RISMEDIA, May 3, 2007-The potential personal liability and damages that may eventually be assessed to real estate agents and brokers throughout the United States, based on the outcome of a single patent infringement case – REAL v Diane Sarkisian et al – appears to be much larger than most industry insiders may have originally anticipated.
Knowledgeable brokers and agents whose listings are regularly featured on Realtor.com, or whose MLS subscription may provide them with interactive mapping features, may be increasingly worried about their potential exposure as members of a class action suit filed by the patent holder.
This case was first filed in June of 2005, and in February, a class action motion was submitted by the plaintiff that essentially sought to extend the liability found in this one case to potentially hundreds of thousands of agents throughout the country. The Class Action alleges that the patent infringers use United States Patents 5032989 and 4870576, "Real Estate Search and Location System and Method," which claim the use of interactive "zoomable" maps to locate available real estate.
The technology has become quite common and pervasive even though court records reveal that industry leaders like Move, Inc, were aware of the possible legal implications for the Realtor.com Web site as early as 1999; but, may have done little to avoid creating potential liability for themselves and other real estate professionals.
Many who originally relied on industry assertions that this case would be won quickly have grown increasingly concerned as more problems regarding the purported defenses to patent infringement have surfaced in court documents. A past RISMedia article on summary judgment motions details much of the current status of the case. (http://rismedia.com/2007-04-03/mapping-patent-summary-judgment-motion-may-pose-serious-concerns-for-real-estate-professionals/)
Busy real estate agents or brokers have a hard time mustering serious concern for a legal issue being fought far away, especially when their names are not on the paperwork. Most professionals choose to delegate such distant concerns to their associations. Until recently, that concept appeared to be working well, as the NAR and the TREND MLS bore most of the cost of indemnifying this single defendant agent and her legal defense. However; in light of the recent class action motion, many professionals whose properties have been on Realtor.com or TREND may be experiencing an…"And then they came for ME" moment.
If the plaintiffs are successful, damages may well be awarded against each of the class member infringers. One of the talking points that many professionals have comforted themselves with as they have seen the plaintiffs present their case through documents to the Court, is that even with a victory, perhaps the courts would award the patent holder very little in damages for each infringer. Unlike many of the industry assumptions that were being rumored behind the scenes in this case, some individual agents and brokers are now undertaking some due diligence of their own regarding this potential liability.
Damage awards in patent cases like this are calculated based on categories that include both Compensatory and Punitive awards. Punitive damages, like the name suggests, are sometimes calculated as a punishment for willful and wrongful acts, or as a penalty-deterrent to ensure higher levels of respect and obedience for the law from individuals in the future. As an example, no one would pay $1,000 to download a recording from the Internet when you can regularly pay $1 or less. Penalties don't always relate to the costs that an individual might otherwise have paid to do something legally.
Compensatory damages include two main sections: Reasonable Royalty and Lost Profits. By statute, a reasonable royalty is the "floor" below which damages cannot fall. A reasonable royalty award is normally determined by multiplying the infringer's total sales for the business in which the infringing use took place, by the reasonable royalty rate. This royalty can be assessed for up to 6 years of past infringement. Lost profits may then be additionally assessed to raise that base minimum to compensate for other earning potentials lost "but for" the infringing acts.
For simplicity, let's set aside any calculation of punitive damages and the potential for any Lost Profits calculations and only consider the "reasonable royalty." According to a report prepared by Navigant Consulting, a $670 million dollar per year industry consultant, a decade's worth of patent infringement cases reveal the pattern of approximately 3 out of 4 decisions yielding royalty rates between 6-25% of revenues. The vast majority of those cases squarely falling in the 6-10% range.
According to court papers filed recently by the plaintiff the alleged infringement of the patents in this suit is a method for locating available real estate on zoomable maps. The evidence seems to indicate that the inventor offered his invention to agents as far back as 1988, at rates comparable to what agents pay today for similar tools. Since this type of mapping is found at the core of much of today's real estate marketing, the plaintiffs will undoubtedly make the case that commissions earned in the marketing of available real estate are the revenues onto which the "reasonable" royalty should be applied.
By way of financial illustration, let's optimistically speculate that the reasonable royalty winds up being well below the national average at only 5%. For the average real estate agent making $45,000 per year that would create a liability of more than $2,200 per year for as many years as the infringement may have been occurring, up to the six year maximum. According to Navigant, the lowest royalty rate recorded was .75% for Slimfold Manufacturing vs. Kinkead Industries. However even this damage assessment was significantly enhanced by the addition of Lost Profit damages.
The real estate industry has scoffed at the patent holder offering licenses for a readily available, and now-common property marketing tool at a fee of $10,000 per individual agent. When agents can choose online mapping services from so many different companies and at such affordable fees, how could anyone pay $10,000 just for the license rights? To some top producers, however, that fee may now be looking like a bargain.
With this case moving toward trial, and more evidence making its way into the record, some, including the media, are being given more information than in the past, and are now able to evaluate the claims beyond the crossing hype, accusations and denials. What they are finding may be making some uncomfortable about the potential consequences. While the outcome is far from certain, that very uncertainty appears now to be causing some proactive brokers and agents to take a look at the case for themselves.