Has NAR solved the “CIVIX problem”?

(UPDATE 5/25: We published an update on this subject. Markups on this post reflect that newer information.)
At NAR’s midyear meetings last week, NAR General Counsel Laurie Janik and industry consultant Ann Bailey presented preliminary results of their negotiations on behalf of the real estate industry with CIVIX-DDI, LLC, the owner of a couple patents that have been the source of much trouble in recent years. The resulting “settlement” (scare quotes explained below) could resolve all outstanding and future claims by CIVIX against REALTOR® associations, MLSs, MLS system vendors, and even brokers and agents. For it to work, though, the proposal will need to garner financial support from a substantial proportion of the MLSs and MLS system vendors in approximately 30 days. This post provides some background, summarizes the proposed resolution as it stands today, and offers some suggestions for MLSs and others who will be called on to make a decision about participating in the proposed licensing arrangement.

The #1 takeaway from this post for MLSs: Make sure you have a meeting of your board or other authorizing body scheduled the week of May 30 or June 6 to discuss this issue and decide whether to authorize entering into the NAR-procured license.

(Cautionary notes: First, this blog has a standing disclaimer that warns readers not to regard what appears here as legal advice. This is especially true with posts like this one. Second, though I always encourage folks to post comments here on MLSTesseract, I recommend doing so with caution on this post. I don’t think you want to attract CIVIX’s attention if you have not already; and I don’t know whether they may be reading this.)

Background

CIVIX-DDI, LLC owns two United States patents, numbers 6,385,622 and 6,415,291. CIVIX, through its attorneys, describes the patents very broadly, stating the “technology of the ‘622 and ‘291 patents concerns systems and methods used to locate and provide information about items of interest, such as real estate, from a remote database, using the Internet.” Based on this description and CIVIX’s suits against site owners of REALTOR.COM, HOTELS.COM, and others, we anticipate that each MLS system and consumer-facing MLS and broker IDX website in the country operates in ways that CIVIX regards as infringing its patents. (It has an incentive to read the patents broadly, as you can imagine.)

The company has pursued various players in the real estate industry for royalties based on the patents, including the following lawsuits: In December 2005, CIVIX sued NAR and Move, Inc., over the operation of the REALTOR.com website, alleging that it infringed the patents; Move and NAR defended the case vigorously, but entered a confidential settlement with CIVIX in December 2009. In 2010, CIVIX sued two large MLSs; after a vigorous defense early in the case, one MLS settled in spring 2011 under confidential terms.

CIVIX has also approached other MLSs with demand letters: So far, it has targeted MLS customers of two vendors, sending letters to the MLSs in April 2011 offering them an opportunity to license the CIVIX patents for their uses. One of the vendors has entered a license agreement with CIVIX (again, confidentially). The deal that CIVIX offered MLSs in those letters looks something like this: CIVIX agrees not to sue the MLS and gives the MLS a license to use the CIVIX patents for the next four years, until the patents expire. In return, the MLS pays CIVIX $6 per MLS subscriber per year, or about $24 total.

CIVIX has taken a very intelligent approach in one regard: It is making its settlement proposals tolerable. At $0.50 per subscriber per month, CIVIX’s base license/settlement proposal to MLSs was substantially cheaper for most MLSs than the defense costs associated with a patent lawsuit. In other words, CIVIX is making an offer most MLSs and MLS vendors would find hard to refuse if they believed the alternative is to defend a patent lawsuit from CIVIX.

The arrangement that NAR is negotiating

The COVE Group, a group of large MLSs whose meetings are facilitated by Ann Bailey and her consulting firm, approached NAR this spring about trying to negotiate an industry-wide solution to the CIVIX problem. The COVE MLSs and NAR invited some other MLSs to join the effort. (Disclosure: We communicated that offer to most of our clients, some of whom we are now representing in the process.) Only a few days ago, Bailey, NAR’s Janik, and Seattle attorney Chris Osborn met with the CIVIX folks. They have since come up with an outline for a proposed resolution of all of CIVIX’s claims against the real estate industry. The details remain to be worked out (and we know the devil is in there somewhere), but the basic concepts are these:

