Free Riding and Other Costs to Newegg of "Crushing" NPE Soverain

Kudos to online retailer Newegg and its Chief Legal Officer Lee Cheng on the Federal Circuit decision handed down last week holding that three patents covering basic online checkout technology were invalid. [PDF] The decision reversed the judgment of the ED Texas trial court that the patents were not invalid and vacated the patent infringement judgment entered in favor of NPE Soverain and against Newegg by the trial court.

Check out Joe Mullin's arstechnia post "How Newegg crushed the 'shopping cart' patent and saved online retail" for a full and insightful accounting of the litigation, which highlight’s Newegg’s commitment to never, ever settling with NPEs. CLO Cheng fleshed out the strategy to reporter Mullin:

 

We basically took a look at this situation and said, 'This is bullshit,' . . . 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.

Without a doubt, Newegg and its counsel have achieved a very big legal victory. Soverain previously received a $40 million in settlement from Amazon, an additional undisclosed settlement from The Gap, and, while the Newegg appeal was pending, obtained a patent infringement jury verdict of $18 million from Avon and Victoria’s Secret. Due to the broad scope of online shopping technology allegedly covered by the asserted patents, InternetRetailer.com's researcher Mark Brohan described Newegg’s decision to go to trial on Soverain’s claims (and after the other six online retailers named as defendants settled out) as creating “the mother of all patent battles.”

Yet even as we applaud both Newegg’s principled stand and the victory realized through the implementation of this strategy, we find ourselves asking whether the costs outweigh the benefits.

It took three years to get the Newegg case to trial at costs reasonably estimated at $2M (all in, including attorneys, experts, discovery, trial exhibits, the bar tab in Tyler, etc). It took another two plus years to get the trial court’s patent infringement judgment overturned, at costs reasonably estimated at $500K (Weil Gotschal headlined with two other firms on the briefing).

Even though Newegg was confident about the appeal, it also had to post an appeal bond covering $2.5 million in past damages, plus ongoing royalties, plus post-verdict damages, thus tying up significant additional monies on the corporate balance sheets for two plus years. What was the opportunity cost of not being able to devote the trial and appeal costs, and the expense of the appeal bond, to other business ends?

Newegg also incurred the significant opportunity cost of committing internal legal and engineering resources to manage and support five plus years of litigation. For example, the trial testimony of Newegg’s Chief Technology Officer and lead designer James Wu was obviously compelling, but how many of his incredibly valuable brain cells and minutes were redirected towards supporting prior art analyses, prepping experts, consulting with outside trial counsel, prepping for and giving a deposition and then prepping for and testifying at trial, as opposed to other Newegg business?

Beyond these costs, Newegg receives no compensation from all the free riders [definition], an economic term for all the other operating companies sued by Soverain that have not shouldered their fair share of the cost of producing the Federal Circuit decision invalidating Soverain's patents.  Free riders Oracle, Best Buy, IBM, Office Depot and numerous other companies currently defending Soverain patent suits (see the excellent chart prepared by Joe Mullin and arstechnia summarizing the pending lawsuits, below), can get the claims against them dismissed based on the Federal Circuit's decision.

arstechnia.com

As succinctly stated by CLO Cheng, as a result of the decision bought and paid for by Newegg, and by Newegg alone, “nobody else has to pay Soverain jack squat.”

Plus what of the prospective free riders, the untold number of additional online commerce companies who would have been pursued by Soverain as part of an overall strategy of extracting a one percent royalty on ALL online shopping revenue?  They too will benefit from Newegg's labors without having to contribute their fair share to preparing the winning defense.

While Newegg's strategy of never, ever settling an NPE claim has been, and hopefully will continue to, produce favorable legal results, the high costs and free riding problem associated with the implementation of this strategy manifest the need to develop other, more efficient and more cost effective strategies for valuing patent assets and allocating the cost of defending NPE lawsuits.
 

Tweet Like Email LinkedIn G+ Buffer
Trackbacks (0) Links to blogs that reference this article Trackback URL
http://www.flatfeeipblog.com/admin/trackback/293892
Comments (2) Read through and enter the discussion with the form at the end
TC44 - February 4, 2013 3:53 PM

Interesting article. Can anyone comment on how they perceive this case against one like VRNG v GOOG . I will be interested to read up on the merits of Souverain and the appeal by NewEgg.

Dave - February 5, 2013 4:29 PM

Thanks. The Vringo case, about which we blogged a couple posts ago, is another NPE lawsuit, but significant in terms of how damages were (or were not) calculated, generally, and application of the entire market value rule, specifically. Soverain is noteworthy from perspective of the direct and free riding costs incurred in taking a never settle position.

Of course, both Vringo and Soverain obtained verdicts in their favor in the trial court. No doubt Google would like to duplicate Newegg's success in getting the verdict overturned on appeal.

Dave

Post A Comment / Question Use this form to add a comment to this entry.







Remember personal info?