FTC wins settlement against MPHJ, but is it enough? Stefano John NAIP Education & Training Group / European Patent Attorney
MPHJ Technology Investments LLC is a notorious US patent asserting entity. It had acquired a family of granted US patents directed to covering network scanning systems. During 2012-2013 it mailed out more than 9,000 demand letters to small businesses who use scan-to-email technology. It would suggest they should pay around $1,000 per worker for using basic "scan-to-email" function. It then mailed further letters under the name of their appointed law firm (Farney Daniels) to let the small businesses know that lack of reply to their previous letter meant that they could reasonable assume that the small business infringed their patent rights and them that they had a 2 week period to reply about starting license negotiations or they could be sued.
As one can imagine, this caused quite an uproar in the small business community!
It has to be noted that, at least up to now, these US patents are presumably valid and can be used by their owners to sue infringers/claim licence income. The main contention with the letters being used by MPHJ was that they contained misleading information: in the first letter, they were claiming they had already settled a number of licences for those same patent rights they were asserting and this was not the case (only 1 company could be proven to have taken such a license). In the letters sent by the Farney Daniels, there were also other misleading assertions, including that the clients needed to reply by 2 weeks or they would otherwise be sued and that they could reasonably assume that the addressee was infringing the asserted patents by not answering previous letters. All of these practices were done by MPHJ to encourage the small businesses to take fright at infringing MPHJ’s patents and, instead of trying to defend themselves at high expense, pay up for a license.
Hence the FTC at the end of 2013 publicly criticized MPHJ and Farney Daniels for i) going after small companies for infringement and ii) that its demand letters had been sent out without the proper due diligence to ensure that the receiving entity is actually infringing.
In a bold response, MPHJ sued the FTC on the basis that they were interfering with MPHJ’s rights to assert a legal right deriving from their granted US patent. District Court Judge Walter Smith dismissed the case. He sided with the FTC, finding that the FTC investigation wasn't complete and so a decision could not be made then, but importantly the judge acknowledged that MPHJ has a constitutional right to file lawsuits and threaten to file lawsuits. The only exception is when such "petitioning" activity is a "sham." What is “sham” should be decided by the FTC.
As a result of further discussion, MPHJ and Farney Daniels reached an agreement with the FTC on 6th November. It stated that MPHJ and Farney Daniels are barred from sending out any more letters with the same misleading statements under penalty of a fine of $16,000 per letter. The FTC was very promptly releasing information about this settlement to dissuade other aggressive patent asserting entities from using similar methods. However it must be remembered that i) MPHJ and Farney Daniels have not been rebuked for asserting their patent rights (not really within the FTC’s powers) ii) MPHJ and Farney Daniels have not been penalized (at least not financially) and iii) the misleading statements they are barred from using in any letters are quite limited in their scope. For businesses and parties who are fighting such aggressive patent asserting entity practices, this victory will probably be of very limited use as a result.
It is however worth noting that this is not the end of the story. MPHJ were sued by attorneys general in 2 US states: Nebraska and Vermont.
Vermont used violation of consumer protection laws to impede MPHJ. MPHJ tried to move the case into federal court and failed. MPHJ will now have to defend its actions in state court, arguing it didn't violate the state's consumer protection laws.
Nebraska issued a cease and desist order against a group of aggressive patent asserting entities (including MPHJ), all linked by their use of the same law firm, Farney Daniels. In the end the Nebraska federal court found that MPHJ did have a constitutional right to "threaten suit for infringement," using its chosen legal counsel, and that right had been violated by the state's actions.
It is therefore clear that, at present, there is no clear way to impede or curtail aggressive patent asserting entities from asserting their rights. If successful, the route taken by Vermont seems to be more efficient than the FTC’s. What will also be a very interesting step in deciding the outcome of this story is that some of the main corporation players in the field of supplying business IT (Ricoh, Xerox, and HP) have filed challenges to MPHJ's patents at the US Patent and Trademark Office. Canon and Sharp meanwhile reached settlement deals with MPHJ to fend off accusations against their customers.
Hence, the lack of legal instruments to curtail aggressive patent asserting entities may mean challenging their rights at the USPTO or by license negotiations by interested players in that field may be the best way forwards.
Author:
Stefano John, European Patent Attorney
Experiences：
European Patent Attorney, Bryers
Trainee European Patent Attorney, Bugnion SpA
Trainee European Patent Attorney, Notabartolo & Gervasi
Internship, EPO
