Last year, Congress held a vigorous debate over so-called "patent trolls." One of the poster children repeatedly held up as an example of patent abuse was MPHJ Technology, owned by a Texas lawyer named Jay Mac Rust. Working with the law firm Farney Daniels, Rust sent out more than 9,000 patent demand letters to small businesses around the country, telling recipients that their networked scanner system infringed on MPHJ patents and asking them to pay a royalty of around $1,000 per employee.

Congress ultimately didn't pass a patent reform bill, but MPHJ became mired in legal battles with state and federal authorities. Rust's company was investigated by the Federal Trade Commission, and then it took the surprising step of actually suing the FTC first.

That lawsuit got thrown out, and now Rust, MPHJ, and Farney Daniels have reached a settlement with the FTC. Under the terms of the settlement, Rust and his lawyers are barred from making "misleading or unsubstantiated representations" in any letters they send out. There is no monetary penalty.

The false representations include suggesting that their patents have been licensed "to a substantial number of licensees," since the vast majority of letter recipients actually ignored the letters. Rust and company also can't make claims about their patents being licensed for a certain amount of money or say they intend to file a lawsuit unless they truly are.

The settlement makes clear that MPHJ and Rust are allowed to state they believe a business is infringing a patent, that they believe the recipient needs a license, and that they "reserve their rights under the Patent with respect to the recipient's conduct."

"Patents can promote innovation, but a patent is not a license to engage in deception,” said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection. “Small businesses and other consumers have the right to expect truthful communications from those who market patent rights."

The FTC has taken a strong interest lately in patent trolls, which it calls "patent assertion entities" or PAEs. Last year, it initiated a sweeping probe into the industry. The case against MPHJ is the first time the FTC has used its consumer protection authority against a PAE.

But the settlement shows how limited the FTC's powers are in this space. Essentially, the agreement will do nothing more than rule out one particular strategy used by MPHJ. The company is perfectly free to go ahead and sue hundreds, or potentially thousands, of the same small businesses it had sent letters to. It can even go back to sending out demand letters, as long as the language conforms to FTC guidelines. It can make threats to sue in those letters, too, as long as the threats aren't "unsubstantiated."

Mixed Reactions

From groups that support patent reform, the FTC settlement is seen as a small step, at best.

"This settlement doesn't even qualify as a slap on the wrist to a company that sent demand letters to thousands of businesses—extorting money, threatening jobs, and stifling innovation," said App Developers Alliance President Jon Potter. "These bottom-feeding harassers must be stopped."

The App Developers group and others said the tepid settlement points to a need for a change in law, which Potter said should include "demand letter provisions with teeth."

"While we are encouraged by the FTC’s work, this is one (long-awaited) action against a single troll," wrote Daniel Nazer at the Electronic Frontier Foundation. "We still need broader reform to deal with low-quality patents and widespread patent trolling."

Sen. Claire McCaskill (D-MO), who had harsh words for patent trolls during a meeting held by her committee, said the FTC "did the right thing," but needs more authority to take action. "This problem is bigger than one company," she said in a statement today.

McCaskill, who will lose chairmanship of her committee when the new Congress takes over in January, wants to pass a bill (PDF) that would require certain minimum disclosures be in all patent demand letters.

"These steps taken by the FTC will stop one notorious patent assertion entity from using misleading demand letters to harass small businesses in Vermont and across the country, but this action alone will not stop abuse of the patent system," said Sen. Patrick Leahy (D-VT). "I am committed to addressing the problem of patent trolls through legislation in the coming year, including a strong provision to address deceptive demand letters."

Rust, who was profiled in Ars Technica last year, didn't respond to a phone call requesting comment.

MPHJ is still involved in litigation with state attorneys general in Nebraska and Vermont. In Vermont, they have been wrangled into state court to face charges that they violated consumer protection laws. Meanwhile, Ricoh, Xerox, and HP have filed challenges to MPHJ's patents at the US Patent and Trademark Office, which await decisions. Canon and Sharp reached settlement deals with MPHJ to fend off accusations against their customers.