The settlement bars MPHJ and its law firm Farney Daniels from making deceptive representations when asserting patent rights, with future deceptive letters triggering a punishment of $16,000 a letter.
This is the first time the FTC has taken action using its consumer protection authority against a patent assertion entity (PAE).
“Patents can promote innovation, but a patent is not a licence to engage in deception,” said Jessica Rich, director of the FTC’s Bureau of Consumer Protection. “Small businesses and other consumers have the right to expect truthful communications from those who market patent rights.”
MPHJ is one of the most notorious PAEs. In January this year it reached a settlement with New York attorney General Eric Schneiderman that imposed requirements on the firm when communicating with New York businesses. That same month MPHJ sued the FTC for trying to stop it seeking payouts for patent infringement. The lawsuit was dismissed in September.
According to the FTC’s administrative complaint, MPHJ bought patents relating to network computer scanning technology, and then told thousands of small businesses that they were likely infringing the patents and should purchase a license. In more than 9,000 letters sent under the names of numerous MPHJ subsidiaries, the complaint alleges, MPHJ falsely represented that many other companies had already agreed to pay thousands of dollars for licenses.
The administrative complaint also alleges that Farney Daniels authorised letters on the firm’s letterhead that were sent to more than 4,800 small businesses. These letters warned that the firm would file a patent infringement lawsuit against the recipient if it did not respond to the letter. The letters also referenced a two-week deadline and attached a purported complaint for patent infringement. The complaint alleges the senders had no intention to initiate lawsuits against the small businesses that did not respond to their letters. No such lawsuits were ever filed.
In the proposed consent order, which was announced for public comment, MPHJ, Farney Daniels, and MPHJ owner Jay Mac Rust agree to refrain from making certain deceptive representations when asserting patent rights, such as false or unsubstantiated representations that a patent has been licensed in substantial numbers or has been licensed at particular prices. The proposed order also would prohibit misrepresentations that a lawsuit will be initiated and about the imminence of such a lawsuit.
The FTC vote to accept the proposed consent order was 5-0.
Vermont Senator Patrick Leahy, chairman of the Senate Judiciary Committee, welcomed the settlement. But he stressed that Congressional patent reform is still needed.
“These steps taken by the FTC will stop one notorious patent assertion entity from using misleading demand letters to harass small businesses in Vermont and across the country, but this action alone with not stop abuse the patent system,” he said in a statement. “The demand letter provision I included in the bipartisan Patent Transparency and Improvements Act would have empowered the FTC to seek meaningful monetary penalties from bad actors, which is an important deterrent for misconduct. Small businesses should be able to focus on their work and on their customers – not frivolous exploitation schemes. I am committed to addressing the problem of patent trolls through legislation in the coming year, including a strong provision to address deceptive demand letters.”
