement litigation. In the United States, American Blind and Wallpaper Factory is demanding that the search provider prevent advertisers from buying even generic phrases such as "American wallpaper discount." Google changed its policy in the United States and Canada to block the use of a trademark in the AdWords ad text if the trademark owner complains, but it continues to let advertisers buy trademarks as key words.

Google also is being sued for the practice in Germany and France, where trademark laws are different.

Despite the semantic hairsplitting, Danny Sullivan, editor of SearchEngineWatch, believes there are real differences between Overture's and Google's methods. He pointed out that while Overture puts advertisers that paid the most at the top, Google also factors in popularity in the form of an individual ad's click-through rate. In other words, the ad of an advertiser that paid less than another could appear higher on the page, because it got heavy response from searchers. SearchEngineWatch and internetnews.com are both owned by Jupitermedia.

There's also an ontological difference, according to Sullivan. Overture calls its paid placements "search results," while Google calls them "ads."

What's in a name? In this case, that's something the judge will have to decide.