Novel Legal Attack On Patent Trolls Falters In US

It began last May, when a tiny state in the United States launched a novel legal attack against a notorious patent troll. Other states and the federal government soon followed, all asserting that the troll’s efforts to licence its patents violated consumer protection laws. At first, this new legal strategy produced some significant victories. Many experts and government officials embraced consumer protection law as an important new tool against patent trolls. But a recent court ruling has cast doubt on the future of this once-promising strategy.

“Patent trolls” is the name often given to companies that garner revenue primarily by licensing their (frequently vague) patents to others – and that threaten patent infringement suits against those who resist purchasing licences. These trolls often make no goods or services, they merely extort money from other business that are contributing to the economy, according to many experts. “This operates as a tax on current production and innovation,” said Prof. Robin Feldman, director of The Institute for Innovation Law at University of California’s Hastings Law School.

Patent trolls are hurting the nation’s businesses, impeding innovation, and hindering economic growth, according to a growing chorus of US companies, government officials, academics, and legal experts. There is an increasing consensus that something must be done to stop these trolls.

The US Congress is considering several pieces of legislation to rein in patent trolls. President Barack Obama recently announced various executive actions. And state governments, too, are starting to target trolls, by using a novel strategy pioneered by the tiny rural state of Vermont.

A Twist on Consumer Protection

On 8 May 2013, Vermont’s Attorney General sued MPHJ Technology Investments. MPHJ owns patents that, the company claims, cover the process of scanning a document and attaching it to an email via a network. The company’s method of monetizing these patents has garnered it a great deal of attention and opprobrium. MPHJ has sent over 16,000 letters to small businesses around the country, pressuring these companies to license MPHJ’s patents. MPHJ had no specific knowledge that any of these businesses was infringing its patents, but MPHJ believed that, based on the size and type of business, each recipient of a letter was likely to scan documents to emails via a network. The letters stated that the recipient was likely infringing MPHJ’s patents and stated that, unless the recipient submitted extensive paperwork to prove that it was not infringing, the recipient needed to licence the patents at a cost of $1,000 or more per employee.

Vermont’s Attorney General alleged [pdf] that MPHJ had violated the state’s consumer protection law by sending out deceptive letters that pressured recipients into purchasing patent licences. Among the alleged violations:

• MPHJ’s letters falsely indicated that the business community had a “positive response” to the licensing campaign, when at the time few or no recipients of the letters had purchased licenses;
• the letters falsely stated that “many” businesses had purchased licences;
• the letters falsely stated that, based on the patentee’s prior licensing of these patents, the fair price of a licence was between $900 and $1,200 per employee;
• by directing its lawyers to send follow-up letters, MPHJ gave the false impression that these lawyers had investigated the recipients and determined they had committed patent infringement; and
• some of MPHJ’s follow-up letters threatened imminent litigation if recipients did not respond, but these were empty threats intended to scare recipients into purchasing licenses.

Vermont asked the court to prohibit MPHJ from threatening Vermont businesses with patent infringement suits, award restitution to all Vermont businesses that suffered damages from MPHJ’s licensing campaign, and fine MPHJ $10,000 per violation of the state’s consumer protection law.

Attorneys general from Nebraska, Minnesota and New York soon followed Vermont’s lead. They all went after MPHJ for violating their states’ consumer protection laws.

Win Some, Lose Some

The results of the states’ efforts have been mixed. MPHJ is fighting Vermont in court, asserting (among other things) that the state’s lawsuit constitutes an “unprecedented” interference with the federal patent system.

Nebraska’s Attorney General ordered MPHJ’s attorneys to stop sending demand letters while he investigated whether the letters contained false or deceptive statements. This order was thrown out on 14 January by a federal district judge, who ruled in Activision TV, Inc. v. Pinnacle Bancorp, Inc. that the Attorney General’s prohibition violated MPHJ’s free speech rights under the First Amendment to the US Constitution, violated MPHJ’s constitutional right to choose legal counsel, and wrongfully intruded on patent rights, an area that “to a great extent” was pre-empted by federal law. The judge added, however, he would reconsider his ruling if the Attorney General did further investigating and concluded that MPHJ’s licensing letters were sent in bad faith.

Minnesota’s Attorney General reached a settlement with MPHJ in August, under which the company agreed to stop its patent enforcement campaign in Minnesota. The company also agreed it would send future licensing letters in the state only after the state’s Attorney General had reviewed and approved the letters. However, MPHJ takes the position that the settlement affects only the form of its licensing letters, not their substance, and that the settlement does not restrict the company’s right to bring infringement suits against Minnesota firms.

New York’s Attorney General reached a settlement with MPHJ on 13 January. This settlement wis far tougher and more detailed than the Minnesota settlement. It prohibits MPHJ from sending future demand letters to any New York business unless MPHJ has made “reasonable efforts” to detail how the business is committing infringement. It requires that any future MPHJ demand letters sent to a New York business must describe “with reasonable specificity” the basis for believing that the business is committing patent infringement. If MPHJ’s letter proposes a license fee, the letter can offer justifications for the amount of the fee only if the letter also provides reasonably detailed factual support for those justifications. Moreover, if MPHJ asserts a patent against a New York company, MPHJ cannot hide behind a shell company but must disclose its interest in the patent.

“The New York Attorney General’s settlement is historic because of the detailed nature of the agreement,” said Feldman. “It is a line in the sand, a warning to other [patent] monitizers.”

More states may soon join the fray. The legislatures of Maine, Kentucky, Oregon and Nebraska are currently considering new consumer protection laws aimed specifically at patent trolls. These bills, inspired by a law Vermont enacted in May 2013, would impose stiff fines on anyone making bad faith patent infringement allegations or baseless demands for licensing fees.

A Federal Case

The federal government also is getting in on the action. The Federal Trade Commission (FTC) prepared a complaint against MPHJ, charging that the company had made deceptive representations in the licensing letters it had sent to small businesses around the country. The agency attempted to negotiate a settlement of these charges with MPHJ, but on 13 January, the company sued the FTC. In this lawsuit, MPHJ Technology v. Federal Trade Commission [PDF], the company sought a declaratory judgment that the FTC’s intended enforcement action against it was unconstitutional.

MPHJ’s suit claims, among other things, that the company’s free speech rights under the First Amendment allowed it and its attorneys to send the allegedly deceptive licensing letters. Even if some statements in the letters were inaccurate (which MPHJ denies), MPHJ believed the statements were accurate at the time they were made, and that is sufficient to protect them under the First Amendment.

That, at least, is MPHJ’s interpretation of the First Amendment. Others, however, interpret the law differently.

“The First Amendment argument is interesting, but I can’t imagine a court finding that sufficient to block the FTC’s efforts to protect the public,” said Marylee Jenkins, a partner in the New York office of the Arent Fox law firm. She noted that many types of speech can create legal liability, despite the First Amendment. “If you send misleading letters with sham litigation threats, for instance, it should not be viewed as protected by the First Amendment,” said Jenkins.

Prof. Michael A. Carrier of Rutgers Law School agrees with this assessment. “It is unclear that MPHJ has a leg to stand on,” he said.

But MPHJ has already prevailed with this argument in one court. The federal district court in Activision found that MPHJ and its counsel had a First Amendment right to send the mass licensing letters. If MPHJ prevails in its suit against the FTC, it could spell doom for all other efforts to use consumer protection laws to rein in patent trolls. What seemed like such a promising legal strategy only a few months ago could become consigned to the junkyard of history.