Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—D. Vt.: Federal court abstains from hearing challenges to state patent trolling enforcement action, (Jun 8, 2015)

By Jody Coultas, J.D.

The federal district court in Burlington, Vermont, dismissed claims pertaining to the Vermont Consumer Protection Act and the state court’s use of Vermont’s long arm statute to assert personal jurisdiction on the basis of abstention (MPHJ Technology Investments, LLC v. Sorrell, June 3, 2015, Sessions, W.).

In 2013, the State of Vermont sued MPHJ Technology Investment, LLC, under the Vermont Consumer Protection Act (CPA) for allegedly sending false and misleading letters to various Vermont entities alleging infringement and demanding the purchase of licenses. The State alleged that no court had ruled on the validity of MPHJ’s patents, that MPHJ did not possess exclusive licenses, and that the targeted businesses in Vermont were largely outside the geographic regions where enforcement of the patents was permitted.

MPHJ sought to enjoin the State’s past and future enforcement activities, and requested injunctive and declaratory relief with respect to the recently-enacted Bad Faith Assertions of Patent Infringement Act (BFAPIA). The State moved for dismissal.

Abstention. The State argued the court should abstain from hearing MPHJ’s claims based on the Supreme Court’s holding in Younger v. Harris, 401 U.S. 37 (1971), that a federal court may not enjoin a pending state criminal proceeding in the absence of special circumstances suggesting bad faith, harassment, or irreparable injury that is both serious and immediate. Younger applies where there is a pending state proceeding that implicates an important state interest, and that “the state proceeding affords the federal plaintiff an adequate opportunity for judicial review of his or her federal constitutional claims.” However, Younger abstention is limited to three classes of parallel proceedings: (1) “pending state criminal proceeding[s]”; (2) “particular state civil proceedings that are akin to criminal prosecutions”; and (3) civil proceedings “that implicate a State’s interest in enforcing the orders and judgments of its courts.”

The court will abstain from hearing the portions of MPHJ’s complaint that directly overlap with the State Action, including challenges to the CPA. The State sought to impose civil penalties as sanctions for wrongful acts involving alleged violations of the CPA. Also, the State initiated the action after conducting an investigation, thereby echoing the description of a proper abstention situation. The constitutionality of the CPA can be determined by the state courts. The state courts may also remedy any violations as appropriate. MPHJ’s assertion of bad faith on the part of the State was not supported by the evidence. MPHJ’s challenge to the state court’s assertion of personal jurisdiction under the Vermont long arm statute is also a matter that is strictly for the state court to determine. However, the abstention did not include MPHJ’s claims for money damages.

Abstention with respect to the BFAPIA claim was unwarranted, according to the court, because the State Action had nothing to do with the BFAPIA.

Standing. MPHJ had standing to challenge the BFAPIA, according to the court. The State argued MPHJ lacked standing because the Attorney General made no effort to enforce the BFAPIA and had not threatened such enforcement. A standing sufficient for injury is established by a credible threat of prosecution. There is a credible threat where: (1) the plaintiffs alleged an intention to engage in a course of conduct arguably involving a constitutional interest; (2) the plaintiffs’ conduct was arguably proscribed by the challenged statute; and (3) the threat of future enforcement was substantial. MPHJ made it clear its intention to send enforcement letters to Vermont businesses in the future. As for a credible threat of future enforcement, MPHJ pointed to an interview with the AG concerning patent trolling and the BFAPIA in which the AG specifically mentioned MPHJ. Courts generally presume that state will enforce their laws. Therefore, there was a credible threat of prosecution.

Ripeness. MPHJ’s claims under the BFAPIA were ripe, while its takings and personal jurisdiction claims were not, according to the court. The State argued that MPHJ’s claims were not ripe because its proposed letter of inquiry does not violate the BFAPIA.

BFAPIA claim. MPHJ alleged that the BFAPIA was invalid or preempted under the First, Fifth, and Fourteenth Amendments, the Supremacy Clause, the Patent Clause, and the Dormant Commerce Clause. Facial challenges are largely disfavored, but allowed when a plaintiff asserts a First Amendment violation. MPHJ claimed that the BFAPIA infringed upon a constitutional right, gave too much discretion to the state court, while failing to put a patent owner on sufficient notice of what might violate the law, and did not include proper pleading and proof requirements. The challenge was sufficient to move forward, according to the court.

The court dismissed MPHJ’s Dormant Commerce Clause and selective prosecution claims for failure to state a claim. MPHJ alleged violations of the Dormant Commerce Clause. Under the Dormant Commerce Clause, “[a] regulation that evinces discriminatory purpose against interstate commerce, or unambiguously discriminates in its effect . . . almost always is invalid per se.” A state statute may violate the Dormant Commerce Clause if “it imposes a burden on interstate commerce incommensurate with the local benefits secured.” The BFAPIA is intended to protect its businesses and citizens from patent trolling. There is no suggestion of protectionism, as the State has not acted to favor Vermont businesses over its competitors. Mere consumer protection does not run afoul of the Dormant Commerce Clause.

Attorney fees. The court granted MPHJ’s motion for attorney fees. The State argued that an award of attorney fees was barred by Vermont’s sovereign immunity. However, the Eleventh Amendment does not prohibit an award of fees against a state.

The case is No. 2:14-cv-191.

Attorneys: Andrew D. Manitsky (Lynn, Lynn, Blackman & Manitsky, PC) for MPHJ Technology Investments, LLC. Bridget C. Asay, Vermont Office of the Attorney General, for William H. Sorrell.

Companies: MPHJ Technology Investments, LLC

Cases: ConsumerProtection StateUnfairTradePractices VermontNews