Update December 8, 2014: Today EFF, together with Engine Advocacy, filed public comments regarding the FTC's proposed consent agreement with MPHJ. We commend the FTC for taking action against this troll's deceptive conduct. At the same time, we urge the FTC to seek real penalties, such as disgorgement of licensing revenues secured through deception. We also request that the FTC take action against similar trolls such as the Innovatio IP Ventures, which sent thousands of deceptive letters to hotels and cafes demanding payment for using off-the-shelf Wi-Fi routers.
The FTC has announced a settlement with MPHJ, the infamous scanner troll. MPHJ owns some patents that it claims cover the basic business practice of scanning to email. It sent thousands of letters to small businesses around the country demanding $1,000 per employee. Its letters misrepresented how many other businesses were paying up and often included false threats to sue. To make its deceptive activities harder to track, MPHJ set up 101 shell companies with obscure names. The scheme was run by Jay Mac Rust (the owner and manager of MPHJ) with help from Texas law firm Farney Daniels.
By targeting so many small businesses, MPHJ became a poster child for patent abuse. The attorneys general of Nebraska, New York, and Vermont all took action to stop MPHJ from operating in their states. When the federal government began to investigate, MPHJ took the dramatic step of suing the FTC to argue that its trolling was protected. The court rejected that challenge as premature. With that lawsuit over, MPHJ agreed to settle.
In the proposed consent order [PDF], MPHJ agrees to stop making false or unsubstantiated representations that its patents have been licensed in substantial numbers or at particular prices. MPHJ also agrees not to make further false threats of imminent litigation. While MPHJ did not admit any wrongdoing, the settlement will at least stop the worst of its abuses. And it may deter others from developing similar campaigns.
The FTC notes that MPHJ sent more than 4,800 letters that attached a draft complaint and threatened patent litigation within two weeks. While some might be brave enough to ignore a letter, a draft federal complaint is a clear threat of imminent litigation. Even consulting a patent lawyer can be a huge expense for a small business (not to mention the stress and distraction). MPHJ subjected thousands of small businesses to such a threat without any intention to file a real lawsuit.
The FTC’s success in this case shows there is a role for the agency in responding to the more egregious patent troll activity. It also shows that we should be careful when crafting legislation around demand letters. (For example, a recent bill – called the TROL Act – would achieve little because it drastically reduces state authority while giving little additional authority to the FTC.) And while we are encouraged by the FTC’s work, this is one (long-awaited) action against a single troll. We still need broader reform to deal with low-quality patents and widespread patent trolling.