Newegg's 'Screw Patent Trolls!' Strategy Leads To Victory

from the standing-up-to-bullies dept

During CES, there was a panel discussion on patent trolling, and panelist Lee Cheng, Newegg’s top lawyer, made some strong statements about how the company had made the decision that it will never give in to patent trolls, because if it does, more will just come knocking. That strategy may be costly upfront, but it also may have just saved the public from paying a massive online shopping tax. Joe Mullin, once again, has the fantastic story concerning Newegg’s big victory over Soverain Software, who claimed that its patents (5,715,314, 5,909,492 and 7,272,639) covered basically any online shopping cart. As we noted back in 2010, Soverain was a pure patent troll which purchased the patents that had originally come from Open Market, and was suing everyone (with a ton of companies settling).

However, Newegg chose to fight it, and despite losing at the district court level (in East Texas, of course), the Appeals Court has invalidated all three patents. Incredibly, the East Texas court had refused to let Newegg make the argument that the patents were not valid.

At district court, the judge hadn’t even let those invalidity arguments go to the jury, stating there wasn’t “sufficient testimony” on obviousness, and that it would be “very confusing” to them.

That’s fairly incredible. The validity of a patent is a key issue in any patent trial, and for a judge to reject it even being brought up for being “too confusing” to a jury is astounding. Thankfully, the appeals court completely rejected not only that idea, but the patents as well — and it means that some other recent verdicts in favor of Soverain are now dead as well.

Mullin’s article also highlights some of the bogus nature of Soverain:

It’s all a sham. Court records show Soverain hasn’t made a sale—ever. The various voice mailboxes were all set up by Katherine Wolanyck, the former Latham & Watkins attorney who is a co-founder and partial owner of Soverain. And the impressive list of big corporate customers on its Web page? Those are deals struck with another company, more than a decade ago. That was OpenMarket, a software company that originally created these patents before going out of business in 2001. It sold its assets to a venture capital fund called divine interVentures, which in turn sold the OpenMarket patents to Soverain Software in 2003.

“Thank you for calling Soverain technical support,” says Wolanyck, if you press option 2. “If you are a current customer and have a tech support question, please call us at 1-888-884-4432, or e-mail us at support@soverain.com.” That number, like the “customer support” number on Soverain’s contact page, has been disconnected.

Mullin also includes a fantastic interview with Lee Cheng about why Newegg was willing to do this. It’s worth reading in full, but here’s just a snippet:

Patent trolling is based upon deficiencies in a critical but underdeveloped area of the law. The faster we drive these cases to verdict—and through appeal, and also get legislative reform on track—the faster our economy will be competitive in this critical area. We’re competing with other economies that are not burdened with this type of litigation. China doesn’t have this, South Korea doesn’t have this, Europe doesn’t have this.

Just in our experience, we’ve been hit by companies that claim to own the drop-down menu, or a search box, or Web navigation. In fact, I think there’s at least four that claim to ‘own’ some part of a search box.

It’s actually surprising how quickly people forget what Lemelson did. [referring to Jerome Lemelson, an infamous patent troll who used so-called “submarine patents” to make billions in licensing fees.] This activity is very similar. Trolls right now “submarine” as well. They use timing, like he used timing.

Then they pop up and say, “Hello, surprise! Give us your money or we will shut you down!” Screw them. Seriously, screw them. You can quote me on that.

Of course, once again, we wonder how companies like Amazon, who “settled” with Soverain, paying them tens of millions of dollars, feel about this. Why is it that the companies who settled over patents later declared invalid aren’t able to seek their money back? Seems only fair.

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Companies: newegg, soverain software

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Comments on “Newegg's 'Screw Patent Trolls!' Strategy Leads To Victory”

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54 Comments
Will Munny says:

“Why is it that the companies who settled over patents later declared invalid aren’t able to seek their money back? Seems only fair.”

No it isn’t. The companies who settled didn’t pay their lawyers to fight the bogus patent. Instead they paid to settled. Newegg paid it’s lawyers to fight. Each option has a cost. If certainly isn’t “fair” to have those too intellectually weak to fight this to ride on Newegg’s coattails post-victory and get their money back. That’s just letting someone else pay for your mistakes.

However, now that the patents are invalidated, there should be some mechanism to invalidate (going forward at least) a contract based on an invalid patent…. though I expect, if the troll’s lawyers were any good, the contract probably explicitly took that into account, so … those who settled and took what appeared to be easy way out shouldn’t be rewarded for their….. lack of …. we’ll call it “character”.

David Spira (profile) says:

Re: Troll Settlement Recouping

This isn’t about rewarding companies for settling by letting them get their money back if the patent is invalidated. It’s about killing the viability of the mass-lawsuit, quick settlement patent troll model.

