How Newegg crushed the shopping cart patent and saved online retail
Anyone who visited Soverain Software's website could be forgiven for believing it's a real company. There are separate pages for "products," "services," and "solutions." There's the "About Us" page. There are phone numbers and e-mail addresses for sales and tech support. There's even a login page for customers.
We basically took a look at this situation and said, This is bullshit.
It's all a sham. Court records show Soverain hasn't made a saleever. The various voice mailboxes were all set up by Katherine Wolanyk, the former Latham & Watkins attorney who is a co-founder and partial owner of Soverain. And the impressive list of big corporate customers on its webpage? Those are deals struck with another company, more than a decade ago. That was OpenMarket, a software company that created these patents before going out of business in 2001. It sold its assets to a venture capital fund called divine interVentures, which in turn sold the OpenMarket patents to Soverain Software in 2003.
"Thank you for calling Soverain technical support," says Wolanyk, if you press option 2. "If you are a current customer and have a tech support question, please call us at 1-888-884-4432 or e-mail us at [email protected]." That number, like the "customer support" number on Soverain's contact page, has been disconnected.
Soverain isn't in the e-commerce business; it's in the higher-margin business of filing patent lawsuits against e-commerce companies. And it has been quite successful until now. The company's plan to extract a patent tax of about one percent of revenue from a huge swath of online retailers was snuffed out last week by Newegg and its lawyers, who won an appeal ruling [PDF] that invalidates the three patents Soverain used to spark a vast patent war.
The ruling effectively shuts down dozens of the lawsuits Soverain filed last year against Nordstrom's, Macy's, Home Depot, RadioShack, Kohl's, and many others (see our chart on page 2). All of them did nothing more than provide shoppers with basic online checkout technology. Soverain used two patents, numbers 5,715,314 and 5,909,492, to claim ownership of the "shopping carts" commonly used in online stores. In some cases, it wielded a third patent, No. 7,272,639.
Soverain will lose the $2.5 million it stood to gain from Newegg, as well as two much bigger verdicts it won against Victoria's Secret and Avon. Those two companies were ordered to pay a total of almost $18 million, plus a "running royalty" of about one percent, after a 2011 trial. The ruling in the Newegg case is a total wipeout for a patent troll that had squeezed many millions from online retailers, was backed by big-firm lawyers, and was determined to collect hundreds of millions more.
For Newegg's Chief Legal Officer Lee Cheng, it's a huge validation of the strategy the company decided to pursue back in 2007: not to settle with patent trolls. Ever.
"We basically took a look at this situation and said, 'This is bullshit,'" said Cheng in an interview with Ars. "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."
For online commerce, the mother of all patent battles
By 2010, with Newegg's trial in patent-happy East Texas coming up, the entire online shopping sector was waking up to the threat posed by Soverain. The battle with Newegg was "the mother of all patent battles," wrote the research director at InternetRetailer.com. Retailers were tired of paying millions in legal fees, and several decided to cut checks to Soverain for "at least $2.5 million."
The company's lawyers weren't some corner-store operation, either. Back then, Soverain was represented by Jones Day, the largest law firm in the US.
Soverain... wanted nothing less than to extract a patent tax from the entire retail sector.
Soverain had already picked a fight with the biggest kid on the playground and won. The first company it sued was Amazon; Soverain scored a $40 million settlement from the giant retailer back in 2005. The Gap also settled for an undisclosed sum. That was back when defendants were afraid of RIM-sized damage payouts, before eBay v. MercExchange and subsequent Supreme Court decisions started to put some limits on what do-nothing patent holders could win.
So the case filed against Newegg and seven other retailers was closely watched. It went to trial in 2010 with Newegg as the only remaining defendant; all the other companies settled. It was a classic East Texas-style trial; a jury was picked on Monday, and the case wrapped up by Friday morning.
During closings, Soverain's lawyer Kenneth Adamo, then a partner at Jones Day, argued the patents were a small but vital part of Newegg's shopping network, like a spark plug in a car. "Take the spark plugs out of the car, and you won't go two blocks," Adamo told the jury, a panel of eight gathered in Tyler, Texas. "Take the shopping cart and the session identifier out of Newegg's system, and they won't sell a nickel of anything."
The jury had its decision within a few hours. Newegg was found to infringe and was ordered to pay damages. But the jury ordered it to pay $2.5 million, a slim fraction of the $34 million that Soverain's lawyers had asked for. (Although still more than the $500,000 that Newegg's expert suggested would be appropriate if infringement was found.) Remarkably, the judge overseeing the case ruled during trial that the jury wouldn't be allowed to make a decision about Newegg's arguments that the patent was invalid. That line of reasoningthat Soverain's patents were bogus to begin withwould become the basis of Newegg's appeal.
Overall, the damages figure was actually a decent result for Newegg, which would be able to tell the next patent troll that it had cut down Soverain's anticipated payoff by more than 90 percent. But there was more bad news for the California-based technology seller. US District Judge Leonard Davis, who had overseen the case, awarded Soverain an ongoing royalty as well as an additional damages-only trial on a third patent. (That extra trial won't happen now that Soverain's patents are dead on appeal.)
Getting stronger
Soverain's plans were always bigger than Amazon and Newegg. It wanted nothing less than to extract a patent tax from the entire retail sector, using three patents it claimed covered pretty much any use of "shopping cart" technology.
Jones Day and Soverain eventually parted ways, but the patent-holding company was still able to hire another top law firm: Quinn Emanuel. That same law firm has done loads of defense work for Google and has become the search giant's go-to patent-troll killer; it's the same firm that defended Samsung in its blockbuster showdown with Apple.
About a year after the Newegg showdown, Soverain's second case went to trial in the same East Texas courtroom. After an hour and a half of deliberation, the jury returned a verdict that ordered Avon and Victoria's Secret to hand over $17.9 million to Soverainjust $1 million less than its lawyers asked for. Soverain also won a running royalty that would have forced the two companies to hand over around one percent of its Web sales for the life of Soverain's patents.
Soverain was strong and getting stronger. The overall economy was struggling, but online commerce was growing at a breakneck paceand Soverain wanted its one percent. That became crystal clear in 2012, when the company launched a full-scale assault on dozens of retailers: hardware stores like Home Depot; clothiers like Macy's, Nordstrom's, and Kohl's; electronics sellers like Best Buy and RadioShack; and Drugstore.com and Walgreen's.
Source: http://arstechnica.com/tech-policy/2013/01/how-newegg-crushed-the-shopping-cart-patent-and-saved-online-retail/