FTC settlement challenges deceptive claims by patent assertion entity

Patent assertion entities have been the subject of much debate in antitrust and intellectual property circles. But there’s one proposition we hope that parties on all sides of the issue can agree on: It’s illegal to falsely threaten patent suits against small businesses or make unfounded claims that other companies have paid for patent licenses. That’s the misconduct alleged in a settlement the FTC just announced with patent assertion entity MPHJ Technology Investments, LLC, MPHJ corporate officer Jay Mac Rust, and Texas-based law firm Farney Daniels, P.C.

Generally speaking, patent assertion entities are companies that acquire patent rights and then seek licensing fees from businesses they claim are infringing their patents. The FTC’s action centers on representations that MPHJ made while asserting patents that relate to network computer scanning technology MPHJ says is used in offices of all sizes across the country.

According to the FTC, the respondents sent out a series of letters to thousands of small businesses. The first letter – sent to more than 16,000 businesses on the letterhead of one of MPHJ’s dozens of six-letter subsidiaries – told the recipient they “likely have an infringing system” and directed them to contact the sender within two weeks “so that we may agree with you upon an appropriate license arrangement if one is needed.” The letter offered to settle without court action if the business agreed to a license of $1,200 per employee. (Other versions said $1,000.)

Things heated up in later correspondence, sent on the letterhead of Farney Daniels. That letter included a draft lawsuit “which our client will be forced to file” against the small business if it didn’t respond within two weeks. According to the FTC, the respondents sent that letter to approximately 4,870 businesses, including 1,718 letters sent on just one day – appropriately enough, April 1, 2013.

The FTC complaint challenges a series of misrepresentations that respondents made in those letters. For example, the first letter stated that “most businesses, upon being informed that they are infringing someone’s patent rights, are interested in operating lawfully and taking a license promptly” and that “many companies have responded to this licensing program in such a manner.” What was the exact tally of the “many companies” that had paid for a license at the time that statement was made? According to the FTC, when the first 7,300 letters were sent, the respondents hadn’t sold a single license through their letter campaign.

What about the later letters on law firm letterhead that threatened imminent legal action against small businesses that didn’t reply? The FTC says the respondents didn’t file a single lawsuit against any of the businesses that didn’t respond, nor did they intend or prepare to file lawsuits against them. So those claims were challenged as false, too.

The proposed settlement would bar MPHJ, Jay Mac Rust, and Farney Daniels from making misrepresentations when asserting patent rights, including deceptive claims about the number of licenses sold, that a lawsuit will be filed, and the imminence of any lawsuit. Future deceptive conduct could trigger penalties of up to $16,000 per letter.

You can file a comment about the proposed settlement by December 8, 2014.