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How Newegg crushed a patent troll and saved online retail
My heroes! I always liked NewEgg, but really, this just makes me like them even more.
Anyone who visited Soverain Software's website could be forgiven for believing it's a real company. There are separate pages for "products," "services," and "solutions." There's the "About Us" page. There are phone numbers and e-mail addresses for sales and tech support. There's even a login page for customers.
“We basically took a look at this situation and said, ‘This is bullshit.’â€
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 Wolanyk, 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 webpage? Those are deals struck with another company, more than a decade ago. That was OpenMarket, a software company that 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 Wolanyk, 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.
Soverain isn't in the e-commerce business; it's in the higher-margin business of filing patent lawsuits against e-commerce companies. And it has been quite successful until now. The company's plan to extract a patent tax of about one percent of revenue from a huge swath of online retailers was snuffed out last week by Newegg and its lawyers, who won an appeal ruling [PDF] that invalidates the three patents Soverain used to spark a vast patent war.
The ruling effectively shuts down dozens of the lawsuits Soverain filed last year against Nordstrom's, Macy's, Home Depot, RadioShack, Kohl's, and many others (see our chart on page 2). All of them did nothing more than provide shoppers with basic online checkout technology. Soverain used two patents, numbers 5,715,314 and 5,909,492, to claim ownership of the "shopping carts" commonly used in online stores. In some cases, it wielded a third patent, No. 7,272,639.
Soverain will lose the $2.5 million it stood to gain from Newegg, as well as two much bigger verdicts it won against Victoria's Secret and Avon. Those two companies were ordered to pay a total of almost $18 million, plus a "running royalty" of about one percent, after a 2011 trial. The ruling in the Newegg case is a total wipeout for a patent troll that had squeezed many millions from online retailers, was backed by big-firm lawyers, and was determined to collect hundreds of millions more.
For Newegg's Chief Legal Officer Lee Cheng, it's a huge validation of the strategy the company decided to pursue back in 2007: not to settle with patent trolls. Ever.
"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."
...lots more...
Ars: Why is Newegg able to pursue this strategy where other companies feel they shouldn't or can't?
We're majority-controlled by an extremely principled guy, our founder [Newegg CEO Fred Chang]. We have always been willing to sacrifice tactical gain for strategic success. We're successful because, since 2001, we have taken really good care of our customers.
Also, a lot of our systems are homegrown. Our CTO [James Wu, who testified at trial] wrote this code from complete scratch, without knowing about these patents, or anybody else's. His approach to coding is different. In the Soverain case in particular, it gave us a tremendous advantage in being to explain that we didn't infringe. Our shopping cart is architected differently.
And we'll take a case through trial as a matter of principle because we want to accomplish the purpose of making good law. Like eBay did, like Quanta did when they challenged LG. It's part of our duty as a good corporate citizen to try to accelerate the rationalization of patent law.
Ars: Why is this an important cause to you?
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.
Anyone who visited Soverain Software's website could be forgiven for believing it's a real company. There are separate pages for "products," "services," and "solutions." There's the "About Us" page. There are phone numbers and e-mail addresses for sales and tech support. There's even a login page for customers.
“We basically took a look at this situation and said, ‘This is bullshit.’â€
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 Wolanyk, 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 webpage? Those are deals struck with another company, more than a decade ago. That was OpenMarket, a software company that 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 Wolanyk, 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.
Soverain isn't in the e-commerce business; it's in the higher-margin business of filing patent lawsuits against e-commerce companies. And it has been quite successful until now. The company's plan to extract a patent tax of about one percent of revenue from a huge swath of online retailers was snuffed out last week by Newegg and its lawyers, who won an appeal ruling [PDF] that invalidates the three patents Soverain used to spark a vast patent war.
The ruling effectively shuts down dozens of the lawsuits Soverain filed last year against Nordstrom's, Macy's, Home Depot, RadioShack, Kohl's, and many others (see our chart on page 2). All of them did nothing more than provide shoppers with basic online checkout technology. Soverain used two patents, numbers 5,715,314 and 5,909,492, to claim ownership of the "shopping carts" commonly used in online stores. In some cases, it wielded a third patent, No. 7,272,639.
Soverain will lose the $2.5 million it stood to gain from Newegg, as well as two much bigger verdicts it won against Victoria's Secret and Avon. Those two companies were ordered to pay a total of almost $18 million, plus a "running royalty" of about one percent, after a 2011 trial. The ruling in the Newegg case is a total wipeout for a patent troll that had squeezed many millions from online retailers, was backed by big-firm lawyers, and was determined to collect hundreds of millions more.
For Newegg's Chief Legal Officer Lee Cheng, it's a huge validation of the strategy the company decided to pursue back in 2007: not to settle with patent trolls. Ever.
"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."
...lots more...
Ars: Why is Newegg able to pursue this strategy where other companies feel they shouldn't or can't?
We're majority-controlled by an extremely principled guy, our founder [Newegg CEO Fred Chang]. We have always been willing to sacrifice tactical gain for strategic success. We're successful because, since 2001, we have taken really good care of our customers.
Also, a lot of our systems are homegrown. Our CTO [James Wu, who testified at trial] wrote this code from complete scratch, without knowing about these patents, or anybody else's. His approach to coding is different. In the Soverain case in particular, it gave us a tremendous advantage in being to explain that we didn't infringe. Our shopping cart is architected differently.
And we'll take a case through trial as a matter of principle because we want to accomplish the purpose of making good law. Like eBay did, like Quanta did when they challenged LG. It's part of our duty as a good corporate citizen to try to accelerate the rationalization of patent law.
Ars: Why is this an important cause to you?
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.
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