Monday, April 8, 2013



Meet the nice-guy lawyers who want $1,000 per worker for using scanners

"It's not some kind of bull. We're not trying to harass people."




Starting late last year, hundreds of US businesses began to receive demand letters from secretive patent-holding companies with six-letter gibberish names: AdzPro, GosNel, and JitNom. The letters state that using basic office equipment, like scanners that can send files to e-mail, infringes a series of patents owned by MPHJ Technologies. Unless the target companies make payments—which start at around $9,000 for the smallest targeted businesses but go up from there—they could face legal action.


In a world of out-there patent claims, MPHJ is one of the most brazen yet. It's even being talked about in Congress. Rep. Peter DeFazio (D-OR), who has sponsored the anti-troll SHIELD Act, cited the operation as a perfect example of why the system needs reform. After publishing a story on the scanner-trolling scheme, Ars heard from letter recipients and their lawyers from around the country—Idaho and Texas, California and South Dakota.
Before the AdzPros and GosNels took over, the patents were owned by an entity called Project Paperless, which threatened dozens of businesses in Virginia and Georgia. Project Paperless ultimately filed two lawsuits, prosecuted by lawyers at Hill, Kertscher, and Wharton, an Atlanta firm with complex connections to the patents. In late 2012, Project Paperless sold the patents to MPHJ Technology Investments. Today, the anonymous owner of MPHJ operates GosNel, AdzPro, JitNom, and at least a dozen other shell companies now targeting small businesses around the country.
So how does it all work? Bringing in the patent payoffs is a lawyer-driven business. The top lawyer behind the new scanner-trolling enterprise is Brian Farney, a Texas IP lawyer who is senior partner at Farney Daniels. Farney won't reveal who he's working for; he simply refers to whoever is behind MPHJ as "the client." But the client did agree, surprisingly, to allow Farney to do an interview about the patent-enforcement campaign.
Another lawyer deeply involved in the scanner-trolling enterprise is Jay Mac Rust, a Waco, Texas attorney who works as a kind of in-house patent enforcer for MPHJ. He isn't the only one with that job, but Rust has a special role. It's up to him to calm down letter recipients who are "really irate"—and, at the end of the day, to get them to pay from $900 to $1,200 per worker. Rust didn't agree to talk to Ars, but a source has provided a recording of a revealing conversation he had with Rust.
Together, the Farney and Rust conversations show how the scanner-trolling campaign is designed. They also give a glimpse at how the lawyers involved see themselves. It's the most insight available into a scheme that, to some business owners, feels like a shakedown.
So what are the top lawyers behind MPHJ Technology Investments like? Well, on the phone they come off as really nice guys. Demanding payouts from small business users of everyday technology isn't the typical patent enforcement strategy, but it's perfectly legal under US law. As a business strategy, however, it has generally been considered unworkable—and unwise.
Well, until now. As the art of modern "patent trolling" enters its second decade, the MPHJ scanner-trolling scheme has opened a new front in the battle. The company has a patent that it believes is being violated by "99 percent" of American office workers. And it wants to get paid.


Jay Mac Rust, from 2006 magazine cover of Super Lawyers Texas “Rising Stars.”

“99 percent of people are using it. You know it and I know it.”

