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.


Reader Comments (rss)

(Flattened / Threaded)

  •  
    identicon
    anonymouse, Nov 22nd, 2013 @ 12:48pm

    And...

    What happens to all of those people that have paid so much money to the troll, can they now get there money back can they sue for false patent claims etc...

     

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      identicon
      alternatives(), Nov 22nd, 2013 @ 1:19pm

      Re: And...

      they sue for false patent claims

      Their settlement agreements prevent them, odds are. But if you the citizen think a crime has been committed or a rule of the ABA has been committed nothing stopping a bar grievence or use Texas statues that allow for a citizens arrest.

      Consider:
      Walk into the courtroom and when one of 'em commits perjury stand up, ask the bailiff to arrest that person for perjury. When the judge says no, then you declare a citizens arrest and remand the custody to the bailiff.

       

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    •  
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      Anonymous Coward, Nov 22nd, 2013 @ 1:28pm

      Re: And...

      under US law and precedent those individuals have to cop it sweet. Patent trolling is legalized extortion. Obtaning money via legal menace.

       

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    •  
      identicon
      Anonymous Coward, Nov 22nd, 2013 @ 6:07pm

      Re: And...

      Odds are very, very good that Spangenberg will drop the case, rather than taking it all the way to trial.

      The second part of NewEgg's defense is aimed directly at invalidating the patent; if NewEgg can adequately show that there was existing prior art for the concepts covered by the patent, the patent will get thrown out. Rather than risk this, Spangenberg will almost certainly attempt to settle and/or dismiss his case. If the patent is nullified, he can't sue anybody else; if it doesn't go to trial, it remains on the books and he can use it to sue other people.

      Either way, the companies listed in the article all settled rather than fighting the patent in court. Unless they can prove fraud (which seems unlikely), they're SOL.

       

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        BernardoVerda (profile), Nov 23rd, 2013 @ 10:18am

        Re: Re: And...

        Isn't the most likely decision that NewEgg isn't infringing, therefore the question of the patent's validity would be moot?

        And wouldn't that then leave this troll in position of still being able to wield it against relatively small defendants who can't afford to fight the thing in court?
        (And also against defendants who aren't privately owned, and thus have a harder time justifying the inherent risk?)

         

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          c1398399 (profile), Nov 23rd, 2013 @ 10:31am

          Re: Re: Re: And...

          I wonder what encryption method one might use rather than RC4? What is the default setting, and does it make the security worse if they used it?

          I'm hoping that Newegg not only prevails, but has the patent invalidated.

           

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          Anonymous Coward, Nov 25th, 2013 @ 5:38am

          Re: Re: Re: And...

          The patent has expired hasn't it?

           

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    •  
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      c1398399 (profile), Nov 23rd, 2013 @ 9:30am

      Re: And...

      There is almost certainly a clause in the agreement that whatever happens to the patent in the future, they company is bound to the payments they agreed upon. I suppose if they could show fraud there might be a way to annull it, but generally your stuck.

      IANAL of course.

       

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    OldGeezer (profile), Nov 22nd, 2013 @ 12:50pm

    NewEgg has the right idea. Sure, a couple of fights against the trolls individually cost more than settlements, but in the schoolyard all you have to do is kick a couple of the bullies asses for the rest of them to leave you alone. I am proud to be a loyal NewEgg customer and have spent many thousands of dollars with them. About the only time I buy from anyone else is for something that they do not carry.

     

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    •  
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      Deranged Poster (profile), Nov 22nd, 2013 @ 2:23pm

      Re:

      I'm looking at building a new computer, it looks like I know who's getting my money.

       

      reply to this | link to this | view in chronology ]

      •  
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        OldGeezer (profile), Nov 22nd, 2013 @ 6:02pm

        Re: Re:

        I highly reccomend them. You will rarely find a lower price for anything they sell. They run specials all the time that no one can touch. You can also be sure that they won't pawn off some refurbished product as new. I received a gift card for Amazon from my sister and I bought a hard drive that was supposed to be new. Turns our it had 6,000 hours on it and several bad sectors. I had to threaten to report him to get it replaced. He still wanted me to pay shipping! NewEgg's 30 day return policy is great. No questions asked and free shipping for refund or replacement. They will sometimes cross-ship product. If you bought it on sale they will apply the same discount if you want to reorder and refund you when they get your return. They will do anything they can to please you. I had a manufacturer take too long to send me a mail in rebate and they issued me a credit code for twice the amount.

         

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        eaving (profile), Nov 23rd, 2013 @ 3:35am

        Re: Re:

        Additionally their customer service is brilliant. I purchased some ram that turned out to be bad. It was an Xmas gift and life was busy so I didn't figure out it was shot until after the 30 day return policy. They could happily have told me to spin on it. Instead saw I had a good order history with them and simply wanted to exchange, took care of my problem straight away.
        Before you go to build your system sign up for their email blasts. You will get an annoying amount of offers from them, but there will be some good deals mixed in and they are good at quitting with the mail once you ask to be removed.

