On November 6, 2014, the Federal Trade Commission (FTC)
announced the settlement of its first action against a
"patent assertion entity" (PAE), also known as a
"patent troll," for employing deceptive sales claims and
fraudulent legal threats in demand letters to thousands of small
businesses. The PAE is MPHJ Technology Investments LLC (MPHJ), a
company in the business of acquiring patents in order to assert
infringement claims and garner licensing fees. Although many
companies engage in "troll-like" business practices, MPHJ
is among the most notorious and aggressive. Despite having only one
member, owner Jay Mac Rust, MPHJ has allegedly sent out demand
letters from dozens of shell companies to more than 16,000 small
businesses over the last two years. Even before the FTC's
investigation became public, several state attorneys general had already
launched investigations into MPHJ's practices and filed
suit under state consumer protection laws, which are still ongoing.
MPHJ's practices also fueled support for legislation to protect
small businesses from patent trolls' predatory practices.
According to the FTC's administrative complaint, MPHJ
purchased five patents on networked scanning systems in September
2012. Soon after, the company began sending out demand letters to
small businesses, alleging that they were infringing MPHJ's
patents and soliciting them to purchase licenses. Using business
directory databases, MPHJ specifically targeted companies having
between 20 and 99 employees, in particular types of industries,
such as veterinary services, gardening, and medical laboratories.
MPHJ also entered into an agreement with the Texas law firm Farney
Daniels PC, under which Farney Daniels agreed to represent MPHJ in
relation to asserting and monetizing the patents, in exchange for a
percentage of any licensing fees MPHJ obtained.
According to the FTC, MPHJ employed a "three-stage campaign
to promote and sell licenses," consisting of three letters
sent to a business over a period of months. Using the letterhead of
one of MPHJ's dozens of shell company subsidiaries, followed by
letters from Farney Daniels, MPHJ allegedly would represent that
"most businesses...are interested in...taking a license
promptly," and that "a fair price for a license" was
"a payment of $1,200 per employee." Finally, MPHJ would
threaten to sue for patent infringement if the recipient did not
respond within two weeks. The third letter was accompanied by a
document, purportedly the draft complaint that would be filed if
the recipient did not respond. The letters, as well as the draft
complaints, were essentially identical across all targeted
recipients. In spite of its threats, MPHJ never filed a single
complaint against any of the more than 16,000 small businesses
targeted by the letters, according to the FTC.
Because of these practices, MPHJ became the first PAE against
which the FTC has taken action under its consumer protection
authority. After discovering that it was the target of an FTC
investigation, MPHJ filed its own suit against the FTC in January
2014 as a "preemptive strike," naming four FTC
commissioners and claiming that the agency was "violat[ing]
the [First Amendment] rights of MPHJ and its counsel under the U.S.
Constitution." MPHJ argued that sending the demand letters was
a "constitutionally protected activity." On September 16,
2014, the Western District of Texas threw out MPHJ's
suit, ruling that MPHJ had not exhausted its administrative
remedies because the FTC's investigation was ongoing, and there
was no "final" agency action to dispute.
On November 6, 2014, the FTC announced its settlement with MPHJ and
published the proposed consent order. The proposed order would
prevent MPHJ from making representations in its demand letters
without "competent and reliable evidence" to back up its
claims. Specifically, the FTC has identified the following demand
letter claims to be "misleading" under the Federal Trade
Commission Act (FTCA), unless the PAE has "competent and
reliable evidence" to back up the claim at the time the letter
is sent:
-
A particular patent has been licensed to a substantial number of
licensees;
-
A particular patent has been licensed at particular
prices;
-
Any other statement concerning "the results of licensing,
sales, settlement, or litigation of a particular
patent;"
-
Any statement about responses from other recipients of the
demand letters;
-
The PAE has filed a lawsuit against the recipient;
-
The PAE will initiate a lawsuit if the recipient does not agree
to a license, pay licensing fees, or otherwise respond; and
- The PAE will initiate a lawsuit within a specified period of time, or imminently, if the recipient does not comply
However, the FTC also specified that statements asserting that the
recipient is infringing the patent or needs a license, or that the
PAE reserves its rights under the patent, are not
"misleading" without more. The proposed consent order is
subject to public comment through December 8, 2014.
Under the consent order, MPHJ will have to make copies of any
demand letters available to the FTC for the next five years. Any
violation of the consent order subjects MPHJ to a civil penalty of
up to $16,000 per violation, which means $16,000 for each deceptive
letter sent. Nevertheless, MPHJ appears undeterred from its
aggressive patent assertion policy, claiming that its letters have all along been
"accurate, required by law and protected by the First
Amendment" and therefore would not require any material
revision in light of the consent order.
Although the FTC has not yet indicated whether more patent troll
actions are forthcoming, the settlement suggests that the FTC may
become more active in policing deceptive practices of the more
egregious PAEs. These developments may also fuel activity under
state consumer protection laws, often referred to as "little
FTC Acts," designed to supplement the FTC's mission of
protecting consumers from unfair or deceptive practices. These laws
allow individual consumers to sue companies engaged in misleading
and deceptive practices, rather than relying on the FTC to bring
enforcement actions. If you have received a demand letter asserting
that you may be infringing a patent or need a license, the
FTC's proposed consent order may present new ways to fight
back. Possible courses of action now include: 1) sending a
response requesting the "competent and reliable evidence"
that the sender must have to support its claims or 2) notifying the
FTC about the misleading demand letter claims. For more
information about this topic, please contact Venable.
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