NY Attorney General Settles Investigation into Patent Troll
|Written by Gene Quinn
Patent Attorney & Founder of IPWatchdog, Inc.
Principal Lecturer, PLI Patent Bar Review Course Posted: January 14, 2014 @ 3:13 pm
“So-called ‘patent trolls’ exploit loopholes in the patent system and have become a scourge on the business community,” said Attorney General Schneiderman. “They drain critical resources from small and medium-sized businesses that would otherwise be available for reinvestment and job creation, which are sorely needed across New York. State law enforcement can’t cure all the ills of the federal patent system, but the guidelines established in today’s settlement will put an end to some of the most abusive tactics by placing the industry on notice that these deceptive practices will not be tolerated in New York.”
Law Professor Robin Feldman, the Director of the Institute of Innovation Law at the University of California Hastings College of Law and a frequent contributor to IPWatchdog.com, said this of the announced settlement: “Misrepresentation and downright fraud have become a major problem with patents, particularly against vulnerable targets like individuals and small businesses. Today’s historic New York settlement agreement strikes at the heart of this inappropriate behavior while protecting the legitimate exercise of patent rights. The agreement provides a model for other states, and for federal regulators as well.”
I agree this is an important moment in the battle against destructive and abusive patent litigation and pre-litigation tactics. I also believe that Professor Feldman is accurate when she says that this investigation and subsequent settlement provide a blueprint for dealing with the patent troll problem. Having said that, I’d rather take a far more nuanced position than did Attorney General Schneiderman. Unfortunately, in his announcement the Attorney General goes too far. What he says means that virtually all patent owners are patent trolls. He also suggests that engaging in legal, authorized activity under the patent laws could subject one to investigation, which is obviously a dangerous precedent; one that is hardly necessary to justify what appear to be entirely appropriate actions taken against MPHJ.
Although I do think it is relatively clear that MPHJ engaged in activities that justifiably earn for itself the characterization of a patent troll, the Attorney General goes farther than necessary to call out and punish this bad actor. For example, the following paragraph defining patent trolls was included in the press release issued by Schneiderman’s Office:
Patent trolls – sometimes referred to as “patent assertion entities” – are not innovators. They buy patents owned by others and then try to turn a profit by aggressively pursuing businesses they claim infringe the acquired patents. In virtually all cases, the businesses targeted by patent trolls did not copy other companies’ technology. Instead, patent trolls argue that that independently developed technology or business processes used by the target – and in some cases, everyday business activities – require a license linked to the troll’s patents. MPHJ, for example, contends that most businesses that use an ordinary commercial scanner on a computer network with an everyday email system will infringe its patents.
The problem with this statement is that the Attorney General is vilifying those that acquire patents and seek to enforce them without regard to whether what they are doing is abusive. It seems that the Attorney General is taking the position that it is condemnable to acquire patents and then enforce them against those who did not copy but rather independently created. The problem is that this is simply not true. While independent creation is a recognized defense in copyright infringement proceedings, independent creation is not and never has been a defense in patent infringement cases.
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The fact that one independently created does not mean they are not infringing a patent. From a legal standpoint it is wholly irrelevant whether the defendant independently created. It really has to be that way or there would be absolutely no incentive to invest the millions and sometimes billions of dollars necessary to uncover the innovation in the first place, which many times requires extraordinary and pioneering breakthroughs in the fields of science or engineering. Therefore, it is wholly inappropriate and quite dangerous to vilify what is completely legal activity. To the extent that the Attorney General is grandstanding to acquire attention we can debate whether that is appropriate, but it is simply not acceptable to the extent he is saying that his Office will seek to punish wholly legal activity.
Furthermore, by the definition of patent troll presented by Schneiderman he is condemning virtually every major technology company in the world. Under this definition Google, Apple, Cisco, Microsoft, and many others are patent trolls. Those companies, just like the nefarious actors who deserve to be labeled patent trolls, acquire patents. These entities all have advanced licensing regimes that seek to license patents to those who they say infringe. In many cases those that are asked to take a license claim to be and are independent creators. But under the patent laws enacted by Congress it has never been a defense to claim you independently created because copying is not a prerequisite to infringement of a patent. Further, under Schneiderman’s definition even one of the most innovative companies of this or any other era, IBM, would be a patent troll because they acquire patents for the purpose of seeking licenses. So a definition that captures every technology company in the world and defines them as a patent troll simply can’t be correct.