These companies use patients like lotto tickets, and a lot of them “get lucky.” However if these trolls constantly have a axe hanging over their ill-gotten gains, they may think twice before trolling.

Will Munny says:

Re: Re: Troll Settlement Recouping

Oh, I agree with you. I’d love nothing more than smashing the patent trolls back to the stone-age minus their front teeth and ability to pro-create. But it’s still not entirely fair to take a weasel’s way out and then when someone else with bigger…, um, more, um, gumption comes along to whine about not getting the same deal they did.

That One Guy (profile) says:

Re: Re: Re: Troll Settlement Recouping

But that’s just it, the idea at that point isn’t to reward the ones who took the ‘easy’ way out, it’s to punish the trolls as much as possible, and make the ‘Make cash fast, just add extortion!’ model they use as unattractive as possible.

Send the settlement/extortion money the trolls got to the company that paid it or send it to charity or something like that, what matters is taking it back from the patent trolls, because if they get to keep all the money, then why would they care if they lost the ability to make money off of a particular set of bogus patents, they still managed to rake in millions with them, and all they have to do is switch to the next set of bogus patents, of which there is an endless supply.

Will Munny says:

Re: Re: Re:2 Troll Settlement Recouping

I agree. But the original statement was about the companies who settled getting their money back, not as a punishment to the patent troll but simply reversing their earlier bad decision to settle rather than fight. Settling fast and then waiting for someone else to do the dirty work isn’t fair to the one who did the right thing.

Punishing the patent troll is entirely different, and I like your idea about charity…. I’d like to see something like extracting gains from bogus parents forcibly. Of course the legal implications and unintended consequences of such a “law” are mind-numbing, but….it’s fun to wish for justice even if we’re unlikely to get it in this crazy world.

That One Guy (profile) says:

Re: Re: Re:3 Troll Settlement Recouping

Well if it was legally treated as what it is, fraud and extortion, (someone with a legal background correct me if I’m wrong here) isn’t it already legal to return the money/items back to the rightful owners?

Now, if it was treated like this, the money would have to go to the one who originally paid the extortionists, as otherwise you’d have judges deciding on a whim where millions of dollars were going, but that seems like a small price to pay to stomp out the trolls.

As a further idea, and assuming it was treated this way, perhaps have the defendant’s legal fees paid out from the money that’s to be returned, equally, which would provide incentives for those fighting the trolls.

Willton says:

Re: Re: Re:4 Troll Settlement Recouping

Now, if it was treated like this, the money would have to go to the one who originally paid the extortionists, as otherwise you’d have judges deciding on a whim where millions of dollars were going, but that seems like a small price to pay to stomp out the trolls.

As someone who used to work for a federal district court judge, I say this: fuck you, you don’t know what you’re talking about. Judges work very hard and do their very best in trying to decide the cases before them correctly. The very idea that judges decide cases based on whimsy is completely wrong and insulting.

That One Guy (profile) says:

Re: Re: Re:5 Troll Settlement Recouping

Not what I was saying, but I suppose it can understand why it might come across that way.

What I was trying to say is that, in a hypothetical system like the one that was described, where a judge was able to determine where the recouped money retrieved from a patent troll went, without guidelines that either mandated it go back to the original company, or specifically listed a set of charities that the money would be sent to, it would basically fall down to the judge as to which ‘charity’ the money was going to, hence the ‘on a whim’ bit, as I’m sure which charities were considered ‘more important’ would vary between judges.

Josh in CharlotteNC (profile) says:

Re: Re: Re:2 Troll Settlement Recouping

Send the settlement/extortion money the trolls got to the company that paid it or send it to charity or something like that, what matters is taking it back from the patent trolls,

All the money they won is gone, one way or another. Either it was paid to the lawyers and expenses for later cases, paid out to “investors” or has been funneled through many shell corporations and is effectively untraceable as far as the law is concerned. This is nothing new – whether it is for tax evasion, money laundering, or structuring expenses so studios don’t need to pay royalties, all you need are a few ethically lacking lawyers and accountants to hide money beyond the reach of retrieval.

BeaverJuicer (profile) says:

Re: Re: Troll Settlement Recouping

On the one hand, I’d love to see the troll sent back to zero revenue plus court costs…

But that gives incentive to the people the trolls go after to say “someone else will pony up for this one, and I’ll claim back after.”

