Newegg loses encryption lawsuit to patent troll, endangering web security for everyone


Not many companies can take on a full grown troll and live to tell the tale. Newegg has just discovered this, after a Texas jury ordered them to pay $2.3 million in damages in a lawsuit that was over a patent concerning encryption Newegg.

The patent in question, U.S. patent 5412730, was granted to Michal Jones of Telequip in 1995. The patent is said to be a vague patent related to how modems work. Today the patent is owned by TQP Development, a non-practicing entity. As a non-practicing entity, TQP is in the business of extracting cash from companies who try to use one of its patents. Companies like this are better known as patent trolls.

The troll in this case has already managed to win over $40 million in settlements from Microsoft, Amazon, and a bunch of smaller companies using this particular patent. Newegg wasn’t going to go quietly and settle, so they took it to court.

Newegg seemingly had a solid case that TQP’s patent covered “a modem suitable for transmitting encrypted data over voice-grade telephone line,” not the fiber optic cables that are used today. TQP’s attorneys, of course, interpret the patent differently and said so at trial.

According to TQP, Newegg was violating the patent by using SSL with RC4 for encryption purposes. Newegg’s lawyers argude that the patent doesn’t describe modern public key cryptography used today, and they pointed out “prior art” (legal term of technology or ideas that existed prior to a patent being issued) of RC4 being invented in 1987 and public-key cryptography techniques first appeared in the 1970s. Both these years predate the patent in question.

On top of that, the jury heard testimony from Ray Ozzie (a former Microsoft tech chief), Ron Rivest (the pereson who invented RC4), and Whitfield Diffee (the person who worked on public-key cryptography in 1970s) against TQP. However, the jury still found that Newegg did in fact infringe upon TQP’s patent. TQP wanted over $5.1 million in damages and the jury awarded them just under half that.

This verdict is unsettling primarily because it is an attack on industry-standard, widely used online encryption techniques. The precedent set by this case could really shake the foundations of the web as we know it. And I’m not exaggerating here. While this case may not necessarily break what is left of online encryption, it may make it much more expensive to run websites if TQP can force money out of anyone that uses industry-standard encryption techniques. And when it becomes too expensive to operate, companies will simply stop using it — i.e. stop using industry-standard encryption. Plus, imagine how other patent trolls are thinking now that TQP has won.

Newegg doesn’t plan on paying the $2.3 million without another fight. After the trial, Newegg legal chief Lee Cheng stated, “We respectfully disagree with the verdict that the jury reached tonight. We fully intend, as we did in the Soverain case, to take this case up on appeal and vindicate our rights.” For those that don’t know, the “Soverain case” is a situation where Newegg lost against a patent troll but won on appeal. Let’s hope history repeats itself.

[via Gigaom, via Ars Technica]

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