This is not to say, however, that the action taken against MPHJ was not condemnable. It seems as if the action taken by the New York Attorney General was wholly justified because MPHJ engaged in abusive pre-litigation tactics with the intent to deceive those receiving demand letters, scaring them into settling.
MPHJ employed a strategy of targeting small and medium-sized businesses, which in and of itself is not legally problematic. The fact that MPHJ acquired patents of dubious validity is interesting, but again, patents are presumed valid, so that is not terribly probative either. The problem with the MPHJ strategy is that it was deceptive. They sent out letters to a large number of small businesses in an effort to extract small, nuisance-value license payments from them. Indeed, some patent trolls seek far less than even a fair nuisance-value, asking for $500 or $1,000. It is this type of behavior that is the hallmark of a patent troll. The mere fact that one has acquired patents and seeks to license them is in and of itself irrelevant because that activity is completely legal.
In the letters sent by MPHJ hundreds of New York businesses were told that it was “likely” that they were infringing MPHJ patents and, therefore, needed to take a patent license. By saying that they were “likely” infringing an impression was created that MPHJ had conducted at least some kind of individualized analysis of the targeted company’s business. But MPHJ did no investigation, choosing merely sent out form letters in bulk to companies of a certain size and industry classification. There was no way MPHJ could have legitimately made the assertion that the businesses receiving the letters were “likely” infringing. Furthermore, MPHJ falsely stated in the letters that most other businesses approached had paid a fee to acquired licenses when in fact very few businesses had actually paid to acquire licenses. MPHJ also provided misleading information about the fees that the few businesses accepting licenses had paid.
The Attorney General also cited MPHJ for falsely threatening to sue hundreds of businesses if they did not respond to its letters within two weeks. The Attorney General explained that MPHJ never filed any patent lawsuits against a New York business. While I have issues with the other false and misleading statements made in the letters, such as the reference to a likelihood there was infringement despite no investigation, I find it impossible to believe that threats to sue that are not acted upon are in some way a deceptive activity that the government needs to concern itself with. If a threat to sue that is not followed up on creates a legally actionably wrong then the Attorney General had better hire far more staff and get ready to go after tens of thousands of businesses and lawyers. I’m not saying it is smart to issue these kinds of blanket threats, and it is rather poor practice to make a threat and then there be absolutely no consequences to follow, but it seems naive not to understand that such threats are a dime a dozen.
This brings me full circle. Why is it necessary to overstate who is a patent troll? Why is it necessary to vilify completely legal activity associated with acquiring and enforcing patents? Why would the government take it upon itself to police every over-blown threat to sue? It is enough to recognize that the activity that makes one a patent troll is the use of a patent as part of an overall abusive litigation or pre-litigation strategy. The entire industry does not need to be condemned or vilified. So why? Such exaggerated and legally inaccurate statements smack of grandstand for the media, or as an attempt to vilify all patent owners and destroy the patent system as we know it.
Kudos to New York Attorney General Schneiderman for setting in place a blueprint that others can follow, if the desire, to put an end to abusive pre-litigation tactics. This is a far better model than anything Congress has or will consider.
Shame on the Attorney General Schneiderman for vilifying patent owners generally and suggesting that wholly legal activities somehow make one a patent troll. How and why a patent has been acquired is simply irrelevant to the inquiry. The only relevant inquiry is whether the alleged patent troll is using a patent as a way to exploit judicial inefficiencies to engage in an extortion-like shakedown. Given the deceptive and false statements made and the lack of even a modicum of investigation it seems the MPHJ strategy was what some federal courts have characterized as extortion-like activity. Recognizing that abuse of the litigation process is unacceptable is enough to clean up the industry. We need not go further than that.- - - - - - - - - - Attorney General Eric T. Schneiderman announced earlier today that a groundbreaking settlement was reached with MPHJ Technology Investments, LLC, a patent troll according to Schneiderman. Schneiderman’s investigation focused on MPHJ’s use of deceptive and abusive tactics when it contacted hundreds of small and medium-sized New York businesses in an effort to get them to pay for patent licenses characterized as being of dubious value.
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About the Author
Gene Quinn is a Patent Attorney and the founder of the popular blog IPWatchdog.com, which has for three of the last four years (i.e., 2010, 2012 and 2103) been recognized as the top intellectual property blog by the American Bar Association. He is also a principal lecturer in the PLI Patent Bar Review Course. As an electrical engineer with a computer engineering focus his specialty is electronic and computer devices, Internet applications, software and business methods.