FTC Settlement Challenges Patent Asserting Entity’s Deceptive Claims

Patent assertion entities have been a focus of debate in the antitrust and intellectual property circles. But we hope all sides of the issue can agree on one proposition: Falsely threatening patent litigation against a small business or making baseless claims that other companies have paid patent licensing fees is illegal. This is the misconduct alleged in the FTC’s just-announced settlement with patent assertion entity MPHJ Technology Investments, LLC, MPHJ corporate officer Jay Mac Rust, and Texas law firm Farney Daniels, PC.

Generally speaking, a patent assertion entity is a company that acquires patent rights and then collects licensing fees from companies that claim to infringe its patents. The FTC’s action focused on statements made by MPHJ in asserting patents related to network computer scanning technology that MPHJ said is used in offices of all sizes across the country.

According to the FTC, the respondents sent a series of letters to thousands of small businesses. The first letter, sent to more than 16,000 businesses on letterhead from one of MPHJ’s dozens of six-letter subsidiaries, told recipients they “may have infringing systems” and instructed them to contact the sender within two weeks, “So that we can agree appropriate licensing arrangements with you, if necessary.” The letter offered to settle without filing a lawsuit if the business agreed to pay $1,200 per employee for a license. (Other versions say $1,000.)

In later letters headed to Ephanie Daniels, things got even more heated. The letter included a draft lawsuit and if the small business did not respond within two weeks, “our client would be forced to file a lawsuit against the small business.” According to the FTC, the respondents sent the letters to approximately 4,870 businesses, including 1,718 letters sent in just one day (April 1, 2013).

The FTC complaint challenges a series of misrepresentations made by the respondents in these letters. For example, the first letter states that “most businesses are interested in operating legally and obtaining a license immediately upon learning that they have infringed someone’s patent rights” and that “many companies have responded in this way Licensing Program.” At the time of this statement, what was the exact number of “many companies” that had paid for the licenses? According to the FTC, when the first 7,300 letters were sent, the respondents had not sold any licenses through the letter campaign.

So what then of a letter on law firm letterhead threatening legal action against small businesses that didn’t respond? The FTC said the respondents have not filed lawsuits against any of the non-responding businesses and do not intend or prepare to file lawsuits against them. Therefore, these claims are also questioned as false.

The proposed settlement would prohibit MPHJ, Jay Mac Rust, and Farney Daniels from making false statements when asserting patent rights, including deceptive statements regarding the number of licenses sold, that litigation will be filed, and that any litigation is imminent. Future deceptive conduct may result in fines of up to $16,000 per letter.

You may submit comments on the proposed settlement until December 8, 2014.

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