Federal judge dismisses ‘scanner troll’ case against FTC

By Jessica M. Karmasek | Sep 22, 2014

WACO, Texas (Legal Newsline) - A federal judge has sided with the Federal Trade Commission in a case filed against it by the so-called “scanner troll,” MPHJ Technology Investments LLC.

Texas-based MPHJ sued the FTC in the U.S. District Court for the Western District of Texas in January for allegedly violating its constitutional rights.

MPHJ sought to enjoin the commission from threatening a suit against the company’s patent enforcement efforts, which, MPHJ has argued, are both lawful and constitutionally protected.

But Judge Walter Smith said last week the FTC’s investigation was not complete and that the issue was not “ripe” for decision.

“In the present case, as noted previously, the FTC’s actions have not progressed beyond the investigative stage,” he wrote in his 13-page memorandum opinion and order. “There is, therefore, no file agency action.”

Other factors also weigh against MPHJ, Smith said in his Sept. 16 decision.

“Plaintiff is seeking a declaration from this court that the letters sent by it do not violate Section 5 of the (Federal Trade Commission) Act,” he explained. “This would usurp the fact-finding responsibility vested in the FTC and would impede rather than foster ‘effective enforcement and administration by the agency.’”

The judge continued, “Further, there is no immediate impact upon the plaintiff other than responding to the FTC’s discovery requests.”

Litigation expenses, Smith noted, do not constitute irreparable injury.

As for MPHJ’s assertion that the FTC violated its First Amendment rights, the judge said that depends if the company’s letters are a “sham.”

“Yet, again, a determination of whether MPHJ’s various letters were a ‘sham’ would require the court to usurp the fact-finding responsibility of the FTC,” Smith explained.

“Even if MPHJ’s activities are not considered a sham but a legitimate exercise of its First Amendment rights, the assertion of a Constitutional violation as a defense to administrative proceeding is still subject to exhaustion. Standing and ripeness must also be satisfied.”

He continued, “After investigation, the FTC could well determine that no Section 5 violation has occurred, meaning that no further agency action would ensue and no Constitutional issues would arise.”

Generally speaking, a non-practicing entity, patent assertion entity or patent monetization entity purchases groups of patents without an intent to market or develop a product.

In some cases, but not all, the entity then targets other businesses with lawsuits alleging infringement of the patents it bought. Often, these are referred to as “patent trolls.”

MPHJ has been accused of demanding businesses pay $1,000 per worker for using a process of scanning and emailing an electronic document.

MPHJ has said it believes the FTC simply does not like the free speech in which the company is engaged and, therefore, is seeking to interfere with or stop that speech.

“The FTC’s threatened suit is principally based upon the FTC’s contention that if any U.S. patent owner threatens suit for infringement, even against a single infringer, and then fails promptly to bring suit for infringement, then that U.S. patent owner has committed an unfair trade practice under Section 5 of the FTC Act unless the patent owner bears the burden and can prove that at the time the threat was made, it intended to bring suit,” MPHJ’s attorney, Steven Daniels of Texas-based law firm Farney Daniels PC, wrote in the company’s 55-page complaint.

MPHJ, in a corporate statement, said it believes the federal court erred in its decision.

“MPHJ’s case against the FTC sought a declaration that MPHJ’s patent enforcement activity is protected by the First Amendment, as has already been confirmed by other federal courts. Unfortunately, the court concluded that MPHJ’s suit was premature, on grounds that the FTC has not yet reached any final conclusion,” the statement read.

“The FTC had threatened to sue MPHJ in that court, and MPHJ sought only to have the FTC’s claim resolved in that court.”

MPHJ noted it was willing to litigate the issue in the federal courts, as it was “confident” that its conduct was lawful.

“It is also important to note that even though the FTC case was dismissed as premature, the court did acknowledge that the First Amendment principles relied upon by MPHJ do apply to MPHJ’s activity,” according to the company’s statement.

“MPHJ is considering whether it will appeal the decision.”

A spokesman for the U.S. Department of Justice, which represented the FTC in the case, declined to comment.

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

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