FTC Bars Patent Assertion Entity From Using Deceptive Tactics

Federal Trade Commission building, Washington, DC.

A company and its law firm have agreed to settle Federal Trade Commission charges that they used deceptive sales claims and phony legal threats in letters that accused thousands of small businesses around the United States of patent infringement. The settlement would bar the company, MPHJ Technology Investments, LLC, and its law firm from making deceptive representations when asserting patent rights.

The settlement with MPHJ is the first time the FTC has taken action using its consumer protection authority against a patent assertion entity (PAE). PAEs are companies that obtain patent rights and try to generate revenue by licensing to or litigating against those who are or may be using patented technology.

“Patents can promote innovation, but a patent is not a license 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.”

According to the FTC’s administrative complaint, MPHJ Technology Investments, LLC, 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 MPHJ’s law firm, Farney Daniels, P.C., authorized 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, usually drafted for filing in the federal court closest to the small business receiving the letter. In reality, the complaint alleges, the senders had no intention—and did not make preparations—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, announced today for public comment, MPHJ, Farney Daniels, and MPHJ’s 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 Commission vote to accept the proposed consent order was 5-0.

The FTC will publish a description of the consent agreement package in the Federal Register shortly. The proposed consent order will be subject to public comment for 30 days, beginning today and continuing through December 8, 2014, after which the Commission will decide whether to make the proposed consent order final. Interested parties can submit written comments electronically or in paper form by following the instructions in the “Invitation to Comment” part of the “Supplementary Information” section of the Federal Register notice.

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Federal Trade Commission

Federal Trade Commission

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Discuss this

There are currently 10 Comments comments.

  1. Gene Quinn November 6, 2014 12:03 pm

    I personally think this is the exact place where the FTC should be involved in the patent monetization industry. The FTC has a history of protecting the public, both consumers and small businesses, against false and deceptive claims. I think the FTC should steer clear from the patent industry more globally, but putting their foot down to stop abusive demand letter practices will protect the public and also the legitimate patent industry.

    I also think it is very good to see this quote from Jessica Rich, Director of the FTC’s Bureau of Consumer Protection.

    “Patents can promote innovation, but a patent is not a license to engage in deception…”

    While I could take issue with the statement that “patents can promote innovation,” it seems to me that this is an important recognition from the FTC, which hasn’t always seemed to understand the critical role patents play in advancing innovation. Patents promote innovation for a variety of ways, but abuse of patent rights has no place in the system.

    -Gene

  2. Simon Elliott November 6, 2014 3:29 pm

    Good to see the FTC state that patents can promote innovation

  3. Paul Morinville November 6, 2014 7:05 pm

    If you get behind on your bills, you will receive threatening letters from you creditors threatening law suits. Most never intend to file a suit. Why are we making such a big deal out of demand letters for patent infringement?

  4. Anon November 7, 2014 7:43 am

    Mr. Morinville makes a point – but perhaps we should apply the logic fully in the opposite direction, taking those “Troll” creditors to task.

    Next on the list: the mega banks in depressed cities across the lands and the plight of homes under water – the “threat” of foreclosure (and accompanying tax burdens) that the banks never really intend to follow through on (because they really do not want the assets themselves).

    For example, look at the housing blight in Detroit, or look at the impending (very large) bubble bursting in Las Vegas. If what is aimed for in patent demand letters is accepted (remembering eBay and the thought that patent law is not somehow different), then the rest of ANY business communication letters “threatening” legal action are equally suspect.

    It seems to me that we have another opportunity to stomp on the gas pedal and bring the logic to its ultimate conclusion. So what if we crash the car in the process? The equivalent “insurance value” is higher than the “worth” of the car (given the trends in weakening patents).

    At the risk of mixing metaphors, full speed ahead and damn the torpedoes.

  5. tifoso November 7, 2014 9:55 am

    The settlement seems toothless. All that MPHJ and its ilk need to do is assert that, at the moment of sending the letter, they sincerely intended to file suit but, later, changed their mind.

    Something more is needed. Would it make sense to require that such cease-and-desist or demand letters be stated with utmost particularity? These letters should contain a specific reference to that part of the patent, down to the words, which part is supposedly infringed as well as the specific acts which are claimed to constitute infringement. “Claim 5, line 18 claims a widget from 3 to 5 inches long. Your widget is 4 inches long.”

    Such a requirement would slow down the trolls but would not prevent patentees whose rights are truly infringed from protecting their rights.

    Dunno. Just thinking in print.

  6. Paul Morinville November 7, 2014 10:56 am

    tifoso, It’s toothless except in its effect overall. Few will send demand letters. They’ll just sue.

  7. tifoso November 7, 2014 12:15 pm

    Suit will require, at some point, particularity. A defendant could move under FRCivP 12e for that particularity or 12b6. Further, a troll who is simply without any real basis would be risking Rule 11 sanctions.

    And then there is the Bishop of Boston angle.

  8. Jim November 10, 2014 8:07 am

    I believe the deception was not as much in the isle threat, as it was in stating that hundreds of others had acquired licenses and included dollar amounts that were false.

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  10. Sinai Yarus November 12, 2014 4:52 am

    Why the distinction between NPE and practicing entities? One would hope that practicing entities are also barred from deceptive practices.