I’d like to see the person who smashes the troll receive more incentive to fight, like being awarded costs plus punative…

Jun Zhang (user link) says:

Re: Re: Troll Settlement Recouping

Congressman Peter DeFazio (D-OR) introduced HR 6245, the bipartisan Saving High-tech Innovators from Egregious Legal Disputes (SHIELD) Act to protect American tech companies from frivolous patent lawsuits that cost jobs and resources. The SHIELD Act will put the financial burden on the patent trolls.

The SHIELD act will force patent trolls to take financial responsibility for their lawsuits by allowing defendants to recoup money spent to successfully defend themselves against frivolous lawsuits.

I just created a petition on whitehouse.gov to urge the Congress to pass this act. In order for the White House to respond to this petition we need collect 100,000 signatures (the threshold has been increased recently) in 30 days.

Following are the information for the petition:

Title: Pass the SHIELD Act to protect American technology companies from frivolous patent lawsuits

URL: http://wh.gov/V9O7

GMacGuffin says:

Re: Re:

“there should be some mechanism to invalidate (going forward at least) a contract based on an invalid patent”

Settlement agreements almost always have language releasing all claims known or unknown, and express waivers of issues/claims that might arise based on later-discovered facts. Designed to end it for good.

Contracts can sometimes be invalidated for fraud; but in settlement agreements, the facts were disputed in the first place, and the agreement likely would have indicated that. And … these guys did have a patent with a presumption of validity.

So for the folks who paid, trying to get out would be a just a costly exercise in windmill tilting. I hope someone tries anyway. I’d take that long-shot bet on principal.

Anonymous Coward says:

Re: Re:

I like how you call those companies “intellectually weak”, when it is the intellectually smart idea to settle for pennies instead of committing business suicide over fighting a battle that the company won’t benefit from once they have won.

No, this isn’t a case of someone being weak, or dumb, or feeble, it’s a case of Newegg being a bigger bite than this patent troll could chew.

John Fenderson (profile) says:

Re: Re: Re:

If a company can afford to fight a troll and doesn’t because it’s cheaper to pay the extortion price, they intellectually weak. I think that’s a fair characterization.

If a company cannot afford to fight a troll, then they are feeble. I forgive them for paying the extortion price, as the alternative is devastation, but they’re still feeble.

Every time a company pays a patent troll, they are damaging themselves in the long run, and everybody else in the short run. Paying a patent troll is an inherently selfish act.

DannyB (profile) says:

Re: Re:

If you settle a patent troll threat, be sure that the terms of your settlement have a clause for if the patents are found to be invalid in the future.

If you really believe your patents are valid, Mr. Patent Troll, then you should have no problem with that. If you won’t accept that as part of the settlement agreement, then you really don’t believe in the strength of your patents, and you are signalling to me that I should fight rather than settle.

Davey says:

Re: Re:

Exactly, Will. Amazon obviously doesn’t have any principles to adhere to (it being something of a patent troll itself). So let it pay for its totally selfish participation in the kind of scams that will eventually bring down the systems it depends on.

I wonder if law enforcement has ever audited these E Texas judges’ finances? By now they must have many millions stashed away from “supporters” grateful for their supernatural level of reptilian ignorance.

Brett says:

Re: Re: Audit this stinkin' judges and the whole corrupt system

This has to go deeper than one “tough”, jerk judge. Audit the judge, audit the town officials. How is this judge, the town officials, people of Marshal TX, county they’re in benefiting directly, sideways, or more insidious ways. Is the judge elected or appointed? Who the hell is running this corrupt, racketeering ring?

The whole thing stinks of conspiracy, fraud and corruption.

SkUrRiEr (profile) says:

Re: Re:

Maybe it should be written into law that contracts based on patents must, through some mechanism, grant the people involved the right to sue for some compensation over invalidated patents. – of course the trolls will inevitably find a way around this, but it’s a start.

So this way if Company A pays up, then Company B fights and wins and the patents are declared invalid, Company A has grounds to sue the troll for compensation. Of course they’ll never get back the full amount they paid up as they’ll have to shell out some cash for lawyers and stuff, but in the end it’ll be another cost for the troll.

David Spira (profile) says:

Re: Why - why not

Or they don’t have the money to fight.

When you defend yourself in court, you have to have the cash to pay for an attorney who can win. Usually not cheap.

Then you have to pay for the appeal. It’s inevitable.

If you lose, you’re then on the hook for the loss as well. This is a deep pockets game.

Lastly if you cut corners and bring anyone but the best attorney to court, you’re going to lose at create more case-law that favors the patent trolls.

This stuff is a lot more murky than you’re making it sound.

Richard (profile) says:

Re: Re: Re:2 Why - why not

I think you have to think through to the endgame of this. It is true that for a while there might be a deluge of litigation and possibly some collateral damage but after that it would be like the ending of “For a Few Dollars More” with all the patent trolls lying dead in a cart!

