Newegg Battles World's Most Litigious Patent Troll Over Bogus Claims Of 'Inventing' E-Commerce Encryption

from the good-luck,-newegg dept

Joe Mullin is down in an East Texas court room, covering all the details of a key patent lawsuit, pitting the world's most litigious patent troll, Erich Spangenberg, against well-known electronics retailer, Newegg, a company that has vowed never to settle with patent trolls -- a strategy that has been quite successful so far. Spangenberg is infamous for his "sue first, license later" approach to patent trolling, but the details revealed during the lawsuit show how profitable it is. Spangenberg has sued a ton of companies over this very patent -- with nearly all of them settling for much less than it would cost to fight a patent suit in court (fighting is estimated to cost upwards of $1 to $2 million). Nearly all the settlements are for much less:
Target had a website; Target got sued by TQP. It got out of the case by paying $40,000.

Some paid less than that—but most paid more.

Dodge & Cox, a mutual fund, paid a bit more than $25,000. Pentagon Credit Union paid $65,000. QVC paid $75,000. MLB Advanced Media paid $85,000. PetSmart paid $150,000. PMC paid $400,000. Cigna paid $425,000. Bank of America paid $450,000. First National paid $450,000. Visa paid $500,000. Amazon, Newegg's much larger competitor, paid $500,000. UPS paid $525,000.

IBM paid $750,000. Allianz Insurance paid $950,000. Microsoft paid $1,000,000.
All in all, Spangenberg has squeezed $45.37 million out of licenses for this one patent, which almost certainly does not actually cover the encryption used in online shopping, as Spangenberg claims. Oh yeah: Spangenberg's deal with the original inventor of the patent? The inventor gets 2.5% of the money, plus $350/hour for consulting. End result? He's made $588,000, while Spangenberg keeps the rest -- all on a patent he bought for about $750,000.

And, yes, the patent (which has since expired) is highly questionable in the first place. While Spangenberg's lawyers (representing his shell company called TQP) tried to claim that the inventor, Michael Jones, was some sort of visionary genius who predicted the world of e-commerce, there's no actual evidence to support this. Newegg (thankfully) has famed cryptography expert Whitfield Diffie on hand to call bullshit on the claims that Jones (a) invented anything special or (b) that his invention is even remotely in use on e-commerce sites today. Diffie, of course, is one of the inventors of public key cryptography, which happened prior to Jones' invention, and is what is actually used online.
Jurors got a short dose of the conventional historical record when Newegg lawyer Kent Baldauf gave them a preview of Diffie's testimony. "It's Dr. Diffie's invention that allows credit cards to be encrypted today," explained Kent Baldauf. "He's the one that figured out how you could send information to some remote server that you've never had any contact with before without these keys somehow being pre-set and pre-arranged in a closed system."

Baldauf also raised the basic themes of Newegg's defenses. The patent described symmetric cryptography—two hard-coded modems talking to each other. It wasn't that different in theory than the code books that have been exchanged since ancient times. It had nothing to do with public key cryptography that kept Internet data safe; Newegg therefore does not infringe, he argued.

To boot, to the extent Jones is an inventor at all, he isn't the first. The RC4 cipher was designed two years before Jones' patent filing and was combined with Lotus Notes by Ron Rivest of RSA Security.
Of course, with a patent jury trial in East Texas, you never now how things are going to turn out. But, this case is at least interesting in helping to open the books on how patent trolling works -- getting tons of companies to pay up on questionable patents by offering "settlement" rates below what a lawsuit would cost, even if the patent is totally bogus. And, kudos, once again, to Newegg for fighting this. It could have easily settled like all those other companies, but is fighting this one out on principle -- and in the hope that it will stop the next patent troll from doing the shakedown game.

Filed Under: e-commerce, encryption, erich spangenberg, michael jones, patents, whitfield diffie
Companies: newegg, tqp

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