Newegg’s Three-Step Solution to Fighting Patent Trolls

By Gary Shapiro, President and CEO, Consumer Technology Association (CTA)

Lee Cheng is a troll trapper. As chief legal officer for Newegg.com, the second-largest online only retailer in the United States, Cheng has successfully battled the almost three dozen trolls that have attacked his company in the last ten years. And not just fight them, but win.

Patent trolls — sometimes called “non-practicing entities,” or NPEs — don’t actually create any products or services. Instead, they scoop up patents for the express purpose of using them to extort money from real companies large and small that can’t or don’t want to pay high legal defense costs. NPEs focus on settlements and generally have no desire to test their generally poor-quality patents in trial and through appeal. Even bad patents can generate millions in settlement dollars.

A newly-updated Harvard Business School study finds patent trolls sue cash-rich firms “seemingly irrespective of actual patent-infringement” — because that’s where the money is. The Harvard researchers noted trolls are taking a toll on innovation at the firms they target: “After settling with NPEs (or losing to them in court), companies on average reduce their research-and-development (R&D) investment by more than 25 percent.” So instead of funding development of the Next Big Thing in consumer technology, these American small businesses are handing over legalized extortion payments to trolls.

Research estimates that patent trolls drain a prodigious $1.5 billion a week from the economy. I sat down with Lee Cheng to get a from-the-trenches account of the patent troll problem, and to let him share his lessons for taking down the trolls.

How did you first become aware of patent trolls?

I started as general counsel at Newegg back in 2005. I’m a corporate lawyer by trade. That meant if I did my job right would never see the inside of a court room. For many years, not going to court that was my professional objective.

When I joined Newegg, patent lawsuits ended up on my desk. A lot. It surprised me because Newegg doesn’t actually make anything. We’re a reseller. So when I first came across patent suits, my first initial reaction was, ‘This must be a mistake.’ I thought our suppliers had problems with each other and were just trying to create some leverage against each other. Then I realized these were actually suits against Newegg claiming infringement.

Over the course of your career at Newegg, what has been your overall experience with patent trolls? How much time have you dedicated to this issue?

In the past ten years, we’ve dealt with about 35 claims. Fortunately, due to our successful deterrence strategy, the claims have slowed down. Actually, we really don’t have any left.

We decided that we needed to fight because we were one of the first companies to identify that patent trolls proposed a threat not just to our industry, but to the broader U.S. economy.

Newegg is a very low-margin business. We couldn’t afford to do what big companies were doing at the time, which was to settle with the patent abusers. Some companies were just cutting checks to make the trolls go away.

What are some of the experiences that Newegg has had with patent trolls that will resonate with other companies?

We’ve never lost a case. Whenever we have taken a case to trial to appeal, we’ve always won.

What’s frustrating is the money that we’ve spent on patent cases could have been invested into our business. We could have built new warehouses to make fulfillment more convenient for our customers. We could have invested in our systems, built better navigation for our customers on our website or even expanded into other countries. The only reason we had to fight is because if we didn’t do it, we would end up having to pay more to these trolls. We would have never heard the end of it.

We’re the second-largest pure-play online retailer. Small businesses are hit even worse. They don’t have the means to defend themselves or in-house legal departments to fight problems like this effectively, and are often forced to settle.

You’ve had the opportunity to talk with members of Congress about patent reform. You’ve even walked the halls of Capitol Hill with CTA to talk about these issues. What do you say in these meetings?

I let them know the numbers don’t lie. The people in the technology community — the people who innovate — turn innovation into ideas and fulfill the purpose of the Patent Act, not patent trolls.

I have yet to meet one of the “little guy inventors” constantly used as an excuse by patent trolls to justify their extortion campaigns, who’ve had a problem enforcing a patent that was truly groundbreaking. I have yet to meet any successful startup founder that supports patent trolling. Patent troll founders don’t count.

Just think about the names associated with technological innovation in America in the last 20, 30 years; Facebook, Uber, Google, Twitter and Apple. All of these companies have patents, but they didn’t create these patents other than to protect themselves from being sued by competitors. And they didn’t create successful companies and products by asserting stupid patents. A true innovator focuses on creating a product or service that changes the world that makes life better for the rest of humanity. They do, rather than sue.

What is your best advice for other businesses battling patent trolls?

Don’t just cut a check. That will make your company a serial target.

Even if you do eventually cut a check because it makes sense to do so, settle hard. There are so many tools and methods available to help you get a better result than cutting that initial check.

Find friends. Find out who else has been sued and see if they’re willing to share costs with you.

At Newegg, we’re trying to help by putting new structures in place to create off-the-shelf joint representation and joint defense solutions for everybody sued by a single troll. Making it easier for everyone to join a defense platform and leverage shared costs and shared work will lower the average cost of defense.

Think about the patent troll model: The goal is to try to get as much cash flow in as quickly as possible. The troll lawyers need cash flow as well. What every business should be doing, if they want a better outcome against trolls, is to play the waiting game. Beat the trolls by starving them of cash — there’s a pretty good chance you can do that in six months to a year with a typical nuisance troll. And troll lawyers won’t want to do work without getting paid. At worst, making the troll desperate for cash can help you achieve a much lower settlement.

So, the first step, have a strategy. The second step is to find friends and share costs. And then, if you have the means, fight a few cases that can make a name for your company as a hard target. We did that, so Newegg literally doesn’t get sued anymore by patent trolls.

Gary Shapiro is president and CEO of the Consumer Technology Association (CTA)™, the U.S. trade association representing more than 2,200 consumer technology companies, and author of the New York Times best-selling books,Ninja Innovation: The Ten Killer Strategies of the World’s Most Successful Businesses and The Comeback: How Innovation Will Restore the American Dream. His views are his own. Connect with him on Twitter: @GaryShapiro