Newegg hurtles toward Texas showdown with famed “patent troll”

MARSHALL, TX—Who is Michael Jones, and what did he invent?

After five years of legal battles over Jones’ patent involving hundreds of lawsuits and tens of millions of dollars in payments, that question still has no clear answer.

Whatever the invention, hundreds of companies have paid tribute to it. Jones’ patent, now wielded through a holding company called TQP Development, has become one of the most widely asserted patents in history. In complaints, TQP lawyers have accused website after website of patent infringement for using one of the most common Web-encryption strategies: combining the Secure Sockets Layer (SSL) protocol with the RC4 encryption algorithm.

But Jones didn’t invent SSL or RC4, an algorithm invented in 1987, two years before the filing date of the Jones patent.

Whatever his invention is, it came before the World Wide Web, which was made available to everyone in 1993. Jones filed for his patent in 1989, and it uses some distinctively pre-Web vocabulary, describing encryption via modems and phone lines.

Jones has never spoken publicly about the patent litigation. His lawyers are walking a fine line, trying to describe what he did as broad enough to justify suing hundreds of websites yet narrow enough that the case shouldn't be dismissed as irrelevant over the encryption that existed at the time.

That will change this week. Jones’ patent is finally going to be challenged at trial, and Jones himself is scheduled to take the stand tomorrow. After more than 120 companies have paid confidential settlements to TQP, one company—online retailer Newegg—has at last refused.

Newegg’s top lawyer, Lee Cheng, has sworn not to pay settlements to patent holders like TQP, which he and many other critics have called “patent trolls.”

Cheng is not clashing with any ordinary “troll,” however. TQP Development is controlled by Erich Spangenberg, one of the most controversial and successful figures in the patent-licensing business.

Spangenberg’s ability to wring settlements from the nation’s largest corporations is unmatched. This summer, Spangenberg was the subject of a New York Times profile: “Has Patent, Will Sue.” His consultancy, IPNav, has sued more than 1,600 businesses, according to one study.

The TQP campaign has won settlements from telecoms like Verizon and Sprint, from insurance companies like State Farm and Aflac, and from retailers as varied as CVS, Lowe’s, Amway, and 1-800-Flowers.com. Earlier this month, Expedia and Orbitz settled just one week away from their own trial with Spangenberg. By claiming to cover common encryption, the TQP patent is essentially a “we-own-the-Internet” patent. Spangenberg declined to speak to Ars for this story, but in an August interview he said that the TQP licensing campaign has reaped around $40 million in revenue.

There’s no love lost between Cheng and Spangenberg, two courtroom warriors who have sharply different views on the patent landscape today. Both are scheduled to testify about their respective businesses this week in court.

Newegg and TQP are facing off in the federal courthouse in Marshall, Texas, a small town near the border with Louisiana that been a favorite venue of patent holders for several years now. East Texas courts are no longer speedy "rocket dockets," but they continue to be popular with patent plaintiffs—especially with the small licensing shops sometimes derided as "trolls." The Eolas case drew international attention last year when it was heard in nearby Tyler.

The trial takes place as an unprecedented debate over patent trolls moves ahead in Washington. Congress has held three hearings on the issue this month, and more debate is scheduled. (Newegg has been broadly supportive of the reform efforts, but Spangenberg's company has supported several prongs of the Goodlatte "anti-troll" bill as well.)

Following the Newegg trial, at least 20 more TQP patent cases remain to be resolved. Given the costly realities of patent litigation, the odds are good that most of those companies will end up cutting Spangenberg a check—unless, of course, Newegg invalidates the Jones patent.

Cheng: “This is the strongest case we have ever taken to trial”

Much of the docket in the Newegg case is sealed, so it isn’t perfectly clear what each side will bring to bear in the coming days. But Newegg is likely to present to the jury at least the one argument that did become public, suggesting that a combination of Lotus Notes and RC4 render the Jones patent invalid. Lotus Notes, created by well-known software entrepreneur Ray Ozzie, included online discussion, e-mail, phone books, and document databases.

“This is the strongest case we’ve ever taken to trial,” Cheng told Ars. “We have absolutely killer prior art. When the patent sucks and the patent is invalid, we do not mount frivolous defenses.”

To make the company’s case that the Jones patent should be shot down, Cheng’s legal team has brought in Whitfield Diffie, a legend in encryption circles, as an expert witness. Encryption can basically be cleaved into two eras, with the key turning point taking place in 1977, when the RSA algorithm and the Diffie-Hellmann key exchange system were created. (A recent Ars report has more detail on this history.)

“Whitfield Diffie and Martin Hellman got together in the late 1970s and pretty much invented public key cryptography,” said Jim Denaro, a lawyer with CipherLaw Group who has been watching the TQP case closely. “Having Diffie is basically like having God for an expert witness. Diffie-Hellman plus RSA is the Internet.”

Newegg has a recent string of patent wins in court. This year, it destroyed the infamous “shopping cart” e-commerce patent belonging to Soverain Software, and it defeated Alcatel-Lucent, a company that Cheng has called a 'corporate troll’ because of its large patent-licensing operation.

In an August interview, Cheng expressed his determination to take the case through trial and appeal. Indeed, he feels he has to. "TQP is the third shell entity affiliated with the Spangenberg Family to come after Newegg," Cheng said. "That's 'Family' with a capital F."

