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Newegg And The Problem With Patent Trolls

It started with a patent for an encrypted modem that never really took off. That patent was first invented by Michael Jones — who sold about 30 copies of his modem before his firm Telequip (TQP) went bust.

The TQP patent was later bought by famous/infamous patent enforcer/patent troll Erich Spangenberg in 2008 — at which point the lawsuits started pouring out. The argument? The Jones patent entitled its creator to royalties anytime basic SSL internet encryption was in use.

That very wide net caught up a lot of firms: Google, Intel, Yelp, Apple, TV AmeritradeMovieTickets.com. The list was at hundreds of names long and very lucrative — all in Spangenberg and Jones ultimately made more than $45 million from the patent.

Now the truth was that no one had ever heard of TQP until it started suing everyone and anyone under the sun over its patent — but settlements are often the easy way out in matters like these for tech firms, particularly big ones that can essentially pay to make something go away.

“Their business model is not to go to trial and potentially risk the validity of the patent for any one particular defendant,” Jim Denaro, a Washington, D.C.–based attorney for the CipherLaw Group, told Ars Technica, referring to TQP. “The business model is based on the fact that the cost of defending a lawsuit, and the risk of a large damages award as a result of being found to infringe a patent is so high that it’s worth paying a perhaps substantial sum of money in order to extricate yourself from that lawsuit. When you scale that up to hundreds of companies, there’s quite a bit of money to be made.”

But Newegg, the online marketplace for all things technical and geek, decided it was not playing with by the patent troll’s rules. It refused to settle anf said the patent has almost nothing to do with the kind of encryption it uses, deciding to take its case to court.

The Battle

Things didn’t start out so well for Newegg when it decided to battle back its patent troll.

It lost.

Well, the first time out, in 2013 anyway, when a jury found for TQP and ordered Newegg to pay $2.3 million for infringement. But that loss was more an opening shot — Newegg fought back and won the lawsuit on post-trial motions. Jury trials are particularly difficult in infringement cases because technical issues abound. However, it was ultimately determined by U.S. District Judge Rodney Gilstrap that because the company’s encryption scheme didn’t change “key values” with each block of data, it couldn’t possibly fit into the description of the Jones patent.

But patent trolls don’t get to be who they are by going down without a fight — and so the case was appealed to a three-judge panel of the U.S. Court of Appeals for the Federal Circuit early last month.

And the drama, it seems, ends there.

Yesterday, the three-judge panel found in Newegg’s favor. They offered no official explanation of their ruling — and though TQP could theoretically still appeal to the full Federal Circuit or to the Supreme Court, it seems that is unlikely. Most experts think there is no legal issue in the case that would merit further hearing.

The win this time around will not invalidate the TQP patent — but it expired in 2011 anyway, and no new suits have come in since 2014, when Spangenberg sold it out.

“Newegg’s eCommerce encryption systems never infringed on TQP’s patent, which is directed to outdated modem technology from the 1980s,” Newegg lawyer Dan Brean told Ars Technica via email. “The differences are clear and fundamental in terms of how and when data is encrypted and transmitted. That is why Judge Gilstrap entered judgment in Newegg’s favor despite the jury’s verdict, and the Federal Circuit has now affirmed that judgment.”

“I’m glad that this is finally over,” added Newegg lawyer Kent Baldauf. “We have lived with this a long time as it was filed in 2011. This patent troll case was particularly troubling as it not only involved an antiquated technology that has never been used by modern Internet retailers such as Newegg, but it was also asserted to cover the foundational developments of luminaries in the field of encryption such as Ron Rivest and Whit [Whitfield] Diffie. We are thankful that Newegg once again stood up to a patent troll and refused to settle based upon a patent that it did not infringe.”

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