FTC Settles Patent Troll Case

Over the last decade an increasing number of businesses have been plagued by the activities of patent assertion entities, commonly known as “patent trolls.”  Simply put, a patent troll is an entity that exploits patent rights it has acquired, not by practicing the patent (e.g., by actually using the patented technology), but instead by collecting licensing fees from parties the patent troll alleges has infringed the patent.   Indeed, hundreds, if not thousands of companies have encountered patent trolls, such as, Acacia Research Corporation, in recent years.

Recently, the activities of one such patent troll, MPHJ Technology Investments, resulted in an action by the Federal Trade Commission (FTC).  Through investigation of MPHJ, the FTC determined that MPHJ had sent more than 15,000 cease and desist letters to small businesses around the country alleging the infringement of patents that involved scanned documents that were then emailed.  The letters demanded a hefty licensing fee of $1,000-$1,200 per employee, and further warned that if the business did not comply with MPHJ’s demands, it would face a lawsuit.  The letters further represented that there had already been substantial licensing of the patents, in some instances, referencing specific amounts of the licensing fees that were allegedly paid.

The FTC order was directed to the sole executive of MPHJ, Jay Mac Rust, and a local Georgetown, Texas law firm Farney Daniels.  The FTC contends that Farney Daniels stood to profit from a percentage of any license fees paid.  Rust allegedly purchased a handful of patents from the prior owner, another “patent troll”, and began asserting the patents by demanding licensing fees.  After state consumer protection regulators in New York, Vermont, and elsewhere began responding to complaints about the company, the FTC began an investigation into MPHJ’s activities.  The result was the FTC’s disclosure that it intended to file an administrative complaint against MPHJ alleging deceptive trade practices under Section 5 of the FTC Act.

The basis of the FTC’s allegations of deceptive trade practices originates from the cease and desist letters sent by MPHJ.  The FTC alleged that MPHJ had no intention of actually suing the companies, and that MPHJ did not enter into prior patent licensing agreements as it represented in the letters.  Accordingly, the FTC alleged that MPHJ was engaged in deceptive business practices in violation of the FTC Act.  In response, in January 2014, MPHJ filed a suit against the FTC in the U.S. District Court for the Western District of Texas alleging, inter alia, that under the First Amendment, it had the Constitutional right to assert its patents on the grounds of free speech, and was obligated to do so to protect its patent rights.

Last month, the FTC announced that it had reached an undisclosed settlement with MPHJ.  The proposed consent order sets forth an agreement by MPHJ, Farney Daniels, and MPHJ’s owner, Jay Mac Rust, to refrain from making deceptive representations when asserting patent rights, including the making of “false or unsubstantiated representations that a patent has been licensed in substantial numbers or has been licensed at particular prices.”  The proposed order further prohibits misrepresentations regarding the initiation and imminence of a lawsuit.    According to a New York Times article, MPHJ contends that “Under the agreement, MPHJ continues to have the right to enforce its patents by contacting companies suspected of infringement, and there is no restriction impairing MPHJ’s right to enforce its patents.”

To date, only two companies have reportedly paid MPHJ’s licensing fees.  And perhaps that fact best demonstrates why businesses contacted by a patent troll are well advised not assume the worst, but instead, should calmly seek the advice of experienced intellectual property counsel.

Anna Vradenburgh is a well-respected, business-minded expert in intellectual property issues.  As a patent attorney licensed to practice before the United States Patent and Trademark Office, Anna assists clients in patent and trademark prosecution, and represents clients in trademark opposition matters, domain name dispute matters, and patent and trademark litigation.  Anna can also assist your company in all manner of intellectual property protection.  For more information, visit her website, or contact Anna at (818) 488-8146.  This article is for educational purposes only and nothing in this article is intended to be, nor should be considered legal advice.

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