The online retailer Newegg has lost a patent case centering on Web encryption, after a Texas jury rejected its argument that a claim from the company TQP Development was invalid. The jury ordered Newegg to pay $2.3 million — less than half the damages TQP had sought.
The result is a resounding victory for TQP, widely seen as a "nonpracticing entity" whose sole source of income is settlements and legal fees related to its patents. Retailers and others often term such firms "patent trolls," as NPR reported this summer.
The verdict could also send a chill through other companies that might consider fighting TQP's claims, particularly because Newegg is seen as a consistent opponent of patent trolls. The patent in question relates to a common method of securing customers' privacy in online banking and commerce.
TQP has previously wielded the patent, which it acquired in 2006, to extract more than $40 million in settlements from Microsoft, Amazon, and scores of other companies. Newegg says it will appeal the verdict, which followed several cryptography experts' testimony on its behalf.
One of those experts was a pioneer in public cryptography, Whitfield Diffie, who on Friday generated one of the trial's most memorable exchanges. It was highlighted by Ars Technica, which has followed Newegg's crusade to fight patent trolls.
The speakers quoted below are Newegg attorney Alan Albright and Diffie:
"We've heard a good bit in this courtroom about public key encryption," said Albright. "Are you familiar with that?"
"Yes, I am," said Diffie, in what surely qualified as the biggest understatement of the trial.
"And how is it that you're familiar with public key encryption?"
"I invented it."
Diffie went on to say that the patent belonging to TQP wasn't valid, as it dealt with an established methods of encoding information — in the case of the patent, over a modem.
Testimony in the patent case has traced milestones in cryptography, as each side sought to portray the evolution of Web encryption. Key topics range from a cipher that was included in early Lotus Notes software to work on encryption performed in the 1960s and '70s by employees at Britain's intelligence agency, GCHQ.
Under questioning from TQP lawyer Marc Fenster that Ars Technica described as "a stunning attack," Diffie acknowledged that the work of Britain's spy agency covered some of the same terrain as his own ideas. He also discussed the nuances involved in recognizing breakthroughs in cryptography, particularly among researchers whose goals are markedly different.
Newegg rested its case after Diffie's testimony without calling a witness to comment on the question of potential damages, a move that suggests the retailer was confident of its chances of winning.
As for the patent being enforced by TQP, the GigaOm website explains the background:
"U.S. Patent 5412730 (the '730 patent) was filed in 1992... and granted in 1995 to one Michael Jones, at the time of a company called Telequip. It now belongs to TQP Development, an outfit established by Erich Spangenberg for the sole purpose of extracting cash from companies that allegedly infringe on its claims. Such outfits are officially known as 'non-practicing entities' and unofficially as 'trolls'."
"We respectfully disagree with the verdict that the jury reached tonight," Newegg Chief Legal Officer Lee Cheng tells Ars Technica. "We fully intend, as we did in the Soverain case, to take this case up on appeal and vindicate our rights."
Newegg has taken a hard-line stance against "patent trolls," refusing to pay settlement fees to avoid legal action. In a previous case, the electronics and computer retailer won an appeal against Soverain, another patent troll that had won millions in settlements from dozens of companies.
In that case, Soverain had insisted it held a patent for e-tail shopping carts. After an initial ruling ordering the retail to pay $2.5 million to Soverain, Newegg won an appeal — in part by introducing as evidence "a magazine ad from CompuServe bragging about an electronic mall" dating from 1984, as Daily Tech reported in January.