In the long run it is basically a huge disincentive to the filing (and more especially the enforcement) of bad patents!

That One Guy (profile) says:

At district court, the judge hadn’t even let those invalidity arguments go to the jury, stating there wasn’t “sufficient testimony” on obviousness, and that it would be “very confusing” to them.

Translation: ‘If the jury is provided with actual, relevant information, they might end up making a decision contrary to the verdict I’ve already decided on.’

kyle clements (profile) says:

nice

This story makes me feel good about the PC sitting on my desk that was built from parts ordered entirely through NewEgg.

Every time you roll over and let a troll win, you provide incentive for that troll to continue trolling, and more people will be exploited.

In my opinion, money spent doing good like this does more to advertise for NewEgg than money spent on advertising would.

TheBuzzSaw (profile) says:

Why is "old technique but on a computer" patentable?

I’ll never understand this concept. If anyone deserves royalties/patents on the matter, it is whoever invented the original physical shopping cart. The concept is very simple: a container that queues items up for purchase all at once at a future time. It is very obvious to take that concept and apply it to online purchases. How were these patents granted in the first place? Because it was done “on the Internet”? The concept is still the same. From what I gather, the patents simply cover a particular style of implementation.

This is why patents are stupid.

etrimby says:

Check out the interview he did with Ars.

I actually Like their lawyer

“We basically took a look at this situation and said, ‘This is bullshit,'” said Cheng in an interview with Ars. “We saw that if we paid off this patent holder, we’d have to pay off every patent holder this same amount. This is the first case we took all the way to trial. And now, nobody has to pay Soverain jack squat for these patents.”

And his philosophy

Newegg is unique in its willingness to take on patent troll cases and fight them through trial. The company won’t hire law firms that take on patent troll cases, and its top lawyer, Lee Cheng, is vocal about his view that others should take the same approach.

Gwiz (profile) says:

Of course, once again, we wonder how companies like Amazon, who “settled” with Soverain, paying them tens of millions of dollars, feel about this. Why is it that the companies who settled over patents later declared invalid aren’t able to seek their money back? Seems only fair.

Why is that the case? Is there something in the settlements preventing them from going back and suing to get their money back?

It seems to me that a patent being declared invalid would invalidate the prior settlements concerning that patent also. Is it because both sides agreed voluntarily to the settlement and the issue is declared legally “resolved” at that point or what?

Anonymous Coward says:

been buying from this scrappy little upstart called newegg since it’s inception.. now with actions like this, makes me feel good that the money I have given them all these years goes for something good.
Newegg; great company, awesome tech support, customer service, and prices.
Newegg.com – patent troll beat down specialists ๐Ÿ™‚

Anonymous Coward says:

Good job newegg!

I really respect their decision to fight this and the outcome couldn’t have been better. It almost makes me want to start using them to buy my electronics again…..then I remember that I’ve spent over 100k with them since 2003 (running a computer repair shop) and watched as their prices have gone from $10-20 less than the competition to $10-20 more and their return policy went from “best in the business” to nonexistent.

So good on you Newegg, I still won’t be sending you money though ๐Ÿ™

Some Other AC (profile) says:

Just a funny little point for this shady ass organization. Digging around the Soverain site, I found a link to a PDF about Patent Validity(Patent Valid and Infringed). The PDF it links to only shows the East Texas Ruling, but mentions nothing about the Appeals court overturning and invalidating these patents.
http://www.soverain.com/pdf/patents_found_valid_and_infringed.pdf
As in most cases, trolls(or those who exhibit trollish behavior) never learn.

Some Other AC (profile) says:

Re: Re:

Here is some more funny…listing of the Patents they own, applied for, purchases, etc…

Soverain Software currently owns a portfolio of more than 50 issued and pending U.S. and international patents. Many of these patents resulted from Open Market?s pioneering research and development, and date back to applications filed in the 1993-1995 timeframe.

Among the technologies addressed by this portfolio are:

Internet-based systems for making secure payments
Online purchasing methodologies
Online shopping cart system
Online advertising creation and product fulfillment
Online customer service
Hypertext-based linking and authentication
Multi-merchant/-site transaction processing and order fulfillment
Session management in the stateless environment of the Internet
Mapping telephone numbers to URLs – Doesn’t Apple have this one in the bag already???

Anonymous Coward says:

If a big company like Amazon settled and paid money to license a patent which is later invalidated why should they get their money back. They settled and lost their right to fight, now if Amazon wants to pay a portion of Neweggs legal costs that would be a different story.
Amazon paid and has now lost out on the win. Look at what happened to RIM.

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