Mac Rust is one of a few lawyers who gets certain "territories" of the MPHJ patent scheme. A person who had a conversation with Rust in January about alleged violations of the MPHJ patents—I'll call the source Mr. Smith—gave Ars a recording of his phone call. The recording was made with Rust's knowledge.
In the call, the confused Mr. Smith starts out by telling Rust he can scarcely believe what is happening. "Just to reiterate, my home printer—if I scan to e-mail, it's an option on my Hewlett-Packard printer—I do that, I owe you money?" asks Smith.
"If you said you hooked it up to the Internet, and in one button, you can scan and e-mail directly out—yes, you have violated the patent that we own," says Rust.
That means millions of Americans owe Rust’s anonymous client money. But Smith seemed overly focused on his personal behavior, with his home printer. Individuals aren’t the intended target, Rust explains.
“We’ve been trying to do what we can to focus on businesses that have 10 or more employees,” says Rust. “But look, it's not perfect. All our information is not exactly perfect. That’s why we send a letter to ask you certain questions.”
The six-letter entities are divided up by region, Rust continues. "According to patent law, if we're going to sue you, we have to sue you in your area. So we broke those up, so we could sue in those individual areas, so we don't have to drag you to Delaware [where MPHJ is incorporated]. You don't really want to fight in Delaware, and I don't want you to have to fight in Delaware."
"I see. So you're doing me a favor!" says Smith.
"In a sense, yes," replies Rust.
"So—I'm sorry," says Smith. "You're going to have to bear with me. I'm just flabbergasted."
"I highly recommend you contact a patent attorney," says Rust, a theme he returns to throughout the 15-minute phone call.
Telling target companies to consult an attorney may seem like a surprising suggestion for an enforcer of controversial patent claims. But suggesting that small companies lawyer up probably yields excellent results for Rust and MPHJ. A patent lawyer will likely tell targets that the letters shouldn’t be ignored, and the lawyer will quickly let them know the cost of fighting an issued patent, which can be hundreds of thousands of dollars—or millions, if a case actually goes to trial. That’s far more than the cash asked for by AdzPro, GosNel, and the other MPHJ entities, which will grant a license for between $900 and $1,200 per worker—around $100,000 for a 100-employee business.
"I promise, they'll help you to understand how patent law works,” says Rust. “You'll figure out it's not a scam. It's not some kind of bull. We're not trying to harass people. They'll look up the patents and tell you whether or not what you do infringes. And if you don't infringe, hey, let us know that."
Companies that don’t infringe just need to sign a simple "declaration" document saying so, Rust explains.
In the MPHJ declaration, which Ars has obtained a copy of, a representative of the target company must swear under penalty of perjury that the company doesn't use any equipment that scans a document to e-mail and then transmits it over a network. If that statement proves to be false, the company agrees to a "consent judgment" in the amount of $1,200 per employee.
But most companies do infringe, according to MPHJ. "If you're scanning direct to e-mail, you're violating," says Rust. "It's pretty simple."
"So everyone violates!" says Smith, later in the call.
"99 percent of people are using it," says Rust. "You know it and I know it. So, yeah."
Smith continues to be incredulous that he as an individual, and not a big company, could be on the hook for payments related to patents. At one point, Rust uses an analogy about Apple v. Samsung to explain to Smith the power that MPHJ has over him.
"Do you know that if you had bought a notebook—or whatever, the Samsung version of the iPad—you know they could have come and taken those away from you? Actually made you give them all back? Do you know that?" says Rust. "So I mean—it's interesting how patent law works. They could have actually stopped everybody from using them. Even though you paid your thousand bucks for the thing, they could have taken them away, under patent law."
Near the end of the call, Smith asks Rust how he even got his phone number. (The call was initiated when Rust called Smith; Smith had been repeatedly calling the call center number featured on the threat letters.)
Rust explains that in general, the scheme is broken up geographically, with certain MPHJ lawyers getting certain regions. The lawyers stick with the target company they are assigned to, suggesting they are paid on some kind of commission basis. But there’s a certain type of business owner that always ends up with Rust and his easygoing Texas drawl: the angry ones.
"You're the lucky guy that gets me," Rust explains to Smith. "I get to answer all the ones that are really, really… irate. And I understand that."
"I'm not irate at you, Mac, because like I said, you seem nice," says Smith. "But I am irate."
"I know you are, and I don't blame you," says Rust. He continues:
That's why I encourage people to go to a lawyer. Look, I'm a regular lawyer, too. I started out doing litigation. So if I had seen it [the threat letter], I would have gone, "Aw, bullshit," just like everybody else. But unfortunately once you get into the patent world, you'll find out… some guy that made an invention in 1999, back when this was a novel idea, really does have rights. Even going for a long time into the future. Now that… scanning and e-mailing has replaced the fax machine, all of a sudden his invention is really, really valuable.
Rust ignored our phone calls and e-mails requesting interviews over a period of several weeks. Last week, I made a final phone call to let him know we were moving to publication with a piece that included a recorded phone conversation of him as well as a photo.
He returned that call within minutes.
"I'd appreciate you not running a photo of me, anywhere," said Rust. "You know how photographs work, with copyright and all. If there's a photograph up online of me, I own it."
I simply told Rust that we did have a photo that was fine for us to use, with or without his permission. I asked if he would talk about his work on the MPHJ patent campaign at all.
"No," he said. "I think you've already talked to Brian Farney. I doubt seriously if anything I say is going to change your mind about the legality of this, or anything else."

