As unpopular as patent trolls are, few argue that they're illegal, or even that they should be. But occasionally some tech company will sue a troll under a legal theory like abuse of process or racketeering. Those lawsuits tend to fall flat, as the online retailer Newegg Inc. was reminded at a hearing on June 18.
In a bench ruling, U.S. district judge Leonard Stark in Wilmington blocked Newegg from bringing an abuse of process counterclaim against a troll called Data Carriers LLC and a related entity called IP Navigation Group LLC. Stark expressed some sympathy for Newegg's underlying gripe that Data Carriers and IP Nav were using hardball tactics to generate a "nuisance settlement." But the judge concluded that even if all the facts that Newegg alleged are true, it had failed to show that Data Carriers and IP Nav did anything improper. (You can read a transcript of the hearing here. The argument begins on page 25; the ruling is on page 57).
Data Carriers sued Newegg for alleged infringement of a patent on so-called auto-complete technology. IP Nav, which bills itself as "the world's leading full service patent monetization firm," advised Data Carriers on the litigation.
Data Carriers didn't pick an easy target. Since 2007, Newegg has refused, as a matter of principle, to settle with non-practicing entities, or NPEs, as trolls are also known. "Screw them. Seriously, screw them," the company's chief legal officer, Lee Cheng, said in this interview with Ars Technica. To its credit, Newegg has a strong win-loss record in court (see our coverage here).
As soon as it got sued by Data Carriers, Newegg sought Stark's permission to bring a counterclaim for abuse of process against both Data Carriers and IP Nav. According to Newegg, Data Carriers's complaint was part of a scheme to coerce Newegg into resolving several supposedly unrelated cases at once, either through a settlement or a so-called "patent auction." At the time that the complaint was brought, Newegg was defending itself against two patent cases in Texas, one brought by an entity called SFA Systems LLC and the other by an outfit known as TQP Systems LLC. Newegg said it had reason to believe that the plaintiffs in those cases—as well as Data Carriers—are shell companies controlled by IP Nav's CEO, Erich Spangenberg. (Spangenberg is a pioneer of troll litigation, as we explained in this Q&A.)
"Data Carriers and IP Nav…filed this lawsuit and sent the Complaint to Newegg to further tax Newegg's and its counsel's resources available to defend against patent infringement, and thereby coerce a settlement in the SFA and TQP matters," Newegg's lawyers at the Webb Law Firm and Proctor Heyman wrote.
At last week's hearing, lawyers for both IP Nav and Data Carriers claimed that IP Nav had no involvement in Data Carriers's lawsuit. But even if these shell companies were related, they weren't doing anything wrong by asserting their patents, the defense lawyers argued. "You know, if there is a tax on Newegg's resources, what they should do is just address the merits of the claim," IP Nav counsel Kevin Brady of Eckert Seamans Cherin & Mellott said. "And if they had any serious doubts about the merits of the claim, they should file a Rule 11 motion [for sanctions]."
After letting Newegg plead its case, Stark sided with IP Nav and Data Carriers and blocked the counterclaims. "Newegg is complaining about efforts to assert patent rights, efforts to settle litigation, and efforts to sell or auction licenses and/or covenants not sue. All of these activities under current law are permitted activities," he said.
"The Court does recognize Newegg's concern [that] there is a problem, perhaps a systematic problem, perhaps one that reaches well beyond this case and this court involving litigation brought by NPEs," Stark added (referring to trolls by their more proper name, non-practicing entities). "Those concerns, however, do not persuade the Court in this case that the motion pending before it should be denied."
Stark noted that his dismissal was without prejudice, and that he "is open to a request to pursue discovery of plaintiff and IP Nav."
"Rhetoric that plays well in the press apparently does not hold up so well in court," Spangenberg afterwards said in a corporate blog post on IP Nav's web site.
"I think [Stark] was sympathetic to our position, but understood that perhaps the current legal remedies are not sufficient to deal with the NPE problem," said Newegg counsel Kent Baldauf Jr. of Webb Law Firm. "I think he went as far as he felt he could under the current law."