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FTC settles with patent troll

The Federal Trade Commission has come down on a patent troll and its law firm for misrepresentations in their assertion of patent rights. According to the FTC, patent-assertion entity MPHJ had purchased from another patent assertion entity four patents—called the Klein Patents—relating to networked office scanning systems.

“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 FTC writes. “The settlement would bar the company…and its law firm from making deceptive representations when asserting patent rights.”
The FTC does not address the validity of the patents themselves. Instead, it addressed a series of three letters that MPHJ and its law firm sent to thousands of small businesses with 20 to 99 employees between September 2012 and June 2013.

“Each first letter,” the FTC complaint says, “states that the recipient is likely infringing the Klein Patents by using common office equipment, and that ‘we are contacting you to initiate discussions regarding your need for a license.’” In addition, in the first letter, the FTC says, “Respondents represented, among other things, that ‘we have had a positive response from the business community to our licensing program,’ that ‘most businesses, upon being informed that they are infringing someone’s patent rights, are interested in operating lawfully and taking a license promptly,’ and that ‘[m]any companies have responded to this licensing program in such a manner.’” The FTC said some versions of the letter suggested that the price determined from the responses of “many companies” would be a payment of $1,200 per employee. Other versions cited a $1,000 per employee figure.

However, states the FTC complaint, “When Respondents sent the final 638 of these First Letters, the Respondents had sold a license to the Klein Patents to only two of the 8,443 small businesses that Respondents had contacted in their licensing campaign.” Beginning in March 2013, the letters “…did not include the representations concerning substantial sales of licenses….”

If a recipient failed to respond to the first letter, the FTC says, a second letter from the law firm would state, “…our client reasonably assumes you have an infringing system and need a license…. While our representation…can involve litigation, it is our client’s preference here that we first make all reasonable efforts to reach agreement on a license. To that end, we do need to hear from you within the next two weeks.”

A third letter, accompanied by a complaint alleging a cause for patent infringement, states that the recipient would be sued if it failed to respond within two weeks.

The FTC complaint says the representations that substantial numbers of businesses contacted agreed to pay compensation was false or misleading or not substantiated at the times the representations were made.

In addition, the complaint says, “In fact, Respondents were not prepared to initiate legal action and did not intend to initiate legal action for patent infringement against small businesses that did not respond to the Respondents’ letters, and were not prepared to initiate and did not intend to initiate such legal action imminently.”

The FTC says the settlement with MPHJ is the first time the FTC has taken action using its consumer protection authority against a patent assertion entity. “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.”

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