Policy —

Newegg’s chief counsel testifies: 30 infringement claims in last 8 years alone

"Unfortunately," Cheng tells the jury, TQP is not Newegg's first patent lawsuit.

Newegg Chief Legal Officer Lee Cheng
Newegg Chief Legal Officer Lee Cheng

MARSHALL,TX—"Imagine you're sitting at home minding your own business," said Newegg lawyer Kent Baldauf in opening statements earlier this week. "Someone knocks on your door and tells you—or demands from you—millions of dollars for a service that you're already paying someone else for."

Imagine the service is cable television and that you're already paying the cable company.

"But this person tells you, 'We own a patent on cable TV, and you owe us too for all the years you've been watching cable TV,'" Baldauf continued. "Then you look into it, and you find out, wait a minute, this patent really doesn't cover what they say it covers. What would you do? My guess is you [would] do exactly what Newegg has done here. You would say: That's not right. I want my day in court."

Two days later, Newegg's main corporate representative, Chief Legal Officer Lee Cheng, was on the stand as Newegg's first witness. TQP Development had ended its case on Wednesday after its experts explained how a patent invented by Michael Jones to cover his encrypted modems should cover the common Web encryption scheme of using the Secure Sockets Layer (SSL) together with the RC4 cryptographic algorithm. TQP has already raked in $45 million from 139 different licenser payers, and the shell company is one of the most successful belonging to Erich Spangenberg, a major figure in the patent enforcement business.

Newegg’s story

Cheng grew up mostly in and around San Francisco, the city where he was also born, although he spent five of his early years being raised by his grandparents in Taiwan. He went to public schools in and around San Francisco, graduating from Lowell High School.

"In high school, I worked fairly hard and I got into Harvard for college," said Cheng, who was always careful to look more at the jury. "And after three years on the East Coast dealing with snow, I decided to come back to California, and I attended law school at Berkeley."

After marrying and having his first child, he was burned out on big law-firm life. "I decided I wanted to see my kids grow up, and so I started to look around for an in-house job," Cheng said. "I heard Newegg was doing a lot of good things and had a reputation that I admired."

Newegg was founded "in the ashes of the Internet trough" in 2001, said Cheng. The first 10 employees worked in a warehouse about 20 miles outside Los Angeles. Newegg still owns the facility, called Warehouse 1, though the company's headquarters now resides in another warehouse in City of Industry.

Today the company has more than 1,100 employees in three states, mostly in California but also in New Jersey and Tennessee. (Cheng left out the logistics center outside Shanghai and the eight warehouses across China.)

"Had you ever heard of TQP or Telequip before this lawsuit?" Newegg lawyer Kent Baldauf asked him.

"I never heard of either company before this lawsuit," answered Cheng.

"To your knowledge, did TQP lose any sales whenever Newegg sells a computer or a video game?"

"I can't see how they would lose any sale if we sell a product."

Cheng said that he never heard from TQP or Spangenberg with a licensing offer after the lawsuit was filed. Why there were no discussions is actually a point of contention between the parties; Spangenberg said from the stand on Tuesday that he made at least five attempts to contact Newegg by telephone.

Flipping the script: Patent trolling on trial

The testimony soon got to the heart of Newegg's views on the "patent troll" phenomenon.

"Do you recall Mr. Spangenberg also testifying that there are many other companies, in addition to his, that buy patents just to assert them and make money?" asked Baldauf.

"Unfortunately, yes, there are," said Cheng.

"Has Newegg been accused of patent infringement by these types of companies in the past?"

"Even more unfortunately, yes, we have."

In Cheng's eight years at Newegg, over 30 patent claims have been lodged against the online retailer, many of them overlapping, he testified.

"We've had four claims on some aspect of search alone," said Cheng. "This is at least our second online security patent that's been asserted against us."

"Is this unique to Newegg?"

"Very unfortunately, it's not. It's not even unique to retail. Coffee shops get asserted against, too."

"What is Newegg's policy when dealing with these?"

"Well, we send these cases to outside counsel," said Cheng. "We're not terribly qualified to evaluate the specific technical merits of a patent. But if anything, we don't really have a policy, but we have a practice of not settling and paying money out just to avoid the cost of defense. We think that paying money just to avoid the cost of defense every time someone says that you've done something, and you don't think you've done something wrong... invites more lawsuits."

The average cost of taking a patent case through trial is $2 million to $6 million, he testified. Newegg has kept its costs to about $3 million for the cases that have gone through trial so far. (This is Newegg's third patent trial after Soverain Software and Alcatel, both ultimately Newegg wins.)

Newegg does cut deals with patent holders, however. "If we are advised a patent is a good patent, then we will engage in discussions with the patent holder," Cheng said. The deals Newegg makes are typically in the form of a "covenant not to sue," not a settlement.

Cheng went on to talk about the Newegg product accused of infringing TQP's patent. It isn't something Newegg built—it's an off-the-shelf "load balancer" built by Citrix, called the NetScaler. The company has purchased three pairs of NetScalers since 2004 and paid a total of $260,000.

With that, Baldauf passed the witness. He had made his key point—Newegg had paid its "cable bill," it had been a good corporate citizen, and it saw no reason for the knock on the door.

Cross-examination

Newegg was cross-examined by TQP lawyer Ben Wang. During cross-examination, Cheng's focus on the jury became more intense. He barely altered his gaze to look at Wang at all, just maintaining a light smile as he testified.

"There's nothing wrong with coming to court today and asserting to the jury a patent that is presumed valid, correct?" asked Wang early in his questioning.

"Well, I would probably disagree," said Cheng. "I would say that there's nothing illegal about it."

Then Wang moved on, asking a series of questions emphasizing the fact that Newegg didn't have a technical witness testifying.

"Mr. Cheng, the question is: Who is the technical expert that Newegg is bringing to trial?"

"We have invalidity experts and non-infringement experts who will be testifying about matters concerning technology."

"Mr. Cheng, do those witnesses work at Newegg?"

"No, no. They don't work at Newegg. No, I'm sorry. If you mean that are we bringing any Newegg employees who are technologists here to trial to testify, we're not. I'm not a technical expert."

Wang specifically referenced James Wu, a Newegg engineer who wrote much of the company's original source code. Wu had testified in the earlier Soverain patent case against Newegg. Why wasn't he coming?

"He is also our chief operating officer right now, and we did not feel that we had a need to put Mr. Wu on. Especially because we have our busy holiday shopping season, literally next week, and he had to go home."

Wang hammered the point that neither Wu nor another Newegg engineer had showed up to testify about the technical workings of Newegg's system until US District Judge Rodney Gilstrap had enough. "Counsel, this has been covered about three times," he told Wang. "Let's move on."

"Mr. Cheng, and between the time this suit was filed to the expiration of the patent in 2012, Newegg never changed its website to not use RC4, is that correct?" asked Wang.

"That's correct," said Cheng. "Why would we if we haven't done anything wrong?"

"It's just a yes or no question, Mr. Cheng."

"No, we didn't."

"And Newegg could have stopped using RC4 had it chosen to, right?"

"We could have, yes."

Wang's point was that once accused of infringement, Newegg could have stopped using the combination of SSL and RC4 that is said to infringe.

"Newegg could have changed the NetScalers to default settings, isn't that right?"

"We could have," agreed Cheng.

"But you didn't. "

"We didn't do that."

Cheng stepped down, and the next witness was called.

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