Newegg's Legal Strategy: Focus on Pricing

Wednesday, July 29, 2015

The online store Newegg built a reputation for excellent service and fantastic prices. That said, the firm is known for something else: fighting patent trolls. Interestingly, the firm's blog glosses over one interesting side of its legal strategy. Why is the company really willing to spend so much to defend itself?

Before we can answer that question, we must first look at patents. They were originally intended to address a monetization problem: Why would any business invest in research if other companies could simply "steal" their findings? Patents allow companies to monopolize the results of their research and enable them to charge higher prices as a result.

Unfortunately, an unintended consequence of this system was soon discovered. Companies could receive patents for overly-broad, exceedingly vague or otherwise defective claims. These patents would rarely hold up to judicial scrutiny, yet were highly prized by their owners.

So why would anyone place a positive value on a patent that has little chance of standing up in court?

Every patent holder has the power to threaten another party with a claim of patent infringement. Whoever receives such a claim must then decide between the following two options:

Many companies make a simple mathematical decision. They take a look at the two costs and pick whichever looks to be the lesser. By design, the patent holder's demands are below the cost of a proper defense. As a result, settlement becomes the norm. While such responses make economic sense in the short run, they set a dangerous precedent. Every time a firm settles an accusation, it announces to the world that it will pay money to every accuser, so long as his demands are below the cost of mounting a defense.

By declaring their intent to fight each and every frivolous case, Newegg is removing any incentive for trolls to pursue claims against it. Sure, the firm will have to spend a hefty sum in the short term, but patent trolls will soon see that they do not stand to gain anything from attacking Newegg and choose to attack other firms instead.

Need some help understanding your pricing? Confused about your ideal pricing strategy? Contact us for a private consultation or read our book on software monetization.