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Google ordered to hand over part of AdWords revenue after losing patent case

Google ordered to hand over part of AdWords revenue after losing patent case

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Google could end up paying out 1.35 percent of the money it makes off AdWords in the US after losing a patent suit. On Tuesday, Virginia judge Raymond Jackson set an ongoing royalty rate that Google owes a patent and ringtone company called Vringo in addition to the millions in damages it was ordered to pay last year. The case could theoretically net Vringo hundreds of millions of dollars a year, all because of two patents from the early days of search engines.

Vringo produces video ringtones and a Facebook-based app called "FaceTones," but its big business is buying and leveraging patents — a struggling Nokia, for example, sold Vringo 500 of its patents in exchange for $22 million. This case dates back to 2011, when it acquired two patents formerly owned by Lycos and promptly sued not only Google but AOL, IAC, Gannett, and Target for infringement in Google's AdWords system. The strategy was successful, and in 2012, a court issued a broad ruling in its favor. Google and its advertising partners were ordered to pay a total of around $30 million, plus an ongoing royalty. Microsoft settled its own case with Vringo last year, paying $1 million upfront and licensing its patents.

Google's AdWords redesign still used a "colorful variation" of the patent

In Google's case, the court found that AdWords incorporated an important element of Lycos' original system: a "long-term value" calculation, which selected ads based not only on click-through rate but on factors like the overall quality of the page and minimum bid. After the original decision, Google tweaked AdWords to cut the long-term value score from some elements of AdWords and to move the point at which it was calculated, but Jackson determined that this new method was merely a "colorful variation" on its predecessor, keeping Google on the hook for damages for as long as it uses the modified system.

A jury had suggested Google pay 3.5 percent of a portion of its revenue (the amount found to depend partly on Vringo's patents, or 20.9 percent), but the judge nearly doubled that, awarding a 6.5 percent royalty. That number was raised partly because even if Google didn't necessarily intentionally copy Lycos' system, it redesigned its product in a way that "clearly" still infringed the patent. For scale, Google's total advertising revenue in 2012 was over $43 billion, though that's not all through AdWords or earned in the US.

This is Google's second patent loss within a week. Last Wednesday, a Texas judge determined that its Android push notification system infringed the patent of a company called SimpleAir, though damages have not yet been set. In both cases, Google chose to go to court rather than settle or pay a licensing fee; now that the Vringo penalty is set, the company tells Ars Technica that it's already appealed this decision.