reader comments 53
Share this story
Lee Cheng is one of the few attorneys to fight back against patent trolls and prevail.
And at the latest Ars Live event, we talked to him about his most famous case, how people can fight patent trolls today, and what the future of patent abuse will look like in coming decades. His answers, as expected, were incredibly candid and hilarious.
In 2007, a patent troll known as Soverain had already gotten millions of dollars out of The Gap and Amazon for their online shopping cart patent when they hit Newegg with a suit.
Cheng’s colleagues in the legal community said you’d better just pay up—this patent is legit.
Cheng didn’t see it that way. Newegg had just reached a billion in sales, and he thought this piece of litigation would be the first of many lawsuits brought by companies that wanted a piece of Newegg’s success.
And sure enough, soon after the shopping cart claim, Newegg was hit with patent claims on several aspects of online search.
Cheng decided he wasn’t going to lie down and take it. He thought he could win on appeal if he could just make it through the courts in the Eastern District of Texas, where 40 percent of patent infringement claims are brought.
“I looked at the numbers, and you know the typical patent troll strategy is to say, ‘You know how much money it’s going to cost you to fight a case? Two to $6 million. We’re only asking for $3 million… give us the money and we’ll go away,'” he said. “I looked at it differently. [I said if] I can control legal costs… by doing as much work myself and with my team, this is a cost that’s spread out over three to five years.
That’s how long a lawsuit takes.”
When Cheng put it that way to his employers, they decided the money was worth it.
If Cheng’s strategy worked, they would never have to deal with patent trolls again. “It was obvious there was a scam going on, and someone needed to say no,” he recalled.
Cheng explained the Eastern District of Texas, where there’s one courtroom in Marshall, Texas, that gets 25 percent of all patent cases filed in the US. He noted there have been theories about why so many cases go to Marshall, involving “certain retired federal judges viewing themselves as stewards/godfathers of the local economy… but that’s speculation.” “Still,” Cheng said, “federal judges have a huge amount of discretion setting rules in their courts, and they created certain rules heavily in favor of plaintiffs.” One such rule requires both parties to provide “everything relevant” during discovery.
This “disfavors defendants” because the trolls are usually “shell companies” who have very little paperwork to show. Meanwhile, the legitimate entrepreneurs and businesses who are the defendants have an incredibly expensive process to go through, often with years of documents to comb through.
Plus, Cheng said, being in East Texas gave the plaintiffs a chance to “play race cards.” He recalled an attorney describing Newegg as “a Chinese company” in court, despite the fact that it is based in the US, because many of Newegg’s executives are Chinese-American.
As he told the story, Cheng recalled thinking to himself, “‘Fuck you… we are proudly American, because in this great country anyone from around the world can be American’… I told the jury we’re based in California and our profits are made in America and we proudly employ 1,000 Americans.
And they got it.
That was the one trial we won.”
Why was Newegg willing to stand up to patent trolls, against all odds, when bigger companies wouldn’t? Cheng believes much of it has to do with fearing risk, especially when the companies are publicly traded and answerable to shareholders.
There were also concerns that plaintiffs could simply shut the defendant’s business down. Until the 2006 decision in eBay Inc. v. MercExchange, plaintiffs could get immediate injunctive relief that forced the defendant from using any technology described in the patent at issue.
That would mean, for example, that Soverain could have prevented Newegg from using online shopping carts until the case was decided.
Though there has been a lot of reform around patent lawsuits, both in the courts and Congress, Cheng warned that he “has it on good authority from patent trolls that they are planning to jump back into the fray.” He said that you have to look at patent abuse and trolling as an industry, and recent reforms mean “the mid market has been wiped out.” So trolls are focusing on “big game cases like going after Google or Apple for large amounts of money,” Cheng said. “They go after international companies, too, which often settle—especially in East Texas.” On the other side are “nuisance trolls filing hundreds of lawsuits, asking for small amounts from each defendant.” He called the latter especially dangerous because they’re going after smaller businesses that don’t have the budget to fight over $25,000-$100,000 claims.
Cheng recommended that small businesses hit by these kinds of trolls “organize all the defendants together.” He suggested that groups of defendants can “create a defense war chest” and fight the trolls that way, by paying half of what they would to the patent holder. “It’s hard though because someone has to make the 50 or 25 phone calls [to the other defendants],” he admitted. Plus, “the problem is that most companies call their outside counsel” instead of having an in-house lawyer who can help them work with other defendants.
Still, Cheng believes the best option for a defendant who wants to fight trolls is to organize with other defendants and share costs.
During the question-and-answer period, Cheng talked more about how lawyers and entrepreneurs can challenge bad patents. He also had some choice words for patent trolls and abusers, singling out Qualcomm as a particularly grave offender. Ultimately, he worried that the litigation landscape around patents stifles innovation: “At a certain time, will we have a country that can build another Golden Gate Bridge? Or are the lawyers and regulators going to kill everything?”
Cheng said the possibilities of patent trolling make him fear for the future of this republic.
And with stakes like that, the question of fight or flight becomes an easy one.
You can watch previous episodes of Ars Technica Live here.
Be sure to join us in October for another episode of Ars Technica Live, filmed at Longitude in Oakland, California, with guest Ariel Waldman.
She’s the founder of Spacehack and has served as a consultant to the US government on human spaceflight. Waldman will talk to us about what it’s like in space and how we’ll get there.