U.S. Federal Trade Commission and NPE Enter Settlement Agreement

The U.S. Federal Trade Commission, a consumer protection agency, has entered a settlement with non-practicing entity MPHJ Technology Investments, LLC.  The U.S. Federal Trade Commission press release concerning the settlement states, in part:

 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 fall-out from the consent order will be interesting to watch.  According to the press release, a penalty of up to $16,000 per letter can be assessed for future violations of the law.  The Agreement Containing Consent Order can be found, here.  For additional commentary, see Bloomberg, here.  (Hat tip to Bloomberg BNA).