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State reaches settlement with ‘patent trolls’

Eric Schneiderman

Eric Schneiderman

A settlement has been reached with MPHJ Technology Investments LLC, a so-called “patent troll.”

An investigation by Attorney General Eric T. Schneiderman focused on MPHJ’s use of deceptive and abusive tactics when it contacted hundreds of small and medium-sized New York businesses in an effort to strong-arm them into paying MPHJ for patent licenses of dubious value.

The settlement, which Schneiderman calls groundbreaking, resolves his investigations and imposes requirements on MPHJ when communicating with New York businesses in the future. “So-called ‘patent trolls’ exploit loopholes in the patent system and have become a scourge on the business community,” Schneiderman said. “They drain critical resources from small and medium-sized businesses that would otherwise be available for reinvestment and job creation, which are sorely needed across New York.”

He said the settlement will put an end to some of the most abusive tactics by placing the industry on notice that the deceptive practices will not be tolerated.

Schneiderman said patent trolls — sometimes referred to as “patent assertion entities” — are not innovators; they buy patents owned by others and try to turn a profit by aggressively pursuing businesses they claim infringe the acquired patents.

In virtually all cases, the businesses targeted by patent trolls did not copy other companies’ technology. Instead, patent trolls argue that independently developed technology or business processes used by the target, which are sometimes everyday business activities, require a license linked to the troll’s patents. MPHJ, for example, contends that most businesses that use an ordinary commercial scanner on a computer network with an everyday email system will infringe its patents.

Schneiderman said certain patent trolls, acquire patents of dubious validity, then send deceptive and abusive letters to a large number of small businesses in an effort to extract small, often nuisance-value license payments from them.

In MPHJ’s case, Schneiderman said, it told hundreds of New York businesses that they “likely” infringed its scanner-related patents, creating the impression that MPHJ had conducted a meaningful, individualized analysis of the targeted company’s business. In fact, MPHJ merely sent form letters to companies of a certain size and industry classification. In addition, MPHJ falsely told businesses that most other businesses it had previously contacted had acquired licenses when in fact only a handful of businesses had done so.

MPHJ also provided misleading information about the fees that the few prior licensees had paid, according to the release, and MPHJ falsely threatened to sue hundreds of businesses if they did not respond to its letters within two weeks; in fact, it has never filed a patent lawsuit against a New York business.

As redress, the settlement requires MPHJ to allow any licensees that received deceptive letters to void their license with it and receive a full refund and it prohibits MPHJ from further contacting certain small businesses it previously targeted.

The settlement also imposes a variety of obligations on MPHJ that should serve as guidelines for all patent trolls engaged in similar patent assertion behavior.

Schneiderman said the federal patent system suffers from a variety of flaws that are exploited by patent trolls and state deceptive practices laws cannot solve all the resulting problems. By restricting the tactics that patent trolls can use when contacting small and medium-sized businesses about possible infringement, the guidelines in this settlement should put an end to some of the most abusive and predatory tactics used by patent trolls.

The attorney general’s office is continuing to review the activities of patent trolls and will step in to stop abusive practices regardless of whether the guidelines are technically met. It is also willing to supplement the guidelines with additional requirements in future cases.

“It is crucial that government enforcers do whatever they can to prevent patent trolls from abusing flaws in the patent system,” said Daniel Ravicher, executive director of the New York-based Public Patent Foundation. “New York’s new patent troll guidelines are a significant and valuable contribution to the overall effort to curb abuses by patent trolls.”

A copy of the agreement is available at: www.ag.ny.gov/pdfs/finalaodmphj.pdf.