Mac Rust: From “Ponzi schemes” to patent trolling

The practice known as "patent trolling" certainly has its detractors, but it is unquestionably legal. Patents can be licensed by anyone, whether they're being used or not. Whoever "the client" behind MPHJ is, he or she is unlikely to be accused of criminal behavior.
Rust's earlier clients, however, have faced more serious accusations. Before Rust moved to Waco and became a patent enforcer for MPHJ, he had an office about 90 miles away in Stephenville, Texas, and he did some work for a man named Steven Dean Kennedy. Kennedy offered loans through shell companies he called Atlantic Rim Funding and West Coast Holdings. In 2008, a couple named Jay and Anita Hyman wrote checks to Rust totaling $650,000, thinking they were loaning money to West Coast Holdings that would be paid back, with interest rates ranging from 17 to 22 percent.
But they say they weren’t paid. In 2010, the Hymans filed a lawsuit against West Coast, Kennedy—and Mac Rust. It was Rust who had collected the $650,000, and the checks were made out to him, according to court documents.
Rust tried to get out of the case on jurisdictional grounds, but the judge wouldn't allow it. Rust filed papers that denied any liability and blamed Kennedy and West Coast. Court documents show that Rust reached a settlement with the Hymans in November 2012.
The Hymans weren’t the only ones claiming they got bilked by Rust and Kennedy. A complaint filed by a Philadelphia-area nonprofit in 2012 was more direct about Kennedy's behavior, alleging that Kennedy was running a "Ponzi Scheme"—with Rust as a key lawyer.
Those allegations are from a 2012 complaint filed by the Land Conservancy of Elkins Park, a nonprofit that operates a 42 acre historic estate near Philadelphia. In 2010, the Conservancy was in a bad financial situation and filed for bankruptcy protection. As part of a settlement, it arranged to get funding from a source that would prove unreliable—Kennedy's Atlantic Rim Funding.
In court documents, Conservancy lawyers say Atlantic Rim kept the Conservancy’s $600,000 deposit and went into “radio silence” when they tried to get some of their money withdrawn in late 2011.
Atlantic Rim and Kennedy “represented that they had billions of dollars worth of bonds and that at any time the Deposit would be secure,” wrote Conservancy lawyers. Rust “claimed to have done substantial business with Atlantic Rim” and assured Conservancy representatives that they could get their money back at any time.
The complaint makes clear that Kennedy, not Rust, was in ultimate control of Atlantic Rim. Unlike Kennedy, Rust kept communicating and “indicate[d] a desire to help the [Conservancy] obtain the return of the Deposit.” Still, they claimed that Rust wasn’t providing straight answers. And, they said, “Rust revealed, perhaps unintentionally, that a number of borrowers were looking to have their deposits returned. This caused the Debtor great concern.”
Rust filed an answer in July 2012 saying that he had extricated himself from the matter, selling the Conservancy’s bonds for $360,000, an amount that the Conservancy had agreed to.
In October, the bankruptcy case was resolved. The court entered a $3.1 million judgment against Kennedy and Atlantic Rim, who were nowhere to be found. Lawsuits against Kennedy, meanwhile, keep piling up—but the claims against Rust were dismissed.

Anonymous scanner-trolls “encourage others to invent”

When target companies fail to pay up after the first round of letters, they are ultimately contacted by lawyers from Farney Daniels, the Georgetown, Texas law firm retained by MPHJ. In-house lawyers like Mac Rust refer to Farney Daniels as "litigation counsel," but Farney Daniels has filed no lawsuits on these patents.


