Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—W.D. Tex.: Purported “patent troll” unable to “derail” FTC investigation, (Sep 17, 2014)

By Jeffrey May, J.D.

The federal district court in Waco, Texas, has dismissed a declaratory judgment action filed by MPHJ Technology Investments, LLC—a so-called patent assertion entity or “patent troll”—seeking to disrupt an FTC investigation into the firm's patent practices. MPHJ had unsuccessfully contended that the FTC's investigation and subsequent attempt at a settlement violated its First Amendment right to petition the government (MPHJ Technology Investments, LLC v. FTC, September 16, 2014, Smith, W.).

MPHJ could not “derail” the FTC administrative process through the declaratory injunction action, the court explained. The FTC conducted an investigation to determine whether MPHJ engaged in unfair trade practices with respect to patents related to networked computer scanning programs. The agency was looking into MPHJ's apparent practice of sending patent demand letters to thousands of small businesses across the country representing that the recipient was likely infringing certain patents by using ordinary office equipment. These recipients were allegedly informed that they likely needed to obtain a license for use of the patents at a price of either $1,000 or $1,200 per employee. The FTC also was investigating whether MPHJ had misrepresented that substantial numbers of businesses had purchased patent licenses from MPHJ and whether the company had falsely threatened imminent litigation. Based on the findings of its investigation, the FTC staff sent a draft complaint and proposed settlement to MPHJ and its owner/managing shareholder. In January, MPHJ filed a complaint against the FTC, its commissioners, and its consumer protection bureau director, challenging the FTC’s authority to take enforcement action against it and seeking an injunction to block the probe.

Standing. MPHJ lacked standing to sue, according to the court. While threatened enforcement of a law may create an Article III injury, the threat to MPHJ was not sufficiently imminent to satisfy the standing requirement. There had been no FTC action beyond the investigative stage, other than the FTC's attempted settlement, the court explained.

Ripeness. Moreover, the claims were not ripe for review. The FTC had not taken a final action. According to the court, agency action is final, when: (1) the action constitutes the consummation of the agency's decision-making process; and (2) the action must be one by which rights or obligations have been determined or from which legal consequences will flow. Neither condition had been satisfied, in the court's view. Being required to participate in an agency proceeding was not enough. Further, if the court were to grant the plaintiff's request to declare that the letters sent did not violate the FTC Act, it would “usurp the fact-finding responsibility vested in the FTC and would impede rather than foster ‘effective enforcement administration by the agency.’”

Exhaustion of administrative remedies. Lastly, the court concluded that MPHJ failed to exhaust its administrative remedies. Failure to exhaust administrative remedies bars district court intervention, except when Congress has failed to clearly require exhaustion. The FTC Act clearly required exhaustion, and the assertion of a Constitutional violation as a defense to an administrative proceeding still required exhaustion. “After investigation, the FTC could well determine that no Section 5 violation has occurred, meaning that no further agency action would ensue and Constitutional issues would arise,” the court explained.

FTC study. Separate from its investigation of MPHJ's patent demand letters, the FTC is currently conducting a comprehensive study of the patent assertion entity (PAE) business model. This business model is based primarily on the PAE buying patents and then attempting to generate revenue by asserting them against businesses that are already practicing the patented technologies. In September 2013, the agency announced plans to gather information from approximately 25 companies to examine how PAEs do business and to develop a better understanding of how they impact innovation and competition.

The case is No. 6:14-cv-11-WSS.

Attorneys: Dan N. MacLemore, IV (Fulbright Winniford PC), James R. Dunnam (Dunnam & Dunnam, LLP), and W. Bryan Farney (Farney Daniels PC) for MPHJ Technology Investments, LLC. Lauren Elizabeth Fascett, U.S. Department of Justice, for FTC.

Companies: MPHJ Technology Investments, LLC

Cases: ConsumerProtection FederalTradeCommissionNews TexasNews