Accused Patent Troll Takes Aim at FTC, Settles With N.Y. AG

, The Litigation Daily

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Eric T. Schneiderman
Eric T. Schneiderman

With the regulatory backlash against so-called patent trolls continuing to mount, the patent licensing company MPHJ Technology Investments LLC took matters into its own hands on Monday, bringing a First Amendment case against the U.S. Federal Trade Commission. The very next day, New York Attorney General Eric Schneiderman announced what he called a "groundbreaking" settlement with MPHJ, hailing the deal as a warning to similar companies.

As Joe Mullin of Ars Technica reported, MPHJ lodged a declaratory judgment suit on Monday against the FTC in U.S. district court in Waco, Texas, MPHJ's home turf. The suit was filed by Farney Daniels, the small Texas law firm that's represented MPHJ in its controversial patent enforcement campaign.

MPHJ came under intense scrutiny last year for demanding nuisance settlements from small businesses. Monday's complaint reveals that the FTC has been investigating MPHJ since July 2013 and was on the verge of suing the company for unfair trade practices. MPHJ wants a declaration that it has done nothing illegal, and that the FTC is violating its free speech rights and its right to choose its counsel.

"MPHJ is forced to file the present suit … to secure its rights under the U.S. Constitution and federal law, and to stop the improper and ultra vires interference with and impingement of MPHJ's lawful and constitutionally protected patent enforcement rights," the company wrote.

MPHJ holds a patent on the process of scanning a document and sending it over email. MPHJ and a network of shell companies have sent letters to at least 16,000 small businesses around the country, accusing them of infringing the patent. MPHJ typically offers to agree to a prelitigation settlement of a few thousand dollars, which is far less than the cost of fighting back in court. The company's largest owner is a Texas attorney named Jay Mac Rust, who was not immediately available for comment.

In congressional debate over patent reform, MPHJ has often been used to illustrate the need for change. Vermont sued MPHJ last May, alleging violations of consumer protection laws. Several other states quickly opened investigations into MPHJ.

On Tuesday, meanwhile, New York's attorney general unveiled a settlement agreement in which MPHJ agreed to reimburse any New York business that sent settlement checks in response to demand letters. The AG said in a statement that "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." As Ars Technica's Mullin reported, however, only 17 companies have given in to MPHJ's demands so far, and apparently none of them were from New York.

According to the newly filed Texas suit, the FTC determined that MPHJ's demand letters constituted "unfair or deceptive acts or practices" because the entity had no plans to actually sue anyone. MPHJ tried to dispel that notion in its complaint, arguing that lawsuits were delayed because MPHJ was busy dealing with subpoena requests. In January, MPHJ sued several large companies, including Coca Cola and the department store chain Dillard's Inc.

"The federal courts have long made it clear that communications related to patent rights are protected by the First Amendment unless they can be shown to be, in their essential message, objectively and subjectively baseless," MPHJ argues. "Here, the FTC has made clear that it does not contend that the communications were objectively and subjectively baseless, but yet is proceeding to threaten action against MPHJ and its counsel for what plainly is constitutionally protected activity."

Jeanne Gills of Foley & Lardner, who isn't involved in the case, told us there's something to be said for MPHJ's argument that demand letters shouldn't be overregulated. But Gills wasn't exactly sympathetic to MPHJ, noting that it didn't expressly deny using shell companies and strong-arm tactics. "The problem here is that those arguably legitimate arguments are being made by the wrong plaintiff," she said. "It'll be hard for the court to take them seriously."

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