Patent Assertion Entity Sues FTC, Agrees to Follow New York Attorney General Guidelines

    17 January 2014

    A well-known “patent assertion entity” (PAE), MPHJ Technology Investment LLC, filed a declaratory judgment suit against the Federal Trade Commission (FTC) and its Commissioners for the agency’s alleged “threats to bring action against MPHJ”, which the company claims is “unlawful interference and threats by the FTC against MPHJ and its counsel directed at stopping or impeding the lawful, proper, and constitutionally protected efforts by MPHJ to identify and seek redress for infringement of its US patents.” 

    MPHJ owns several patents related to document management devices and applications covering the ability to scan documents to email, for example. Acting through subsidiaries, MPHJ allegedly sent thousands of demand letters accusing companies of infringing its patents and offering licenses. MPHJ’s demand letters sought a royalty of $900 to $1,200 per employee.

    MPHJ’s January 13, 2014 complaint filed in the Western District of Texas (here) alleges that in making its threats the FTC has not asserted invalidity of the patents, any lack of infringement of the patents, any loss of rights to enforce the company’s patents, any lack of need for the company to send infringement inquiry letters, or that MPHJ does not have a right to threaten suit against would-be infringers. MPHJ complained that the agency does not have the authority to file the threatened unfair trade practice complaint against the company pursuant to Section 5 of the FTC Act, 15 U.S.C. § 45. MPHJ’s suit seeks a declaration that its demand letters do not violate Section 5 and that the company has the First Amendment right to send said letters.

    The day after MPHJ sued the FTC, it finalized an agreement with New York Attorney General Eric T. Schneiderman in which it did not admit to any wrongdoing, but agreed to follow certain guidelines in future communications with New York businesses. New York’s guidelines focus on requiring the PAE to conduct due diligence before accusing any person of infringement and to provide the alleged infringer with certain information. The guidelines include:

    • Diligence and Good Faith When Contacting Potential Infringers. The guidelines require a patent holder to make a serious, good-faith effort to determine whether a targeted business actually engages in infringement before making an accusation. They prohibit the PAE or its attorney from sending demand letters to businesses without considering the actual likelihood that the businesses infringed.
    • Providing Material Information to an Accused Infringer. When a patent holder accuses a business of infringing its patent, the guidelines require it to explain the basis for the claim in reasonable detail. This information will allow the recipient to assess whether the accusation has any foundation in light of the actual activities of the recipient’s business. The guidelines also prohibit a patent holder from trying to collect revenue for a patent that has been held invalid, and from failing to disclose material information that reveals the patent’s likely invalidity.
    • No Misleading Statements about a License Fee. If a patent holder seeks to justify a specific licensing fee, it must clearly explain the factual basis for its proposed fee.
    • Disclosure of the True Identity of the Patent Holder. The guidelines prohibit a PAE from hiding its identity from its targets.

    In announcing the agreement, Mr. Schneiderman emphasized that the requirements imposed on MPHJ should be viewed by other PAEs as “the minimum standards that such entities seeking to contact New York businesses must follow to avoid liability for unlawful deceptive practices.”

    While it resolved the New York investigation, in May 2013, the Vermont Attorney General sued MPHJ for alleged in unfair and deceptive acts under that state’s Consumer Protection Act. MPHJ removed the case to federal court and then moved to dismiss it for lack of personal jurisdiction. Vermont moved to remand the case back to state court. Both motions are pending. 

    In July 2013, the Nebraska Attorney General began an investigation into whether patent infringement enforcement efforts by MPHJ’s law firm violated that state’s Consumer Protection Act and the Uniform Deceptive Trade Practices Act (here). However, on January 14, 2014, the U.S. District Court in Nebraska enjoined the state’s Attorney General from taking any steps to prevent or impede the MPHJ’s law firm from representing MPHJ in connection with licensing and litigation of the company’s patents against Nebraska companies.

    PAEs are also the focus of Congressional legislation, including a bill that passed the House of Representatives in December (HR 3309). The FTC also announced that it investigate PAEs.