Intuit beats Web encryption patent that defeated Newegg at trial

A controversial patent that has been used to wring millions of dollars in settlements from hundreds of companies is on the verge of getting shut down.

US Circuit Judge William Bryson, sitting "by designation" in the Eastern District of Texas, has found in a summary judgment ruling (PDF) that the patent, owned by TQP Development, is not infringed by the two defendants remaining in the case, Intuit Corp. and Hertz Corp. In a separate ruling (PDF), Bryson rejected Intuit's arguments that the patent was invalid.

TQP has been arguing for years that using Secure Sockets Layer (SSL) or Transport Layer Security (TLS) combined with the RC4 encryption cipher infringes its patent. The company's former owner, renowned "patent troll" Erich Spangenberg, acknowledged during a trial last year that he has made more than $45 million in settlements on the TQP patent. TQP is one of dozens of patent groups that he owns.

Now, TQP may have lost whatever mojo is left in its patent campaign. Since its infringement arguments are basically the same in every case, Bryson's Friday ruling should mean that the remaining defendants have a clear route to victory in their cases as well.

LinkedIn, Twitter, and Yelp are facing a TQP lawsuit over the same patent. That case is also overseen by Bryson, and the three defendants are represented by the same team of lawyers from Klarquist Sparkman that won the case for Intuit. It seems likely that those defendants could win their case on the same grounds as Intuit.

A similar non-infringement argument was put forward by Newegg, which is still wrapped up in post-trial motions after losing a jury trial against TQP Development in November. After Newegg lost, TQP settled with more companies, including Google, which was slated to face off with TQP shortly after Newegg.

The TQP v. Newegg case still hasn't reached a final judgment. It's being overseen by US District Judge Rodney Gilstrap, who is still considering post-trial motions.

Gilstrap isn't bound by Bryson's ruling. Bryson is an appeals court judge from the Federal Circuit, who took senior status last year. Because he ruled on this case at the district court level, his decision isn't binding on other judges. It isn't unusual for a judge from a federal appeals court to sit "by designation" in district courts, which allows them to sometimes have the experience of overseeing jury trials.

New owner is a mystery

The victory against TQP Development comes at a strange time in the history of the "patent troll." TQP was originally created by Erich Spangenberg, one of the most successful patent licensors in history, whose lawsuits have been the bane of large corporations for years.

In an interview with Ars earlier this month, Spangenberg said he sold the TQP portfolio and that it was sold again shortly after his sale. Spangenberg said he no longer has any decision-making power in any TQP litigation and that he doesn't know who the current owner is. Nor do the lawyers on the defense side, who continue to grapple with the patent claims.

Following the sale, TQP filed 40 new lawsuits against a wide range of retailers, tech companies, and airlines. Defendants include L.L. Bean, American Airlines, HTC Corp., Canon, Citrix, American Eagle Outfitters, Bed Bath and Beyond, and many others.

Newegg Chief Legal Officer Lee Cheng told Ars that he's optimistic about his company's chances to still win in post-trial motions, following Bryson's ruling. "Bryson cited evidence developed in our case, and the systems are identical," said Cheng. "It would be a monstrous and unfortunate waste of judicial resources to keep this patent alive and permit the new owners of TQP, whoever they are, to tie up our legal system."

Cheng added that following the change in ownership, he has heard that TQP has "drastically reduced the settlement demands."

"They're trying to drive whatever revenue they can before their day of reckoning," he said. "The new owners know their extortion scheme has a very limited shelf life."

The TQP patent expired in May 2012. It can still be used in lawsuits because patent laws allow owners to ask for up to six years of backward-looking damages.

Different systems

TQP's legal team, from Russ August & Kabat, has remained the same. TQP lawyer Marc Fenster didn't immediately respond to a request for comment on the ruling. A lawyer representing Intuit declined to comment on Bryson's rulings other than to say that the company was pleased with the non-infringement finding.

The non-infringement finding centered on the fact that the patents describe an encryption system that creates new key values for each data block it sends out. That doesn't line up with how Intuit's system, and other accused websites, work.

Bryson noted that TQP didn't have any evidence showing that "key-value changes are tied to the number of blocks that are being transmitted at any particular moment" in the accused systems. "Put simply, the defendants’ argument is that... the accused systems do not infringe, because the production of a new key value is triggered by the encryption of a predetermined number of data blocks, not by their transmission," he said.

Intuit also tried, but failed, to invalidate the TQP patent. Its argument focused on Lotus Notes, a piece of software also pulled out as prior art during the Newegg trial, which featured legendary cryptographer Whitfield Diffie as Newegg's invalidity expert. The arguments that the TQP invention was old news didn't sway the jury in November, and Bryson said that "the defendants have failed to show there is no disputed issue of material fact as to whether the prior invalidating invention was abandoned, suppressed, or concealed."

The TQP patent was invented by Michael Jones, a low-profile New Hampshire man who today runs JustStrings.com, an online store for stringed musical instruments. He created the 5,412,730 patent with his former employer, Telequip, which moved into the encrypted modem business in the late '80s but sold around 30 modems before that business line went bust. The patent sat dormant until 2008, when Jones met Spangenberg, a man who believed the pre-Web patent could be applied to modern websites.

Defense lawyers say the "stream ciphers" used in Internet encryption have little to do with the "block cipher" system described in Jones' modem-based patent. But they've been unable to achieve a win against the patent until now.

During the November trial, Jones said he works for TQP as a consultant and had been paid a total of $585,000 for his work related to the patent lawsuits. He was paid $350 per hour plus 2.5 percent of the settlement deals won by Spangenberg's company.