Non-Practicing Entity's Claim Against FTC Shown Door for Failure to Exhaust Remedies

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By Anandashankar Mazumdar

Sept. 24 — A patent holder that took up the cause against the Federal Trade Commission in the name of embattled non-practicing entities failed to exhaust its administrative remedies before going to court, the U.S. District Court for the Western District of Texas ruled Sept. 16.

Dismissing the patent holder's free speech claim against an FTC investigation into the company's demand letter practices, the court said that the plaintiff must first seek adjudication of the issues before the FTC itself, particularly because the agency has not yet determined whether it will accuse the patent holder of unfair business practices.

Patent Holder Engaged in Public Controversy

MPHJ Technology Investments LLC of Stephenville, Texas, has been widely criticized by consumer groups, technology firms, and patent reform activists as a “patent troll”. 

Other parties have defended MPHJ as a patent holder using valid methods to enforce its patents and championing the rights of other non-practicing entities to exercise their legitimate rights.

MPHJ holds rights in several patents originally granted to Laurence Klein related to a “distributed computer architecture” with respect to document management and virtual copying, It acquired the rights in 2012 from Project Paperless LLC of Alexandria, Va.

Project Paperless asserted that these patents covered “an entire networked system having certain components and features” related to the “seamless transmission of a scanned document image into application software running on a destination computer.”

Alleging “widespread” infringement of these patents, Project Paperless, MPHJ's predecessor, began sending thousands of “inquiry letters” to companies with increasingly stringently worded followups.

After MPHJ acquired the patents, it continued the practice of sending “follow up correspondence to non-responding recipients.”

In July 2013, the FTC issued a subpoena requesting information about MPHJ's patent enforcement practices. It shared with the patent holder a draft complaint alleging unfair business practices pursuant to its authority under Section 5 of the Federal Trade Commission Act.

MPHJ then initiated the instant claim, alleging that the FTC did not have jurisdiction to pursue its investigation and that the FTC's investigation infringed MPHJ's free speech rights under the First Amendment.

The FTC moved for dismissal of the complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim for which there is a remedy under the law.

Administrative Remedies Must Be Exhausted

The court concluded that since the FTC had not completed its investigation, the agency might very well find that it will not assert any violations of Section 5 of the FTC Act, rendering consideration of the constitutional question unnecessary.

Thus, the court said, MPHJ must exhaust its remedies before the FTC prior to bringing such a claim in federal court.

The court's decision was issued by Judge Walter S. Smith Jr. MPHJ was represented by Fulbright Winniford P.C., Waco, Texas. The FTC was represented by the U.S. Department of Justice's Consumer Protection Branch, Washington.

To contact the reporter on this story: Anandashankar Mazumdar in Washington at amazumdar@bna.com

To contact the editor responsible for this story: Tom Taylor at ttaylor@bna.com

Full text at http://www.bloomberglaw.com/public/document/MPHJ_Technology_Investments_LLC_v_Federal_Trade_Commission_Docket/4.