         

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        •  
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          OldGeezer (profile), Nov 23rd, 2013 @ 7:41am

          Re: Re: Re:

          This has been my experience with them too. They will often bend the rules for you just about any time you can give them a decent reason.
          I appreciate that you speak to representatives that English is their first language. (I cringe any time I call a support number and it is answered by someone with a barely understandable Indian accent.)
          I also agree with you about the emails. You will average 2 or 3 a day but sometimes they have some really great sales and are worth checking out. Bookmark their Shell Shocker page and click it regularly.
          http://www.newegg.com/special/shellshocker.aspx

           

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  • This comment has been flagged by the community. Click here to show it
     
    identicon
    out_of_the_blue, Nov 22nd, 2013 @ 12:51pm

    No transfer of patents, especially not to corporations, would stop this cold.

    Dead simple, utterly fair, no room for lawyer tricks, Populist and do-able. -- But does Mike endorse it? -- Apparently not from his four academic weenie tweaks an AC directed me to last time I suggested. You cannot fix fundamental problems of The Rich using the leverage of money to get yet more unearned income by tweaking existing systems. We must return to reviling The Rich and setting the gov't on them at every opportunity (as done in the New Deal); otherwise, they just continue to accumulate mere money by wrecking civilization for the rest of us.

     

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      identicon
      Anonymous Coward, Nov 22nd, 2013 @ 1:03pm

      Re: No transfer of patents, especially not to corporations, would stop this cold.

      Your solution accomplishes nothing.

       

      reply to this | link to this | view in chronology ]

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      identicon
      JEDIDIAH, Nov 22nd, 2013 @ 1:08pm

      Re: No transfer of patents, especially not to corporations, would stop this cold.

      This isn't about who owns a bad patent. This isn't about who sues over a bad patent. This is about bad patents that never should have been granted in the first place.

      Making a bad patent non-transferable would not stop this nonsense. It would only alter the terms of the arrangement.

       

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    •  
      identicon
      Anonymous Coward, Nov 22nd, 2013 @ 1:11pm

      Re: No transfer of patents, especially not to corporations, would stop this cold.

      Non-Transfer is the dumbest idea I have ever heard from you.

      Some guy invents and patents something awesome, but he is broke and can not afford to build a factory to make it.

      Currently the inventor would find a corporation capable of making the product and sell the patent to them repeaing the inventor a nice fat check.

      If he is not allowed to do that he might as well just wipe his ass with the patent and flush it down the toilet, at least it would get some benefit from it that way.

       

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        John Fenderson (profile), Nov 22nd, 2013 @ 1:53pm

        Re: Re: No transfer of patents, especially not to corporations, would stop this cold.

        Not really. He could grant an exclusive, perpetual license to said corporation.

         

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    •  
      identicon
      Anonymous Coward, Nov 22nd, 2013 @ 1:13pm

      Re: No transfer of patents, especially not to corporations, would stop this cold.

      No patents is an even simpler answer, and unlike your proposal would solve the problem.

       

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    •  
      identicon
      Anonymous Coward, Nov 23rd, 2013 @ 7:26am

      Re: No transfer of patents, especially not to corporations, would stop this cold.

      It's not the rich that are making your life miserable, blue, it's you.

       

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  •  
    identicon
    Anonymous Coward, Nov 22nd, 2013 @ 12:57pm

    Spangenberg seems to think that is relevant to state to everyone that he was bullied as a kid because of his physical short height.

    He pressed all the right buttons, "the underdog", "the poor bullied kid" trying to justify why eighty percent of all the companies he contacted were through aggressive litigation of the type "settle or else".

    This is not your normal troll, he appears to be a believer in what he is doing, this is the dangerous type and he is not dumb as some other John's out there.

    Still hope that Newegg's council can show a layman jury how full of shite this person is.

     

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      identicon
      Bully to You, Nov 22nd, 2013 @ 3:51pm

      Turnabout is fair play

      He says he was bullied as a kid, so for him it is now okay for him to bully others. If he has kids himself, I pity those poor buggers.

       

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  •  
    identicon
    Anonymous Coward, Nov 22nd, 2013 @ 12:58pm

    Welcome to another episode of "Let shake down innovative companies!" with your host Erich Spangenberg!

    Who are we stealing from today Erich!?

     

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  •  
    identicon
    Anonymous Coward, Nov 22nd, 2013 @ 3:46pm

    I can't imagine the insanity of our current system where you can pay to claim the right to have invented something.


    NO, YOU STOLE THE INVENTION THAT I PAID SOMEONE TO SAY THAT I MADE, THINK OF ALL THE HONEST WORK SOMEONE ELSE DID FOR ME

     

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    identicon
    different name today, Nov 22nd, 2013 @ 5:32pm

    A million bucks

    I have to say that a million dollars would buy a whole lot of lawyer time for IBM, I would guess they looked closely at the patent and realized that YES, it could include the activities they are involved in, and the potential liability is huge, so paying a million and getting away from it is many times better than taking the risk.

    They wouldn't pay if the patent was CLEARLY not about the process in use. Their payouts can tell you that these companies did feel that there was at lease some merit in the case, and the risk / reward on finding out was too high for them to take a chance.

     

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  •  
    identicon
    Anonymous Coward, Nov 23rd, 2013 @ 4:17pm

    Time to file a suit against plaintiff after the case is thrown out, to recoup all defendants litigation fees, recoup damages to defendants reputation caused by the filing of this frivolous lawsuit, and above all else have plaintiff disbarred from practicing law in the United States.

     

    reply to this | link to this | view in chronology ]


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