On September 16, 2014, a federal district court in Texas dismissed a case filed by MPHJ Technology Investments, LLC (“MPHJ”) against the U.S. Federal Trade Commission (“FTC”).  The court found that it lacked jurisdiction over MPHJ’s claims because MPHJ did not have standing, its claims were not ripe for review, and MPHJ failed to exhaust its administrative remedies.  The two takeaways from the case are: (1) patent trolls risk an FTC investigation if they make broad and aggressive assertions in an effort to secure licenses; and (2) targets of FTC investigations cannot seek relief in federal court prior to the conclusion of an FTC investigation and administrative proceeding.

MPHJ sent a series of letters to numerous companies to induce those companies into buying licenses to use MPHJ’s patents.  MPHJ first warned the companies that they were infringing on MPHJ’s patents and that they were required to purchase a license for the patents at a price of $1,000 or $1,200 per employee.  If MPHJ did not receive a response to this first letter, MPHJ sent subsequent letters to the companies threatening to initiate legal action for patent infringement if the companies failed to pay the licensing fee.  The FTC opened an investigation to determine whether MPHJ’s letters constituted deceptive trade practices under Section 5(a) of the Federal Trade Commission Act (“FTC Act”).  During settlement negotiations, the FTC sent MPHJ a draft complaint that the FTC planned to file if a settlement was not reached.  The FTC’s draft complaint alleged that MPHJ had engaged in deceptive acts by:  (1) representing to over seven thousand businesses that MPHJ had made numerous sales of its patent licenses, even though it had not sold any licenses; and (2) threatening imminent litigation against over four thousand businesses when MPHJ had no intent to initiate a patent infringement action against any of the recipients.

Upon receipt of the FTC’s draft complaint, MPHJ filed suit in federal district court seeking a declaratory judgment that sending the letters was protected activity under the First Amendment to the U.S. Constitution.1  MPHJ argued that as a patent owner, it had a First Amendment right to provide notice of its patents to third parties and notice to an infringer of its infringement of MPHJ’s patents.  The FTC moved to dismiss MPHJ’s complaint for lack of jurisdiction, arguing that MPHJ’s claims were not ripe for review because the FTC had not taken a final agency action and that MPHJ failed to exhaust its administrative remedies.

The court granted the FTC’s motion and dismissed the case for lack of jurisdiction on three grounds:

  • First, the court found that MPHJ lacked standing to bring suit against the FTC because MPHJ had not suffered an “injury” under Article III of the Constitution. An imminent threat of prosecution may constitute an injury, but in this case, the FTC’s investigation and attempted settlement did not constitute an imminent threat of prosecution to satisfy the standing requirement.
  • Second, the court found that MPHJ’s claims were not ripe for review primarily because the FTC’s ongoing investigation was not a final agency action. The court also noted that MPHJ was seeking a declaration that its letters did not violate Section 5 of the FTC Act, which would “usurp the fact-finding responsibility vested in the FTC and would impede rather than foster effective enforcement and administration by the agency.”
  • Third, the court found that MPHJ failed to exhaust its administrative remedies prior to bringing suit, as is required under the FTC Act. The court stated that one exemption to the exhaustion requirement is when an agency is not empowered to resolve a Constitutional issue, such as the First Amendment issues asserted by MPHJ in its complaint.  Although the right to petition under the First Amendment is protected from liability unless the petitioning activity is a “sham,” the court found that a determination of whether MPHJ’s letters were a “sham” would require the court to usurp the FTC’s fact-finding responsibility.  The court also noted that the FTC’s investigation was ongoing and the FTC could close its investigation without taking further action against MPHJ, which would mean that the First Amendment issues would never arise.

In sum, the court ultimately found that the “issues of standing, finality and exhaustion boil down to the same question”: “May Plaintiff derail the FTC administrative process by bringing this declaratory judgment action?  The short answer is, ‘No.’”