Tuesday, 18 November 2014

FTC announces settlement with patent assertion entity MPHJ

Almost a year ago, the Federal Trade Commission initiated an investigation into the conduct of MPHJ Technology Investments LLC, a patent assertion entity which allegedly employed deceptive tactics to persuade small businesses to acquire licenses for technologies related to networked scanning systems. The FTC examined in detail the modus operandi of the company, observing that MPHJ typically targeted small companies (having between 20 and 99 employees) in specific sectors (e.g. veterinary services, lawn and garden services, building maintenance services, etc.), employing a three stage process to induce such businesses to conclude licensing agreements:
  1.  MPHJ sent a letter in the name of one of its subsidiaries, identifying itself as the licensing agent for a specific set of patents (known as the Klein patents), deemed to cover computer management systems capable of transmitting electronic images, graphics, and/or documents through a communications network from a network addressable scanner, digital copier, or other multifunction peripheral to external devices, files, and applications. The letter, sent to ca. 16,465 small businesses in the US, alleged that the recipient was likely infringing the Klein Patents by using common office equipment (e.g. a digital copier/scanner/multifunction equipment), and stated that MPHJ was willing to initiate licensing negotiations. The letter also contained some distinctive features, such as the indication of a positive response by the industry to earlier licensing requests made by the patent assertion entity ("most businesses, upon being informed that they are infringing someone’s patent rights, are interested in operating lawfully and taking a license promptly" and “[m]any companies have responded to this licensing program in such a manner"), and the identification of a fair price for a license ($1,200 per employee), allegedly based on prior licensing negotiations.

  2. In case of no response, most of the targeted businesses (over 10,000 of the original 16,465) received a second letter signed by MPHJ's counsel, the law firm Farney Daniels. The letter stated that "our client [has] reasonably assume[d] you have an infringing system and need a license [and] has referred the matter to [Farney Daniels]"; the law firm added that its representation of MPHJ, or of one of the patent assertion entity's subsidiaries, could involve litigation, but reiterated the willingness to enter into a licensing agreement.

  3. The third letter, sent to almost 5,000 companies, was again signed by Farney Daniels' attorneys and contained a draft complaint related to an action for patent infringement that the law firm threatened to initiate, on behalf of MPHJ, within two weeks.
In its complaint, the FTC took issues with the allegedly deceptive, false and/or misleading statements contained in the three letters mentioned above. In particular, the FTC noted that, at the time of the sending of 7,366 first letters, MPHJ had not yet sold a single license for the Klein patents (and had concluded only one licensing agreement by the time it sent the following 1,077). The FTC also observed that different versions of the same letter contained different statements concerning the fair price calculated on the basis of the (non-existent) prior licenses. Further, the authority added that neither MPHJ nor Farney Daniels were, at the time of the sending of the third letters, ready to initiate legal actions for infringement of the Klein patents against the targeted businesses, and did not intend to promptly initiate such litigation. Thus, the FTC's complaint argued that such false and/or misleading statements constituted deceptive acts or practices affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act. MPHJ brought an action against the FTC in the Western District of Texas, alleging a violation of its First Amendment rights and of the Separation of Powers Doctrine; the action was dismissed in September. In the meanwhile, several states conducted parallel investigations into the deceptive tactics employed by MPHJ, employing different means to prevent the patent assertion entity and its counsel from persevering in such activities (see, for example, our previous posts here, here, and here).

On 6 November, the FTC announced that MPHJ and Farney Daniels have agreed to settle the charges. The FTC's proposed consent order, in addition to provisions on record-keeping, compliance reporting and notification, contains specific requirements meant to prevent the use of false and misleading statements in future letters sent by the respondents. In particular, the draft consent order would prevent MPHJ and Farney Daniels from making, in a patent assertion letter, any representation, expressly or by implication:
  • that a particular patent has been licensed to a substantial number of licensees at particular prices or within particular price ranges, or any other representation concerning the results of licensing, sale, settlement, or litigation of a particular patent, unless such representation is non-misleading and based on reliable evidence, at the time the representation is made;

  • about the licenses for a patent or the responses of recipients of a patent assertion letter, unless the representation is non-misleading and based on reliable evidence, at the time the representation is made;

  • that MPHJ, its subsidiaries or counsel have taken any action with respect to the filing of a lawsuit, unless the representation is true and non-misleading;

  • that MPHJ, its subsidiaries or counsel will take any action with respect to the filing of a lawsuit, unless at the time such representation is made, they have decided to take such action and possess and rely upon competent and reliable evidence sufficient to substantiate such statement.
Public comments on the proposed consent order are due, through this dedicated webpage, by Monday 8 December.

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