A bumpy road 

The case has not gone smoothly for Newegg thus far. In February, the company tried to expand discovery in the case to encompass IPNav, Spangenberg’s consulting firm. That backfired when a magistrate judge ruled that the request was “clearly overbroad” and ordered Newegg to pay half of what TQP spent to defend the motion.

In May, the court issued its claim construction order, where it decided the meanings of key phrases in the patent. That construction was broad, favoring TQP’s definitions in the great majority of cases.

In June, Newegg and other defendants that were still in the case argued that the case was so clear that the Jones patent was invalid that it should be decided on summary judgment—that is, without a jury trial. Jones’ claims were beat to the punch by Lotus Notes, the earliest commercial implementation of the RC4 encryption algorithm, which had been invented by Dr. Ronald Rivest in 1987.

US Magistrate Judge Roy Payne, who has overseen much of the pretrial litigation, rejected that idea in September. In a two-page order, Payne found that there were “significant questions of material fact” that called for a jury.

The scheduling of trials in East Texas can be brutal on parties, with trials triple-booked in case of settlements. Cheng and key lawyers flew in last week, just in case the trial "in front" of his settled at the last minute. It didn't, and so he flew on to DC, where he testified at a hearing on patent trolls; he then flew back to Los Angeles to be with his family for one day and took a red-eye flight back to Texas.

The costs and stresses of such preparations add up. Hotel reservations are booked and then forfeited; thousands of miles are flown to meet the demands of the case as it nears trial. Newegg spent more than $10,000 in the week-before trial prep, Cheng said in an e-mail.

"What I have to do and what Newegg has to pay is why most patent troll victims settle," he wrote. "But at Newegg we very strongly believe in doing what we believe is right."

Spangenberg: “I don’t have a lot of respect for the guy.”

Spangenberg declined to speak about the TQP case so close to trial, but in August he spoke to Ars after he won the discovery sanction against Newegg.

At that time, he said that Cheng had attempted to rope IPNav into the litigation with a “ridiculously overbroad” subpoena for information. “They refused to narrow the request to anything intelligible... I have said publicly that I own TQP, so this can’t possibly be a transparency issue.”

As for Cheng’s suggestion that the TQP patent isn’t strong, Spangenberg was dismissive. “He has no idea,” said Spangenberg. “He seeks publicity for himself. He has said there’s no such thing as a valid patent. He has the famous ‘screw em’ quote. I don’t have a lot of respect for the guy, and I don’t think he’s very smart.”

I also asked Spangenberg about the suggestion, made by Cheng and other “patent troll” critics, that very little of the money poured into mass-patent-litigation flows back to inventors. It’s an accusation Spangenberg has heard before, and one he’s wholly prepared to respond to—he can easily rattle off a list of patent-holding inventors who have made good money working with him. And Michael Jones, who gets a percentage of the licensing revenue from TQP, is definitely on that list.

“He’s been paid a not-insignificant sum,” said Spangenberg, who estimates that TQP has made $40 million in revenue, “give or take.”

Little is known about Jones, and his company, Telequip, has faded into the mists of history. A 1995 press release announcing Crypta Plus, a “secure memory card,” appears to contain some of the company’s last words.

Jones filed his first patent application in 1989, four years before the World Wide Web came into existence. In 1995, he was granted US Patent No. 5,412,730. It consisted of just two claims. The key claim describes “a sequence of blocks in encrypted form” which uses “pseudo-random key values” at specific times to encrypt and decrypt information.

Telequip was purchased by Crane, the company Spangenberg says sold him the patent in 2008.

“I tracked Michael down,” Spangenberg told Ars in August. “He and his sons both went to Oxford, and he’s in business with them now. I would describe him as an entrepreneur or inventor.”

The patent expired in May 2013. Since patent owners can seek six years of back damages, the expiration of a patent does not necessarily bring an end to lawsuits over that patent. Nor did a reexamination initiated by TD Ameritrade. The patent emerged from that proceeding intact, and in fact TQP was allowed to add additional claims. (Claim 1 remains the central claim in the case, and the only “independent” claim.) TD Ameritrade settled weeks before its scheduled trial against TQP in 2012.

TQP's campaign started getting a lot more attention in 2012 after it sued big names in tech like Intel, Google, LinkedIn, and Twitter.

At the same time, the description of exactly what Jones had invented seemed like an ever-shifting target. The complaints claim that using RC4 encryption together with SSL is what infringes, yet the Jones patent talks about “modems”—it’s a pre-Web technology altogether. Last year, when a Forbes reporter pointed out to Spangenberg that RC4 predates the TQP patent, Spangenberg emphasized that it was the SSL “handshake” between a Web browser and Web server that infringes.

In other words, the Jones invention isn’t on the same scale as SSL—it’s actually bigger.

“It just so happens that the [technology] TQP reads on is the one the vast majority of companies are using,” said Spangenberg. ”If they do choose to use it because of the way… [the patent's original filer] Michael [Jones] created it, that’s a huge compliment to Michael.”

Now Spangenberg and the lawyers supporting TQP must walk the fine line of insisting that Jones’ idea was narrow enough that it can’t be invalidated by earlier technologies yet broad enough that it is deserving of payments from practically the entire Web economy.

“It doesn’t cover encryption broadly, it covers a very specific method of encryption,” Spangenberg told me in August.

Yet the TQP lawsuits claim that specific method is very widely used on the Web, I pointed out.

“It is prevalent,” he agreed.

Correction: An earlier version of this article said that Telequip was purchased by Crain Communications. Telequip was actually purchased by Crane, a diversified manufacturing company.