Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—D. Vt.: Vermont’s claims against alleged “patent troll” remanded to state court, (Apr 17, 2014)

By Jody Coultas, J.D.

Vermont Consumer Protection Act (VCPA) claims filed by the state against alleged “patent troll” MPHJ Technology Investments, LLC were remanded to state court by the federal district court in Burlington, Vermont. The court found that the claims did not implicate either federal question or diversity jurisdiction ( Vermont v. MPHJ Technology Investments, LLC , April 15, 2014, Sessions, W.).

MPHJ, a limited liability company that operates through forty wholly-owned shell subsidiary companies, owned several patents relating to email scanning that were filed in 1998 and issued in 2001. No attempt to enforce the patents was made until 2012, when MPHJ’s shell companies began sending a series of letters to numerous small businesses and non-profit organizations. These letter notified the company that it was using MPHJ’s patented technology and requested that the company either purchase a license from the shell LLC or confirm that it was not infringing the patents. The state alleged that these letters were false, deceptive, and misleading in violation of the VCPA.

The case was removed to federal court by MPHJ asserting federal question and diversity jurisdiction.

Federal question jurisdiction. Federal courts have jurisdiction over “all civil actions arising under the Constitution, laws, or treaties of the United States.” MPHJ argued that there was a federal question because the court was required to assess the validity, infringement, and enforcement of patents in order to adjudicate the case.

To establish federal question jurisdiction “arising under” the patent laws, MPHJ was required to show either that federal patent law created the cause of action or that the state’s right to relief depended on resolution of a substantial question of federal patent law. MPHJ could not show either basis for federal jurisdiction existed in this case. None of the claims concerned the validity of MPHJ’s patents, and the state’s right to relief did not depend on resolving a patent question.

Federal question jurisdiction could not be established because patent law issues were not “necessarily raised” or a sufficiently “substantial,” according to the court. In cases concerning only state law, court look at whether the federal patent law issue was (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. The state did not challenge the validity or scope of MPHJ’s patents, or allege any infringement. The claim was based on the letters sent by MPHJ’s shell companies and the allegedly unfair and deceptive nature of those letters. The state did not seek an injunction to keep MPHJ from enforcing its patent rights, but merely to stop MPHJ from engaging in unfair and deceptive business practices. MPHJ’s anticipated defenses concerning their patent rights and the First Amendment could not provide a basis for federal question jurisdiction. MPHJ’s allegation that the state hid multiple, separate legal claims under the guise of asserting only VCPA claims was dismissed as unsupported.

The court also dismissed MPHJ argument that the state’s claims would impact the overall functioning of the national patent system because it would impair pre-suit investigation, create “unprecedented patent infringement immunity,” and impair sending of notice letters. If the court had found a federal question present, that federal issue must be a “substantial” one to support federal question jurisdiction. The federal patent issues identified by MPHJ involved the application of existing patent law to the facts of this case, and did not require a determination of patent law that would have implications reaching beyond this case.

Diversity jurisdiction. MPHJ also failed to establish diversity jurisdiction, according to the court. Diversity jurisdiction requires complete diversity between the parties. A state is not a citizen for purposes of diversity jurisdiction. MPHJ argued that the state attorney general filed the suit on behalf of Vermont businesses, and that the state was not the “real party in interest” relevant to the determination of diversity jurisdiction. However, the state brought the VCPA action on behalf of itself, not on behalf of private businesses. This fact was established by the relief sought, since a statewide injunction and civil penalties would not be available to private litigants.

The case is No. 2:13-cv-170.

Attorneys: Bridget C. Asay, Vermont Office of the Attorney General. Andrew D. Manitsky (Gravel & Shea PC) for MPHJ Technology Investments, LLC.

Companies: MPHJ Technology Investments, LLC

Cases: StateUnfairTradePractices VermontNews