LEGAL NEWSLINE

NEW YORK (Legal Newsline) -- New York Attorney General Eric Schneiderman has reached what he calls a "groundbreaking" settlement with "scanner troll" MPHJ Technology Investments LLC.

On Tuesday, Schneiderman issued a statement saying the settlement resolves his office's investigations into the patent troll's "conduct" and imposes certain requirements on MPHJ when communicating with New York businesses in the future.

Patent trolls -- sometimes referred to as "patent assertion entities" -- are companies that purchase groups of patents without an intent to market or develop a product. The companies then target other businesses with lawsuits alleging infringement of the patents they bought.

"So-called 'patent trolls' exploit loopholes in the patent system and have become a scourge on the business community," Schneiderman said in a statement. "They drain critical resources from small and medium-sized businesses that would otherwise be available for reinvestment and job creation, which are sorely needed across New York.

"State law enforcement can't cure all the ills of the federal patent system, but the guidelines established in today's settlement will put an end to some of the most abusive tactics by placing the industry on notice that these deceptive practices will not be tolerated in New York."

In almost all cases, the businesses targeted by patent trolls did not copy other companies' technology. Instead, patent trolls argue that that independently developed technology or business processes used by the target -- and in some cases, everyday business activities -- require a license linked to the troll's patents.

MPHJ, for example, contends that most businesses that use an ordinary commercial scanner on a computer network with an everyday email system will infringe its patents.

In particular, MPHJ told hundreds of New York businesses that they "likely" infringed its scanner-related patents, creating the impression that it had conducted a meaningful, individualized analysis of the targeted company's business.

In fact, according to Schneiderman's office, MPHJ merely sent form letters to companies of a certain size and industry classification.

In addition, MPHJ falsely told businesses that most other businesses it had previously contacted had acquired licenses when, in fact, only a handful of businesses had done so, according to the Attorney General's Office.

Schneiderman said MPHJ also provided misleading information about the fees that the few prior licensees had paid, and it falsely threatened to sue hundreds of businesses if they did not respond to its letters within two weeks.

The attorney general pointed out that MPHJ has never filed a patent lawsuit against a New York business.

As redress, the settlement requires MPHJ to allow any licensees that received deceptive letters to void their license with it and receive a full refund, and it prohibits MPHJ from further contacting certain small businesses it previously targeted.

The settlement also imposes a variety of obligations on MPHJ that should serve as guidelines for all patent trolls engaged in similar patent assertion behavior, Schneiderman said.

They include:

- Diligence and good faith when contacting potential infringers. The guidelines require a patent holder to make a serious, good-faith effort to determine whether a targeted business actually engages in infringement before making an accusation. This prohibits the mass mailing of accusations of infringement to hundreds of businesses with little regard to the actual likelihood that the businesses infringed. The guidelines also forbid using a lawyer as a threatening mouthpiece for baseless allegations. If a patent troll communicates through an attorney, the attorney sending such letters must also make diligent efforts to ensure that there is a good-faith basis for believing that the targeted business infringed the patents;

- Providing material information so an accused infringer can evaluate the claim. When a patent holder accuses a business of infringing its patent, the guidelines require it to explain the basis for the claim in reasonable detail. This information will allow the recipient to assess whether the accusation has any foundation in light of the actual activities of the recipient's business. The guidelines also prohibit a patent holder from trying to collect revenue for a patent that has been held invalid, and from failing to disclose material information that reveals the patent's likely invalidity;

- No misleading statements about a license fee. If a patent holder seeks to justify a specific licensing fee, it must clearly explain the factual basis for its proposed fee. This requirement prevents a patent troll from taking advantage of informational asymmetry to deceive businesses into paying more than a fair price for a license; and

- Transparency of the true identity of the patent holder. The guidelines prohibit a patent troll from hiding its identity from its targets. This allows businesses that have been targeted by patent troll campaigns to find information about the patent troll.

Schneiderman noted that the guidelines in the settlement are minimum standards, and are not a safe harbor.

He said his office is continuing to review the activities of patent trolls and will step in to stop abusive practices regardless of whether the guidelines are technically met.

The attorney general said he also is willing to supplement the guidelines with additional requirements in future cases.

"Misrepresentation and downright fraud have become a major problem with patents, particularly against vulnerable targets like individuals and small businesses," said Robin Feldman, director of the Institute of Innovation Law at the University of California Hastings College of Law.

"Today's historic New York settlement agreement strikes at the heart of this inappropriate behavior while protecting the legitimate exercise of patent rights. The agreement provides a model for other states, and for federal regulators as well."

Daniel Ravicher, executive director of the New York-based Public Patent Foundation, agreed.

"New York's new patent troll guidelines are a significant and valuable contribution to the overall effort to curb abuses by patent trolls," he said.

In a statement, MPHJ said it, too, is pleased to have reached an agreement with the attorney general and for the improved guidelines.

"While MPHJ believes its attempts to enforce its patents have conformed with applicable law, and believes it is better to have patent enforcement subject to the jurisdiction of the federal courts rather than individual states, it considers the guidelines proposed by the New York attorney general to be reasonable and believes this agreement is an acceptable resolution of the issue," the company said in an email.

"The guidelines confirm that sending letters notifying persons of infringement, or inquiring as to suspected infringement, is activity permitted under the patent law. The guidelines simply provide certain requirements in the preparation and sending of those letters that the New York attorney general believes should be followed and which MPHJ believes are not unreasonable."

From Legal Newsline: Reach Jessica Karmasek by email at patents@legalnewsline.com.