NY Agrees to Terms With Patent Troll MPHJ, Firm Fights Back With Lawsuit Against FTC

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By Tony Dutra  

Jan. 14 -- Patent assertion entity MPHJ Technology Investments LLC, under attack in at least three states for sending payment “demand letters” asserting patent infringement by small businesses, consumers and Internet application developers for using off-the-shelf products, signed an agreement on Jan. 14 with the New York state attorney general that “imposes requirements on MPHJ when communicating with New York businesses in the future.”

The agreement comes a day after the company filed a declaratory judgment action in the U.S. District Court for the Western District of Texas against the Federal Trade Commission, citing the FTC's “unlawful interference and threats” to sue the company. No. 6:14-cv-00011-WSS.

Multi-State Action

MPHJ has been the poster child for state attorney generals complaining about “patent trolls” employing abusive demand-letter practices. The letters allege infringement without naming specific products or patent claims and request a license fee, threatening litigation if the recipient does not pay the fee. However, according to Attorney General Eric T. Schneiderman's announcement, MPHJ “has never filed a patent lawsuit against a New York business.”

Vermont Attorney General William H. Sorrell was the first to file a complaint, on May 22, against MPHJ, charging the company with violating the Vermont Consumer Protection Act, 9 Vt. Stat. Ann. §2458, for unfair and deceptive acts and practices in commerce (106 PTD, 6/3/13). Attorneys general in Nebraska and Minnesota have also initiated investigations into the company.

According to the Jan. 14 announcement, the New York agreement does not rely solely on similar protections.

“The federal patent system suffers from a variety of flaws that are exploited by patent trolls, and state deceptive practices laws cannot solve all the resulting problems,” Schneiderman said. “By restricting the tactics that patent trolls can use when contacting small and medium-sized businesses about possible infringement, the guidelines in this settlement should put an end to some of the most abusive and predatory tactics used by patent trolls.”

The 20-page agreement includes as additional exhibits sample letters that MPHJ may use. In general, per the announcement, the letters reflect four goals:

• “a serious, good-faith effort to determine whether a targeted business actually engages in infringement before making an accusation”;

• “material information so an accused infringer can evaluate the claim”;

• a clear explanation of “the factual basis for its proposed fee”; and

• “transparency of the true identity of the patent holder.”

Stakeholder Reaction

James R. Nuttall of Steptoe & Johnson LLP, Chicago, told Bloomberg BNA that the New York agreement “appears to be thorough and sets forth significant guidelines for companies that engage in mass mailing of patent licensing demands,” and that accordingly, “Vermont and Nebraska will be happy with this resolution.”

As to its affect on other demand-letter senders, Nuttall said, “Other companies will likely pay attention to this resolution and to the guidelines in order to reduce the risk of facing similar cases from attorney generals like the one Mr. Schneiderman brought against MPHJ.”

Jeanne M. Gillis of Foley & Lardner LLP's Chicago office agreed, saying, “I would be surprised if MPHJ did not use similar guidelines required in NY to its activities in other states.” She added, “I do think that counsel that represent [non-practicing entities] are following these proceedings to ensure that they do not get swept up in the cross-hairs of current AG action and interest.”

However, Meredith Martin Addy in the same Steptoe office was concerned about the broader effect of the deal.

“I applaud the New York State Attorney General for reigning in a specific PAE that it has determined violates New York predatory business practices,” she said. “However, the NY AG's guidelines should not be confused with fundamental U.S. patent law, which permits sale and license of a patent and provides remedy for the unauthorized use of the patented invention, regardless of ownership or independent development.”

Whither Congress?

Congress is considering a change to that aspect of U.S. patent law by highlighting abuses by so-called trolls, though the chances of specific changes on this topic appear low.

The Demand Letter Transparency Act (H.R. 3540, 224 PTD, 11/20/13) was introduced in the House and would put other restrictions--and impose significant penalties--on abusive demand-letter senders. But its provisions were not added as amendments to the Innovation Act approved in the House (H.R. 3309, (235 PTD, 12/6/13) and directed more broadly to patent troll litigation abuses.

H.R. 3540 and a provision of the Senate bill on patent trolls (S. 1720, the Patent Transparency and Improvements Act, (243 PTD, 12/18/13) call for FTC Act changes to specifically allow the agency to go after letter senders. H.R. 3540 would also allow the Patent and Trademark Office to fine abusive demand-letter senders and void the patent if the fee is not paid.

However, Foley & Lardner's Gillis was more optimistic of the provisions' prospects, telling Bloomberg BNA, “the NY Agreement shows that there is mounting support in the States and in Congress to pass some form of patent legislation that is directed at curbing or limiting litigation by patent assertion entities, particularly those that appear to do little or no pre-assertion investigation as to the accused activity or entity.”

FTC Action

MPHJ's complaint against the FTC faults the commission for allegedly claiming the authority to file an unfair trade practice lawsuit against the company pursuant to Section 5 of the FTC Act, 15 U.S.C. §45.

MPHJ claims infringement of patents (U.S. Patent Nos. 6,185,590; 6,771,381; 7,477,410; 7,986,426 and 8,488,173) on a distributed computer architecture for document management. It has been sending letters, numbering in the thousands, to anyone it assumes may connect a scanner and computer to a local area network. MPHJ argued that the FTC threats are based on the fact that it has not sued anyone for infringement.

MPHJ seeks a declaration that portions of its communications, including a “threat to sue without an intent to sue,” do not violate Section 5 and “are protected speech under the First Amendment of the U.S. Constitution.” It also seeks a declaration that only the courts have the authority to bring action against the company.

“In some respects, the action may represent MPHJ and its counsel standing up for its prior actions as well to avoid any precedent being set for too much government interference into the content of and method by which demand letters are sent (or patent claims are otherwise asserted) in patent litigation,” Gillis told Bloomberg BNA.

Steven R. Daniels and W. Bryan Farney of Farney Daniels P.C., Georgetown, Texas, represent MPHJ.


Announcement is available at http://pub.bna.com/ptcj/NYAG_announcement.pdf

Agreement text is available at http://pub.bna.com/ptcj/NYAG_MPHJ_agreement.pdf.

FTC lawsuit is available at http://pub.bna.com/ptcj/MPHJvFTCcomplaint.pdf.


To contact the reporter on this story: Tony Dutra in Washington at adutra@bna.com

To contact the editor responsible for this story: Naresh Sritharan at nsritharan@bna.com