Homemade solutions against patent trolls - part 2: New York Advocate General reaches settlement with MPHJ

In July 2013, the Nebraska Attorney General chose a peculiar solution to prevent the spread of 'patent trolling' phenomena. Rather than directly targeting the patent holder, the AG filed a cease and desist order against the Farney Daniels law firm, which had sent demand letters on behalf of MPHJ, one of the companies most commonly associated with the allegedly deceptive behaviors which prompted the US House of Representatives to pass the Innovation Act in early December. The order issued by the Nebraska AG enjoined the law firm from initiating new patent infringement enforcement efforts within Nebraska, pending an investigation on the alleged violation of the Nebraska Consumer Protection Act, § 59-1601 seq., and the Uniform Deceptive Trade Practices Act, § 87-301 seq.

As I reported in mid December, Nebraska's homemade solution did not withstand the scrutiny of courts. The District Court for the District of Nebraska ruled that the cease and desist order, issued before the conclusion (and review) of a formal investigation into the conducts of MPHJ and Farney Daniels, was akin to a forbidden prior restraint of speech and association. Thus, the District Court granted a preliminary injunction which prevented the Nebraska Attorney General from enforcing the cease and desist order against the law firm. In a decision of 14 January, the same judge reiterated this conclusion, granting a motion for preliminary relief filed by MPHJ itself, allowing Farney Daniels to keep representing the patent assertion entity in Nebraska.

AG Eric T. Schneiderman

Possibly inspired by the failure of Nebraska's solution, the Attorney General of the State of New York took a different path. On 14 January, the AG announced that he was able to reach a 'groundbreaking settlement' with MPHJ. The agreement essentially requires the patent assertion entity (i) to make a serious effort to determine the validity of its allegations of infringement, before making an accusation, either directly or through an attorney, (ii) to provide the alleged infringer with detailed information on the patents at issue, as well as on the basis on which the infringement allegation is made, (iii) to disclose information about the patents' likely invalidity, or to refrain from trying to collect revenues if the patents have been held invalid, (iv) to state the factual basis for a proposed licensing fee, and (v) to disclose its true identity. The Attorney General, Eric T. Schneiderman, noted that the agreement is meant to serve as a blueprint for other AGs dealing with patent trolling phenomena:

So-called ‘patent trolls’ exploit loopholes in the patent system and have become a scourge on the business community [.] 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.

The following is a summary of the main obligations imposed to MPHJ under the settlement agreement, properly known as 'Assurance of Discontinuance'. The patent assertion entity, in relation to infringement allegations concerning New York individuals or companies, agreed:

• to provide a written notice to any company which has already concluded a licensing agreement with MPHJ, informing the licensee that it has the right to void the license agreement, in return for a full refund;
• to refrain from asserting its patents against any individual or small business (with fewer than 50 employees) which previously received a demand letter from MPHJ or its attorneys;
• if making allegations of infringement, to make reasonable efforts to evaluate (i) the scope of the asserted patents, (ii) the specific product used or sold by the targeted company, which allegedly infringes the asserted patents, according to MPHJ's good faith assessment;
• if merely intending to inquire as to whether a company infringes one of its patents, to make reasonable efforts to identify reasonably available facts about the targeted business, the allegedly infringing products, and the likelihood of infringement;
• to describe with reasonable specificity the basis for the infringement allegation;
• to provide information on the existence of (i) relevant pending or completed litigation in which a court found the asserted patents to be invalid or non-infringed, or (ii) relevant findings by the USPTO which raise issues of invalidity, or (iii) a terminal disclaimer which terminates before the end of the proposed license term;
• on request, to provide a claim chart or equivalent document that explains the basis of MPHJ's good faith infringement allegations;
• when proposing a licensing fee, to provide factual support for any reason or justification adduced for the proposed fee;
• when asserting a patent through a licensing agent, to disclose MPHJ's relationship with the agent;
• when asserting a patent in which another person has a financial interest (5% or more), to disclose the identity of such person;
• to refrain from providing misleading information on license agreements reached with third parties;
• to refrain from requiring the alleged infringer to enter into a non-disclosure agreement which would restrict communications between the targeted company and other companies against whom MPHJ is asserting the same patents (unless the non-disclosure merely protects MPHJ's proprietary business information, trade secrets, or attorney work product);
• to refrain from making fraudulent statements, or from referring to previous communications, unless it includes copies of such communications or has documentation verifying that MPHJ actually sent them;
• to refrain from asserting its patents through a legal counsel, unless the above mentioned requirements are also met by the counsel (good faith basis, reasonable efforts to identify the scope of the patents, as well as the allegedly infringing products);
• to refrain from asserting any patents which has been held invalid in a final judicial decision.

The settlement also contains provisions which require MPHJ to disclose the partial or comprehensive nature of the proposed agreement, and the existence of a licensing agreement or covenant not to sue with the originator or manufacturer of the allegedly infringing products. Further, the agreement establishes fines for any violation of its provisions. The solution endorsed by the New York Advocate General positively addresses most of the issues raised by vague demand letters. It may not be a miraculous cure for the underlying issues that feed patent trolling, but, at least in the State of New York, it could restore fair play rules.