Tuesday, December 3, 2013

The TQP Patent

One of the things I do is witness work in patent litigations. Often, it's defending companies against patent trolls. One of the patents  is owned by a company called TQP Development. The patent owner claims that it covers SSL and RC4, which it does not. The patent owner claims that the patent is novel, which it is not. Despite this, TQP has managed to make $45 million off the patent, almost entirely as a result of private settlements. One company, Newegg, fought and lost -- although they're planning to appeal. The story is here.

Jury: Newegg infringes Spangenberg patent, must pay $2.3 million

Historic Harrison County Courthouse. Marshall, Texas.
Joe Mullin
Newegg, an online retailer that has made a name for itself fighting the non-practicing patent holders sometimes called "patent trolls," sits on the losing end of a lawsuit tonight. An eight-person jury returned to court shortly after 7:00pm and found that the company infringed all four asserted claims of a patent owned by TQP Development, a company owned by patent enforcement expert Erich Spangenberg.
The jury also found that the patent was valid, apparently rejecting arguments by famed cryptographer Whitfield Diffie. Diffie took the stand on Friday to argue on behalf of Newegg and against the patent.
In total, the jury ordered Newegg to pay $2.3 million, a bit less than half of the $5.1 million TQP's damage expert suggested.
Deliberations immediately followed closing arguments and lasted just over three hours. The lawyers from both teams took in the verdict without emotion and shook hands following the verdict.
TQP's single patent is tied to a failed modem business run by Michael Jones, formerly president of Telequip. TQP has acquired more than $45 million in patent licensing fees by getting settlements from a total of 139 companies since TQP argues that its patent covers SSL or TLS combined with the RC4 cipher, a common Internet security system used by retailers like Newegg.
I asked Jones if he had anything to share on the verdict. "I feel fortunate to live in a country with a judicial system like this where a jury can decide these things," he said.
With that, both sides left the courtroom and walked into Marshall's central square. The weather had shifted dramatically since the beginning of trial, and it was cold and rainy.
The Newegg team was obviously crestfallen. But Newegg Chief Legal Officer Lee Cheng—who has said he will appeal any loss at this trial—made a point of congratulating the inventor after the verdict. "Congratulations, Mr. Jones," he said. Cheng then added with a smile: "Get your money up front."

Three-hour wait

There were several quiet periods during the wait for a verdict. Immediately after closing arguments, lawyers from both sides shook hands and congratulated each other on a case well argued. Cheng and Spangenberg, who had not met in person before this trial, spoke quietly for several minutes at that point. Both appeared friendly.

Outside in the rain, I spoke briefly to Spangenberg. The patent expert apparently read some earlier Ars coverage. "Did I really say I didn't think he [Cheng] was very smart?" (I assured him he had, as I had double-checked my notes.) That interview had come during a tense period of the litigation back in August.
"I must have been in a bad mood that day," said Spangenberg. "I do think he's a smart guy—he went to Harvard and Berkeley—and I think he's a nice guy."
Spangenberg had to leave town for other business, as did lead TQP lawyer Marc Fenster. Neither were immediately available for further comment on the verdict.
The wait dragged on. As 6:00pm neared, US District Judge Rodney Gilstrap came out, dressed simply in a blue shirt without his black robe, and spoke to the parties. "Well, what do y'all think? Will we get a verdict tonight?" he asked. Yes, most people thought so. The talk turned to football, what the parties thought of Marshall, and additional small talk. "However it turns out, I hope both sides feel like you got a fair trial," said Gilstrap. Lawyers on both sides nodded dutifully.
At 7:15pm, the judge told the assembled lawyers that he would give the jurors until 7:30pm, and then he might ask if they wanted to come back the following morning. Courthouse security and staff were surely eager to go home. But several minutes later, he got word from his clerk that a verdict had been reached.

