FTC, ‘scanner troll’ MPHJ reach settlement in patent enforcement dispute

By Jessica M. Karmasek | Nov 10, 2014

WASHINGTON (Legal Newsline) - The so-called “scanner troll,” MPHJ Technology Investments LLC, and its law firm have agreed to settle Federal Trade Commission charges that they used deceptive sales claims and phony legal tactics in demand letters accusing thousands of businesses of patent infringement.


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


The settlement, announced Thursday, would bar the company and its law firm, Farney Daniels P.C., from making deceptive representations when asserting patent rights.


The settlement with MPHJ marks the first time the FTC has taken action using its consumer protection authority against a non-practicing entity.


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.”


“Patents can promote innovation, but a patent is not a license to engage in deception,” said Jessica Rich, director of the FTC’s Bureau of Consumer Protection.


“Small businesses and other consumers have the right to expect truthful communications from those who market patent rights.”


According to the FTC’s administrative complaint, MPHJ bought patents relating to network computer scanning technology and then told thousands of small businesses they were likely infringing the patents and should purchase a license.


In more than 9,000 letters sent under the names of numerous MPHJ subsidiaries, the complaint alleges, MPHJ falsely represented that many other companies had already agreed to pay thousands of dollars for licenses.


The FTC’s complaint also alleges that Farney Daniels authorized letters on the firm’s letterhead that were sent to more than 4,800 small businesses. These letters warned that the firm would file a patent infringement lawsuit against the recipient if it did not respond to the letter.


According to the FTC, the letters referenced a two-week deadline and attached a purported complaint for patent infringement, usually drafted for filing in the federal court closest to the small business receiving the letter.


The commission said in its complaint the senders had no intention -- and did not make preparations -- to initiate lawsuits against the small businesses that did not respond to their letters, and that no such lawsuits were ever filed.


In the FTC’s proposed consent order, put out for public comment Thursday, MPHJ, Farney Daniels and MPHJ owner Jay Mac Rust agree to refrain from making certain deceptive representations when asserting patent rights, such as false or unsubstantiated representations that a patent has been licensed in substantial numbers or has been licensed at particular prices.


The proposed order also would prohibit misrepresentations that a lawsuit will be initiated and about the imminence of such a lawsuit.


The commission vote to accept the proposed consent order was 5-0.


MPHJ, in a statement Friday, said under the agreement it 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.”


“The agreement includes MPHJ’s commitment that letters sent by the company and its counsel will continue to be accurate, and requires no material revisions to the company’s letters,” the company said, adding that the agreement will not be formally concluded until certain procedural steps are carried out by the FTC.


MPHJ noted that the commission’s principal allegation was that it and its counsel indicated they would file infringement litigation against recipients of the letters, but then failed to do so.


“The company strongly maintains it did intend to bring suit, but refrained from doing so because of intervening patent reviews challenging certain MPHJ patents,” it explained. “The FTC was unwilling to accept that rationale as a reasonable basis for not bringing suit.


“MPHJ and its counsel strongly maintain their position that the enforcement letters that were sent were accurate, required by law, and protected by the First Amendment. Three different federal courts have agreed with MPHJ on the First Amendment issue, including a recent final judgment in Nebraska in MPHJ’s favor.”


Rust said he is pleased that the commission has agreed to ends it investigation and to enter into an agreement that does not impair MPHJ’s right to continue to send the correspondence required to enforce its patents against infringers.


“This resolution ensures that we can continue our efforts to protect our patent rights, and it avoids protracted administrative hearings and subsequent appeals,” he said.


MPHJ owns a number of patents on certain networking system technologies, and said it seeks to enforce those patents through licensing agreements and, when necessary, litigation.


The company said both Canon Inc. and Sharp Corp. have entered into licenses, and have reached agreements with MPHJ on behalf of their customers.


The FTC said it will publish a description of the consent agreement package in the Federal Register shortly.


The proposed consent order will be subject to public comment until Dec. 8, after which the commission will decide whether to make the proposed consent order final.


Interested parties can submit written comments electronically or in paper form by following the instructions in the “Invitation to Comment” part of the “Supplementary Information” section of the Federal Register notice.


The FTC issues an administrative complaint when it has reason to believe that the law has been or is being violated, and it appears to the commission that a proceeding is in the public interest.


When the FTC issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of up to $16,000.


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

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