Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—Fed. Cir.: Vermont’s consumer protection action against patent holder properly remanded to state court, (Sep 28, 2015)

By Jody Coultas, J.D.

Removal of a Vermont Consumer Protection Act (VCPA) claim filed by the State of Vermont against MPHJ Technology Investments, LLC was properly denied by a federal district court as the State’s complaint did not call into question federal law, according to the U.S. Court of Appeals for the Federal Circuit (State of Vermont v. MPHJ Technology Investments, LLC, September 28, 2015, O’Malley, K.). The court had jurisdiction to hear MPHJ’s appeal of the denial of removal based on a counterclaim filed by MPHJ that concerned federal patent law.

MPHJ is a non-practicing entity incorporated in Delaware that acts through a variety of shell corporations incorporated in many states. The State of Vermont filed a state court action against MPHJ alleging that letters mailed to Vermont businesses—which informed recipients that they may be infringing certain patents—were deceptive and violated the VCPA. The letters alleged potential infringement and requested that the recipients either purchase licenses or confirm that they were not infringing the patents.

MPHJ moved to remove the case to the U.S. District Court for the District of Vermont on June 7, 2013, but the district court remanded the case after finding it did not have subject matter jurisdiction. Upon return to the state court, the State was granted amendment of its complaint and MPHJ’s motion to dismiss for lack of personal jurisdiction was denied.

The second motion to remove was filed on September 9, 2014, in which MPHJ argued that the State’s request for an injunction that required MPHJ’s compliance with the Vermont Bad Faith Assertions of Patent Infringement Act (BFAPIA) concerned the validity of 35 U.S.C. §§261, 271, 284, 285, and 287, as well as the First, Fifth, and Fourteenth Amendments, the Supremacy Clause, and the Patent Clause of the Constitution. The district court again remanded the case, finding that the State’s amended complaint never “revived” MPHJ’s right to remove in the first place. The State’s request for injunctive relief also made clear that the State did not seek relief under the BFAPIA. Even if the passage of the BFAPIA by the Vermont legislature provided a new opportunity for removal, the second removal was untimely. Before the court was MPHJ’s appeal of the district court’s second remand order under Section 1442(a)(2).

Jurisdiction. A compulsory counterclaim filed by provided the court with jurisdiction over the appeal. The State argued that the court lacked jurisdiction and should dismiss the appeal. MPHJ’s counterclaimed for a declaratory judgment that the VCPA was invalid or preempted as applied under the First, Fifth, and Fourteenth Amendments, the Supremacy and Patent Clauses of the Constitution, and Title 35 of the U.S. Code. Although the Supremacy Clause does not create a cause of action for its violation, a claim that a state law contravenes a federal statute remains “basically constitutional in nature” because “the application of preempted state law is … unconstitutional.” Seeking relief from the application of state law on preemption grounds in a compulsory counterclaim vests jurisdiction in the court as long as it “arises under” the patent laws. A counterclaim is compulsory where there is a logical relationship between the counterclaim and the main claim. The same underlying facts were involved in both the State’s claim and counterclaim 5.

MPHJ’s counterclaim 5 arose under federal patent law, according to the court. “[F]ederal jurisdiction over a state law claim will lie if a federal issue is: (1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.” Resolution of a federal question was “necessary” to MPHJ’s counterclaim, as proving preemption of the VCPA by federal patent laws would necessarily require proving that the patent laws preclude enforcement of the VCPA as applied. The federal issue was “the central point of dispute.” Counterclaim 5 was also substantial, in that the issue of whether federal patent laws preempts or invalidates the VCPA as applied has considerable significance beyond the current case. The resolution of this case would assist in delineating the metes and bounds of patent law and clarifying the rights and privileges afforded to patentees in pursuing patent infringement claims. Finally, allowing a state court to resolve a patent law preemption question risks “inconsistent judgments between state and federal courts.”

Removal. Removal under Section 1442(a)(2) requires that (1) an action be instituted in state court; (2) the action be against or directed to the holder of a property right; (3) the property right be derived from a federal officer; and (4) the action would “affect” the validity of a federal law.

Because the court found no basis in the amended complaint for removal under 28 U.S.C. §1442(a)(2), the remand to state court was affirmed. The district court held that removal could not be based on Section 1442(a)(2) because MPHJ’s answer and counterclaims did not “call into question the validity of any federal law,” as required by that section. The amended complaint did not assert claims under, nor requested an injunction requiring MPHJ to comply with, the BFAPIA. The court found no reason to disturb the district court’s finding that the State was not seeking an injunction that would require MPHJ’s compliance with the BFAPIA.

The court declined to decide whether Section 1442(a)(2) applied to intellectual property rights or whether the phrase “derived from” a federal officer means the property right at issue must have been obtained by the removing defendant itself from such an officer, rather than by a predecessor in interest to that defendant.

The case is No. 2015-1310.

Attorneys: Bridget Asay, Vermont Office of the Attorney General. William Bryan Farney (Farney Daniels PC) for MPHJ Technology Investments, LLC.

Companies: MPHJ Technology Investments, LLC

Cases: ConsumerProtection StateUnfairTradePractices FedCirNews