• There are four important dates in the proposed resolution, and it will help to have abbreviations for them. “T” will be the date that NAR reaches agreement with CIVIX; “T+30” will be the date thirty days later; “T+60” and “T+90” have the same meanings, mutatis mutandis.
• NAR would obtain a license from CIVIX, under which NAR could issue sublicenses to MLSs (and through them to brokers and agents) and to MLS vendors. The total fee from NAR to CIVIX to permit NAR to license these technologies to the entire industry on an unlimited basis is $7.5 million; if the industry raises this much money by T+90, NAR will grant the sublicense to every MLS (whether NAR-affiliated or not), broker, and industry vendor (see 5/25 update for clarification on this). But NAR is not putting up the $7.5 million; the industry has to raise it.
• In order for any MLS or vendor to be covered under the proposed license, at least one third ($2.5 million) of the license fees will have to be collected by T+30. If less than $2.5 million is collected in that time, there will be no license and NAR will return the fees to the MLSs and vendors. CIVIX will presumably pursue its previous strategy.
• If NAR meets the $2.5 million target by T+30, all those who paid during the 30-day period will receive a license, and NAR will be permitted to continue granting licenses to MLSs and vendors until T+60.
• If NAR gathers another one third of the license fees (or a total of $5 million) by T+60, all those who paid before T+60 will receive licenses, and NAR will be permitted to continue granting licenses to MLSs and vendors until T+90.
• If NAR gathers the last third (or a total of $7.5 million) by T+90, NAR will have the power to grant licenses to the whole industry, whether they paid previously or not. If NAR does not make the $7.5 million target by T+90, all those who paid before T+90 T+60 will receive licenses, but NAR will not be permitted to grant any licenses after T+90 T+60 and any money it collected between T+60 and T+90 would be returned to the MLSs.
• The $7.5 million works out to about $9.05 or $9.06 per subscriber (based on calculations I may discuss another day). NAR expects that the vendor community will pay more than half of that. An MLS can choose to pay none of that (and risk not receiving coverage under the license), it can pay the portion attributable its consumer-facing website and broker IDX sites (some proportion of the $9.06 yet to be determined), or it can pay the whole amount (if its vendor is unwilling to buy the license). The decision has some nuances that you should definitely discuss with your lawyer (see below).
• This is a license and not a settlement in the sense that it procures the rights to use the CIVIX patents without litigation – at least for most of those involved – thus the scare quotes around “settlement” in the introduction.

NAR plans to finalize the agreement with CIVIX soon. We expect more details the week of May 23.

Thoughts for those making decisions

Many leaders in the industry view this proposed resolution to the CIVIX problem as being a well-negotiated and valuable option for MLSs that otherwise might have faced complex and expensive litigation from CIVIX. The cost of defending a patent lawsuit is enormous. Even if you qualify for coverage under NAR’s errors and omissions policy rider for patent defense coverage, that rider has a $100,000 deductible. Others have been critical of the proposed resolution on various grounds. Whatever your sentiments about the proposed resolution, your organization has a choice to make: whether to support it by paying some or all of the license fee. Your organization should plan to make that decision before T+30. Here are some things I’d consider in the mix:

• The central question is not whether the CIVIX patents are valid; it is whether your MLS or company has the money to carry a suit to its completion. NAR, Move, and one large MLS decided after making vigorous early defenses that the costs of defense outweighed the cost of settling, and they faced much higher settlement costs than what is contemplated in this new proposed resolution. This is thus a business decision and not purely a legal one.
• Another central question is the scope and nature of the license that NAR can grant. We don’t have that yet, but once we do, you’ll want to see what rights it would confer on your MLS or company. Adding up the benefits of those rights plus the value of eliminating the risk of a suit from CIVIX, you have the benefit of the settlement, against which you can measure that $9 or $5 or whatever per subscriber you would pay for the license. You should obtain your attorney’s advice on this issue when we know more.
• If you are an MLS, your vendor contract indemnification provisions are critically important right now. You must also be prepared to use them strategically in light of the fact that you have not been sued yet, and with luck, will not be; most indemnification clauses will not protect you for going out and settling with someone who has not yet threatened to sue you, so be sure to talk to your lawyer before making this decision. A misstep could having you paying more than necessary with no recourse to your vendor.
• Not paying and waiting until T+90 to see if NAR has secured a license for everyone is a bad strategy for the industry, though it may be appropriate for your organization for a variety of reasons. It seems likely to me that NAR will reach the $2.5 million threshold by T+30 because of the number of CEOs of large MLSs that have already said they intend to pay. I’m less confident that NAR will raise the remaining $5 million by T+90. Thus, if you don’t buy in during the first 30 days, no one may get a license, and if you don’t buy in before T+90, your organization may not get a license, while others do. Of course, if your organization does not have the cash available, you may not be able to buy in. If your MLS is sufficiently small, it may decide to sit this out believing that CIVIX will never take note of you (though there may be reasons you should not count on that strategy). In short, you should talk the decision over with your leaders and your lawyer to consider the nuances.
• If your MLS is quite small, you may just want to pay the license fee without consulting your lawyer. Here’s why: If you have 300 subscribers, the maximum license fee payment would be a little over $2,700. If you retain a lawyer to guide you through this decision, you may spend more in lawyer fees than you would pay to buy the license! (Note that it’s o.k. to ask your lawyer for a bid or quote on this project to keep the costs down, but it’s o.k. for your lawyer to refuse to bill it that way because of the uncertain commitment of time, etc.)

There are many other issues you should take into account with regard to this possible resolution to the CIVIX problem. My three key suggestions: (1) If you will need authorization from a board or other body to buy in to this license, make sure you have a meeting of that body scheduled after next week but before T+30 – I recommend the week of May 30 or June 6. (2) Contact your MLS vendor to see whether it has determined its own strategy; this allows you to factor your vendor’s approach into your organization’s decision. (3) Have your lawyer advise you regarding the legal implications of your business options.

In answer to the question posed by the title of this post, NAR has not solved the CIVIX problem, but its legal counsel Laurie Janik and Pranix’s Ann Bailey have laid groundwork for the industry to be able to solve the problem. It will be interesting to see whether and how the industry steps up.

-Brian