Adware Advertisers Catch Legal Fire

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Several Internet advertisers have been hit with lawsuits over their use of desktop software applications serving their ads in a new tactic to fight the spread of advertising through desktop software programs.


Given the litigation, some advertisers have reconsidered their dealings with adware makers like Claria and WhenU.com. Dieting site eDiets.com, which previously advertised through desktop software, said last week that it would stop using contextual pop-up advertising and would forbid advertising affiliates from doing so on its behalf.


"We now believe that consumers in general do not like the idea," eDiets CEO David Humble said in a statement.


Though eDiets painted its decision as a service to consumers, it came after the company was sued over its use of adware programs. Weight Watchers sued eDiets in November, accusing trademark infringement in its use of adware makers to serve pop-up ads to visitors of WeightWatchers.com.


Likewise, L.L. Bean filed lawsuits last month against four retailers for using Claria to display ads on its Web site. One of the advertisers, Atkins Nutritionals, entered into a consent decree that it would not use adware and paid an undisclosed sum to L.L. Bean.


"I think the trend is for the victims of pop-up advertising to sue the advertiser directly rather than the companies that are delivering the pop-up ads," said Terence Ross, the lawyer for Weight Watchers and the lead attorney in many cases against adware makers and their advertisers. "I think it marks a whole new stage in the pop-up litigation and should serve as a cautionary note to Internet advertisers."


Some high-profile advertisers use desktop software firms. Claria claims it has more than 425 advertisers including FTD.com, Orbitz and NetFlix. WhenU reports about 400. 180Solutions, which is being sued in the eDiets case, has 6,000 advertisers.


Adware is usually bundled with free software, such as screensavers, and is downloaded onto a user's computer. It displays pop-up advertising on a user's screen based on Web behavior. Web site owners allege such advertising infringes on their trademarks and steals customers. Adware makers say it offers consumers additional choices and is freely downloaded.


"More and more advertisers are getting more comfortable with the concept that this is a legitimate form of marketing," said Todd Sawicki, director of marketing at 180Solutions. "We're seeing an increase in interest and demand for our services."


180Solutions, which is privately held, reports its revenue grew to $19.4 million in 2003, and the company closed a $40 million round of venture funding. Claria filed for a $150 million IPO in April. It reported net income of $34.8 million on $90.5 million in sales in 2003. WhenU is reportedly shopping itself for $50 million.


Adware makers have increased their reach. Claria claims 43 million computer users have its ad software, which is bundled with popular file-sharing program KaZaA; WhenU reports 30 million; and 180Solutions boasts 31 million.


The money generated through this advertising has upset Web site owners. Claria battled top newspaper publishing companies, including The New York Times Co. and The Washington Post Co., in a case that was settled out of court. Several other Web site owners have sued it. In its IPO filing, Claria said it has nine lawsuits pending, including ones filed by Hertz, L.L. Bean, Six Continent Hotels and Wells Fargo. WhenU is also a litigant in several suits.


Now, more advertisers are entangled in legal disputes for advertising through such companies. Along with the eDiets case, Weight Watchers filed an omnibus suit in Maryland against a dozen advertisers, mostly dieting companies, for using adware to display pop-up ads to visitors on WeightWatchers.com. The suit alleges trademark and copyright infringement as well as unfair business practices.


In Utah, which passed the nation's first anti-spyware bill, Overstock.com sued Smart Bargains for using Claria to advertise to visitors of Overstock's site. Claria executives have noted that Overstock was an early and heavy advertiser with its service.


"I do think there are a number of companies that have ads popping up that they would not do knowingly, but they've entrusted too much control to an advertising agency," Ross said.


Indeed, eDiets has filed suit against its online ad agency, Soho Digital, and the adware companies, alleging breach of contract and negligence in serving the ads, according to regulatory filings. It now will require its affiliate partners to agree not to use desktop software ad programs. Executives from Soho Digital, which deals only in contextual advertising on desktop software, were unavailable for comment.


Likewise, in its consent decree, Atkins blamed a licensee's affiliate network for hiring Claria without its knowledge. The company said when it learned of it, executives put a stop to it.


Sawicki, while declining to comment on the lawsuit, said all 180Solutions advertisers understand how their advertising will be displayed. He said that more than 80 percent of its advertisers work directly with the company, not through an agency.


The confusion over adware's legal status, and concern over more malicious tracking programs, has led to calls for federal legislation to sort out the problem. Adware makers fear more state laws like Utah's will lead to further litigation and suffocating regulation.


With trademark and copyright law on adware unsettled, Ross said he expects more suits against advertisers for using adware since advertisers are more willing to settle the cases.


"They want to make the decision to use adware harder to make," Jupiter Research analyst Gary Stein said.


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