Leaving town

After the verdict, back at their hotel on the edge of town, Cheng and his team were packing their things and preparing to drive to Dallas. He sat down with me in the lobby.
"We're certainly very disappointed," said Cheng. "We respectfully disagree with the verdict that the jury reached tonight. We fully intend, as we did in the Soverain case, to take this case up on appeal and vindicate our rights."
Soverain was the "shopping cart" patent that Newegg was ordered to pay $2.5 million for, but the company then knocked it out on appeal. Soverain's damage request from Newegg had been huge: $34 million.
All Newegg cases are budgeted for appeal from the start, Cheng said. Appellate lawyer Ed Reines, who represented Newegg in its other two patent appeal wins, had been present in the courtroom for much of the TQP trial.
"Of course, we would have preferred to go up as the respondent," Cheng said. "But I'm not going to be upset or unduly disappointed about this. Our team did the best work we could do. We did what we felt in our hearts was right... Look, I could have lost my job if Soverain had won. $34 million is material to Newegg. I could have taken the path of least resistance. I could have said, 'Everyone else did the same thing, so we're no worse off than anyone else.' But we couldn't afford to pay people off the way some of our competitors were paying. We had to do something different. And it's the right thing to do."
"This was a pivotal case that we could not settle," Cheng added. "Mr. Spangenberg has sued us three times."
TQP has pending litigation against more than a dozen other companies. Google, LinkedIn, and Sony are all scheduled for trials in the same court in early 2014. The law firm that represents Google had various lawyers around throughout the Newegg trial to observe and take notes.
As Cheng talked with us, his other lawyers left. Diffie, Newegg's star witness and the co-inventor of public key cryptography, was riding with Cheng and waited for him. His packed bags sat next to him as he worked on his Mac laptop in the hotel lobby. I asked how he was feeling.
"Distressed," he said. "I was hoping to be rid of this business."
With that, he followed Cheng into the parking lot. They began the long journey, first to Dallas and ultimately back to California.

The U.S. Patent System is supposed to represent a bargain between inventors and the public. In theory, it is simple: in exchange for dedicating a novel invention to society, along with a clear explanation of how to practice that invention, a patent applicant gets a 20-year monopoly.
But, lately, we’ve watched as the system appears to fall apart, harming innovation, the very thing it was designed to foster. Many factors contribute to the problems we’ve seen with the patent system, but perhaps none so much as the rise of the patent troll. To be sure, the patent troll problem is not a new one (remember the infamous RIM v NTP case?), but recently, we’ve followed a troubling new trend: more and more small developers and companies targeted by trolls.

What is a patent troll?

A patent troll uses patents as legal weapons, instead of actually creating any new products or coming up with new ideas. Instead, trolls are in the business of litigation (or even just threatening litigation). They often buy up patents cheaply from companies down on their luck who are looking to monetize what resources they have left, such as patents. Unfortunately, the Patent Office has a habit of issuing patents for ideas that are neither new nor revolutionary, and these patents can be very broad, covering everyday or commonsense types of computing – things that should never have been patented in the first place. Armed with these overbroad and vague patents, the troll will then send out threatening letters to those they argue infringe their patent(s).  These letters threaten legal action unless the alleged infringer agrees to pay a licensing fee, which can often range to the tens of thousands or even hundreds of thousands of dollars.
Many who receive infringement letters will choose to pay the licensing fee, even if they believe the patent is bogus or their product did not infringe. That’s because patent litigation is extremely expensive — often millions of dollars  per suit — and can take years of court battles. It’s faster and easier for companies to settle.


In particular, we’ve watched with dismay  as Lodsys, a company that neither makes nor sells a product, targets small app developers, claiming the use of in-app purchasing technology (usually provided by Apple or Google) infringes Lodsys’ patents.
It’s impossible to know how many app developers Lodsys has actually threatened, but we do know that it has sued at least 11. Apple has moved to intervene in that suit, claiming that the license it took from the patents’ former owner covers its app developer’s uses of that technology, and Google has filed a Notice of Reexamination with the Patent Office challenging the validity of Lodsys’ patents. But Apple’s and Google’s actions — while noteworthy — will take years to reach resolution. In the meantime, app developers are faced with an unenviable choice: either take a license from Lodsys or live with the fear that they could be the next party facing a lawsuit.

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