At the top of the firm is Bryan Farney, a name partner who's an experienced patent lawyer, and in charge of many aspects of the licensing campaign. Farney, like Rust, is genial on the phone. He read our previous coverage before the interview and was eager to emphasize two points that he felt weren't made clear in the January story.
First of all: Steven Vicinanza, the owner of Atlanta's Blue Wave Computing who spoke out about his fight against these patents, never won his lawsuit on the merits. It was Farney’s client who decided to walk away from the suit. “The new owner, MPHJ, didn’t want any litigation going on,” said Farney. “The client wanted to start with a clean slate and wanted the case dropped. So Blue Wave was the beneficiary of timing.”
Second: Farney said that his client is going after scanner users, not to avoid doing battle with big scanner makers like HP and Canon but because there’s no other use for the patents. Because of the way the patents are written, MPHJ actually can’t go after scanner manufacturers. Only the whole “system”—putting the scanner together with a network—infringes.
“The devices can be used in plenty of non-infringing ways," Farney explained. "Several of the major manufacturers have talked to us about these patents, and they agree with us. The product they sell is not infringing. It’s putting the whole system together. If you have an office scanner that scans with one button, is hooked up to a network, and can send e-mail—you infringe."
If that sounds like pretty much everyone using a modern scanner that is hooked up to the Internet—that's how Farney sees it, too.
“The inventor obviously came up with something that’s widely used,” Farney said. “That happens sometimes.”
I asked Farney if he really believes the named inventor, Laurence Klein, was the first person to think up a system that scans to documents on a network. The earliest of the four patents that MPHJ uses was filed by Klein in 1997.
“No one had a system where you did these things—where a scanner, a LAN, a PC, and the application software [were linked] with automatic or one-button scan,” said Farney. “There were some technical reasons for that.”
As for Klein himself, Farney has scant information about him. “My understanding is that he had an IT business, and he was trying to figure out how to do this exact thing,” he said. “I think the [current] client has some connection [to Klein].”
And Farney says he has looked at all the prior art, like the 1996 Ricoh patent, that has been sent to him. None of it invalidates Klein’s invention, said Farney.
Today, patent office records indicate that Klein lives in an Israeli settlement in the West Bank. There’s no evidence that Klein’s business succeeded, that he ever executed his idea of a networked scanner, or that he ever shared his ideas. There's no evidence the companies that make scanners and printers had heard of him before these threats, although they surely have now. So was Klein really an “inventor,” as most people would understand the term?
“That depends on your understanding of patent law,” said Farney. “Every patent lawyer in the country deals with engineers who tend to think that things aren’t patentable. But that isn’t the law. The first one to invent does get a patent.”
Is it really ethical or fair to demand thousands of dollars from hundreds of American businesses just for using basic scanners? And is it right that this is being done on behalf of an anonymous client with some murky connection to the guy who supposedly invented all this?
“Well, you clearly said it wasn’t fair,” said Farney, referring to Ars’ January story on MPHJ and Project Paperless. He continued:
But it’s a more nuanced question. My expectation is many of your readers work in high tech. I can tell you almost all of them at some point in their career will have a really good idea. Probably more than one.
The second thing they’ll think is: how do they protect that idea and stop someone from copying it? If they try to go make a business out of the idea, they’re going to ask that.
Many of your readers would want to go patent [their idea.] If they went to investors, the investors would want to patent it. Now how do those patents have value if they can’t be enforced?
Farney’s defense of MPHJ’s behavior was wholehearted, and his belief in the patent religion was total. He was sincere and polite on the phone. Still, I had to ask again: did he really think what he and MPHJ were doing was good for innovation in America? MPHJ may have bought patents representing the "idea" of networked scanners, and that's perfectly legal. But MPHJ hadn't created any kind of manufacturing business around them.
“No, but they stepped into the shoes of the guys that did,” said Farney. “MPHJ is getting a fair license value for these patents. That encourages others to invent and allows others to go get patents and raise money based on them.” Even if the original inventor had started a small business, “he wouldn’t have been able to raise money if he hadn’t been able to protect the idea.”
MPHJ still hasn’t filed any lawsuits, but it could happen. Target companies have reported getting copies of “draft complaints” in the last several weeks.
“I believe the client will try to reach people on reasonable terms,” said Farney. “Most likely, there will be litigation at some point.”

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