EDITORIAL NOTE: Conversant IP has set up a website called Stand Up to the Demand, which helps those being sued for patent infringement to distinguish between a bogus claim of patent infringement and a legitimate licensing inquiry from a patent owner.
One thing you can say about patent trolls: They sure are cowboys! In fact, one of the biggest patent trolls of all time is a cowboy hat-wearing Texas lawyer by the name of Jay Mac Rust.
In 2012, Mr. Rust bought five patents from an inventor named Laurence Klein for exactly $1. He then set up 101 separate limited liability companies (LLCs), each with bizarre six letter names like IsaMai, BriPol, and HarNol. No one but Mr. Rust knows what those acronyms mean. But thousands of Mom and Pop small businesses — 16,465 to be exact — soon found out that they translate as “trouble.” Each of these businesses received a “demand letter” from one of Rust’s shell companies accusing them of patent infringement and demanding roughly $1,000 per employee if they wanted to avoid a minimum six-figure (and possibly seven-figure) lawsuit in U.S. federal court.
How did Rust’s parent company MPHJ Technologies and its hydra-headed hundred-and-one LLCs decide which small business to target? Simple. His lawyers selected a random batch of companies listed in public records as having 1-49 employees, then 50-99 employees, and so on. Then they began moving up the food chain, making unsubstantiated accusations of patent infringement — starting with those least able to fight back.
There’s a word for that: “bully.”
It’s an axiom of modern-day political gridlock that Americans can’t agree on anything. But patent trolls have succeeded in uniting just about everyone in the country around one urgent task: stopping the victimization of small business through extortionist demand letters.
Last year, Vermont Attorney General Bill Sorrell went after patent troll demand letters using a novel legal strategy: he used the state’s existing consumer protection laws to sue the patent trolls who send them. The State of Vermont charged MPHJ Technologies with engaging in unfair and deceptive trade practices by making false claims to recipients of its demand letters. These false claims included:
“Stating that litigation would be brought against the recipients when Defendant was neither prepared nor likely to bring litigation … [implying] that Defendant had performed a sufficient pre-suit investigation, including investigation into the target businesses and their [supposedly] infringing activities, that would be required to justify filing a lawsuit …[claiming that] many if not most businesses were interested in promptly purchasing a license from Defendant … [and] using shell corporations in order to hide the true owners of the patents, avoid liability, and encourage quick settlements.”
Vermont’s suit asked the court to order a permanent injunction barring MPHJ from “threatening Vermont businesses with patent infringement lawsuits” or “engaging in any business activity” in the state that violates Vermont law. It also asked the court to order MPHJ to make “full restitution to Vermont businesses who suffered damages due to Defendant’s acts,” and impose “civil penalties of up to $10,000 for each violation of the Consumer Protection Act.”
The effect of Vermont’s actions has already been felt far beyond the state’s tiny borders. In the last year alone, Nebraska filed a cease-and-desist order against MPHJ and its attorneys, and New York forced MPHJ to sign a consent decree requiring it to pay back all monies it extorted from businesses in the state and stop sending deceptive demand letters to any others. In addition, new laws against patent troll demand letters have been enacted in 12 states and are being considered in 24 others.
When was the last time a common cause has united so many states?
It’s not just the states that have acted with such surprising vigor. At the federal level, in June 2014, Representative Lee Terry (R-Nebraska) unveiled a draft demand letter bill that would clarify the power of the Federal Trade Commission (FTC) and state Attorneys General to regulate patent demand letters sent in bad faith.
The FTC itself announced last December that it would sue MPHJ for violating Section 5 of the Federal Trade Act, which bars deceptive trade practices such as threatening litigation without any genuine intention to bring it. MPHJ responded with a suit of its own against the FTC, claiming the agency is overstepping its bounds. It certainly seems as if the tide is turning against MPHJ, at least.
BEATING THE TROLL TOLL
Even the U.S. Supreme Court has jumped into the fray and helped to pave the way for more effective action against the senders of bad demand letters. In April 2014, the Court issued a ruling in the closely-watched Octane Fitness case that significantly expanded the grounds under which defendants may collect attorney’s fees from abusive patent litigants.
The effect was felt almost immediately. One month and two days after the Supreme Court ruled in Octane Fitness, Judge Denise Cote of the Southern District of New York awarded attorney’s fees to a startup company called FindTheBest.com after it was victorious in a patent suit filed by a patent troll that had demanded a $50,000 “license fee” from the startup. The judge also ruled the troll’s ridiculously vague patent invalid, thereby making it impossible for the troll to extort other businesses — with that patent, at least.
Although this ruling is significant and likely presages more such victories against patent extortionists, it should be noted that many small businesses don’t have the funds required to go to trial rather than surrender. Octane Fitness, based in Minnesota, is seeking reimbursement for $1.8 million in attorneys’ fees, while FindTheBest spent close to $200,000 to win its case — four times the amount they could have settled for. Although they will now recoup those fees, many other small firms are simply not in a financial position to follow their example.
The breadth of anti-troll sentiment and activity is breathtaking in scope. From Montpelier, Vermont to Washington, D.C. — and from the corridors of our regulatory agencies to the chambers of the U.S. Supreme Court — a clarion call is being heard to stop these extortionist demand letters now! Only an intense popular rage at the patent trolls who corrupt America’s venerable and vital patent system could possibly account for such a strong and united effort.
AN EMOTIONAL RESPONSE
That rage is felt every day, of course, by the individual owners of thousands upon thousands of small business victims. Take Chris Hulls, the CEO of family social network Life360. When he received a demand letter, he overruled his company’s attorneys and sent a rather more personal response to the patent troll.
“Dear Piece of Sh*t,” he wrote. “We are currently in the process of retaining counsel and investigating this matter. As a result, we will not be able to meet your Friday deadline.”
Hulls closed his letter thusly: “I will pray tonight that karma is real, and that you are its worthy recipient.”
While Hulls’ anger is certainly understandable, your own mileage may vary should you adopt a similarly aggressive approach. In Hull’s case, the patent troll immediately filed suit in a Florida district court.