• by August 4, 2004

Yesterday, MediaDailyNews published the first of a two-part Q&A session between MediaPost Executive Editor Tobi Elkin and D. Reed Freeman, chief privacy officer and vice president for legislative and regulatory affairs at Claria Corp. As promised, here is the second installment of this in-depth discussion, focusing on spyware legislation and pending lawsuits filed against the contextually driven adware network. Read the first part of this interview here: https://www.mediapost.com/dtls_dsp_news.cfm?newsId=262675

Spyware Legislation

MP: What is Claria's view on all of the pending state actions in California, New York, Pennsylvania, Michigan, and Utah limiting spyware and adware?
Freeman: We actively support [them]. By actively, I mean we've worked with members of these state legislatures and their staffs who've actively supported bans on spyware. We work with these states to the extent possible to find an appropriate legislative solution that bans pernicious spyware and appropriately regulates the emerging adware industry without causing unintended consequences.

MP: Can you give me an example of where Claria is actively working with a state legislature?
Freeman: The most active state legislature now that has not passed legislation already is California. I've been to Sacramento and have met with the staffs of members who have proposed legislation in those states, and have shared our business model with them--talked about concerns we have in bills that were proposed and proposed solutions for them in a way that meets their objectives, without causing unintended consequences to business. In other instances, we've been monitoring the legislation, and where appropriate, providing some education on the industry and what we think is an appropriate legislative paradigm.

MP: What pieces of the proposed [California] legislation is Claria most concerned about?
Freeman: It's a difficult question to answer because it's an evolving product. The bill we're talking about is Senate Bill 1436 proposed by State Senator Kevin Murray. That bill has passed the state Senate, and is pending now in the assembly's Business and Professions Committee. The bill has been modified behind the scenes a number of times, and it's difficult to comment on current concerns because it's not all clear what the Business and Professions Committee will be holding a hearing on, but they will hold a hearing on something on August 3.

Our concerns generally have been that the bill as it was originally proposed, for example, would have provided a cause of action to Internet Service Providers against companies whose practices violated the terms of those ISPs' subscriber agreements. Our comment was: 'We embrace appropriate regulation of our industry, [but] there is no way that we can know and comply with 5,000 different ISP policies, many of which are likely to be conflicting and where damages would have been in play, [the ISPs] would have had an incentive to put us in an impossible position.'

....That said, to the extent that state legislation addresses adware or advertising-supported software, in addition to prohibiting spyware--naturally we would prefer a single, federal standard to 51 potentially different state rules. Congress is considering legislation right now that would pre-empt state regulation of adware and spyware and provide a single national standard.

MP: What is the status of that legislation in Congress?
Freeman: That bill was proposed by Representatives Mary Bono (R-California) and Edolphus Towns (D-New York) and it's HR2929, The Spy Act. It passed the House Energy and Commerce Committee in June, and is now awaiting consideration on the floor of the House. Simultaneously, the Senate is beginning to pick up interest in this, and we are expecting a revised draft--a revised version of a bill sponsored by Senators [Conrad] Burns (R-Montana) and [Ron] Wyden (D-Oregon) of Can-Spam fame when Congress returns from recess the first week of September. Chairman Joe Barton (R-Texas) of the House Energy and Commerce Committee said in a hearing in April: 'We will move heaven and earth to make this law this year,' and we take him seriously. Pending Lawsuits

MP: Where does Claria stand with regard to the pending lawsuits against it, and what is the outlook for Claria's IPO given the pending lawsuits?
Freeman: Unfortunately, SEC rules prohibit me from commenting on the effect of anything on our IPO. The litigation is multi-party, multi-district litigation pending in Atlanta. Let me start by stating that we have over 1,000 advertising clients, including 80 of the Fortune 1000 companies--and out of all these clients we've had a handful of lawsuits, but we prefer to think of our record as suggesting a broad industry acceptance of our model.

As for litigation specifically, the discovery phase is largely over. Right now, we are expecting the court to rule on the parties' motions for summary judgment in the first quarter of next year. It is encouraging to us that several courts have ruled favorably on our business model. These include the Eastern District of Virginia and the Eastern District of Michigan. These are two federal courts and both cases involved WhenU, but the model is sufficiently similar to provide guidance on how it would come out in our case. There is [also] an opinion due soon from the Second Circuit Court of Appeals here in New York in a WhenU case. We're confident that the court will reach the same judgment as the courts in Virginia and Michigan have reached.

MP: Is it weeks away?
Freeman: Nobody knows.

MP: Were these suits filed individually or as a group?
Freeman: The way it works is--these are cases that plead similar causes of action and similar facts, and for purposes of efficiency, have been consolidated in a single proceeding. So the answer is--they were filed individually and consolidated for purposes of efficiency.

MP: On an individual basis, how many suits are there?
Freeman: I can't tell you. ... We have settled a number of these cases, but on terms that are confidential. Summary judgment, again, is due--we think--in the first quarter of next year, and between now and then, there might be other settlements as well.

MP: You said Claria has settled a number of these cases. You can't put a figure on that?
Freeman: No.

MP: Since your arrival at Claria, have you been involved in any settlements?
Freeman: The settlements proceeded my joining the company in May, and have continued since then. I've had some involvement with [a few settlements], and no involvement in others. [Freeman is one member of a legal team dedicated to Claria's settlement issues.]

[In MediaPost's interview with Freeman, he noted that Claria has "recognized the value of joining trade associations for a variety of purposes." The company works with the Internet Alliance, the International Association of Privacy Professionals, the Network Advertising Initiative, and other groups.]