United States District Court, D. Vermont
OPINION AND ORDER
WILLIAM K. SESSIONS, III, District Judge.
Plaintiff State of Vermont ("State") brings this action under the Vermont Consumer Protection Act ("VCPA") against Defendant MPHJ Technology Investments, LLC ("MPHJ" or "Defendant"), for sending letters allegedly containing threatening false and misleading statements to Vermont businesses and non-profit organizations. The Vermont Attorney General originally filed this case in Washington Superior Court on May 8, 2013, seeking civil penalties and other relief under state law. MPHJ removed the case to this Court on June 7, 2013, asserting federal question and diversity jurisdiction. The State now moves to remand the case back to state court. MPHJ also seeks to dismiss the case for lack of personal jurisdiction on the grounds that the exercise of personal jurisdiction over Defendant would not comport with the notions of fair play and substantial justice and has also moved for Rule 11 sanctions. After a motions hearing on February 25, 2014, the State filed a conditional motion to clarify or amend its complaint. MPHJ subsequently moved for summary judgment. For the reasons stated below, the Court grants the State's motion to remand, ECF No. 9. Because the Court does not have subject matter jurisdiction, the remaining motions are remanded to the state court for further resolution.
I. Factual and Procedural Background
The State brought this action under the VCPA, Vt. Stat. Ann. tit. 9 §§ 2451 et seq., on the grounds that MPHJ engaged in unfair and deceptive business practices in Vermont. Compl. ¶ 1, ECF No. 6. MPHJ is a limited liability company ("LLC") that operates in Vermont through forty wholly-owned shell subsidiary companies ("Shell LLCs"). ¶¶ 2-3. MPHJ and its shell LLCs have addresses in Delaware, but are "managed" by a Texas attorney, Jay Mac Rust, who is the contact and signatory on all of the license agreements between MPHJ and its Shell LLCs. ¶¶ 4-5. MPHJ owns 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. Furthermore, MPHJ had engaged in no litigation regarding its patents prior to the State's filing of this lawsuit. ¶¶ 19-20.
The State bases its claims on a series of allegedly unfair and deceptive letters sent or authorized by Defendant throughout Vermont. ¶ 9. The unlawful acts are alleged as follows. In September 2012, MPHJ's Shell LLCs began sending a series of three letters to numerous small businesses and non-profit organizations operating around Vermont. ¶¶ 14-16. These letters are identical in content with the exception of the addressee and the source Shell LLC. The first letter ("Letter #1") begins by stating, "We have identified your company as one that appears to be using the patented technology" owned by the Shell LLC. ¶ 22. It then requests that the recipient either purchase a license from the Shell LLC or confirm that it is not infringing the patents. ¶ 17. Letter #1 further notes that the Shell LLC has "had a positive response from the business community to [its] licensing program, " that most contacted businesses "are interested in operating lawfully and taking a license promptly, " and that many "have responded to this licensing program in such a manner." ¶ 23. Letter #1 states that the fair negotiated price for a license is between $900 and $1200 per employee. Id. The letter concludes by directing that the recipient respond within two weeks of the date of the letter. Id.
The second and third letters ("Letter #2" and "Letter #3") are sent by a Texas law firm, Farney Daniels LLP (Defendant's counsel in this action), on behalf of the Shell LLC that sent Letter #1. ¶ 27. Both letters state that because the recipient has not responded to explain that it has not infringed upon the patents, the Shell LLC reasonably can only assume that the recipient is using infringing technology and requires a license. ¶ 28. Letter #3 says that if the recipient does not respond within two weeks, "our client will be forced to file a Complaint against you for patent infringement in Federal District Court where it will pursue all of the remedies and royalties to which it is entitled" and encourages the recipient to retain patent counsel. ¶ 31. Letter #3 (and sometimes Letter #2) also attaches a draft complaint against the receiving business naming the Shell LLC as plaintiff. ¶ 32. Some Vermont businesses have claimed that they never received Letter #1 or #2, and only received Letter #3 referring to the prior (unreceived) letters and threatening legal action. ¶ 29.
The Complaint alleges that these letters were false, deceptive, and misleading in violation of the VCPA because (1) Defendant did no due diligence to confirm whether the recipients were likely infringers; (2) Defendant targeted small businesses in commercial fields unrelated to patent law; (3) Defendant had not actually received a positive response regarding its licensing program; (4) only a very small fraction of recipient businesses had purchased licenses (rather than "many" or "most" as indicated in the letters); (5) as of the time of the complaint, neither Defendant nor any of its Shell LLCs had filed a single lawsuit in Vermont or any state, even though over 130 days had passed since the supposed two week deadline; (6) as of the time of the letters, Defendant had not retained local Vermont counsel; (7) each Shell LLC claimed to possess an exclusive license, but given the overlapping geographic assignments, the Shell LLCs did not actually possess exclusive licenses; and (8) the Shell LLCs often targeted businesses outside the geographic regions in which they were legally permitted to enforce the patents. Based upon these alleged misrepresentations and falsities, the State contends that Defendant sent the letters in bad faith. ¶ 54.
The State's Complaint therefore claims that Defendant engaged in unfair trade practices in violation of Vt. Stat. Ann. ch. 9 § 2453(a) by falsely threatening litigation where Defendant was neither prepared or likely to bring such litigation, implying that pre-suit investigation had been performed, targeting businesses too small to have the resources to fight such litigation, and providing no independent proof of infringement in the letters, thereby shifting the burden to the recipients. ¶ 56. The Complaint also alleges that Defendant engaged in deceptive trade practices by including deceptive statements in the letters that would lead consumers to believe that they would be sued if they did not respond or pay for licenses, that the Shell LLCs were the exclusive licensees entitled to enforce the patents, and that the program had received a positive response from the business community and that many or most businesses were interested in purchasing such a license. ¶ 57.
The Complaint requests relief in the form of a permanent injunction prohibiting Defendant from engaging in further unlawful business activity in Vermont and from sending letters threatening Vermont businesses with patent-infringement lawsuits, full restitution to businesses that suffered damages due to the unlawful acts, civil penalties of up to $10, 000 per violation of the VCPA, costs and fees to the State of Vermont, and any other relief deemed appropriate by the Court.
On or around June 7, 2013, MPHJ removed the case to this Court, asserting federal question under 28 U.S.C. § 1331 and diversity jurisdiction under 28 U.S.C. § 1332(a). MPHJ maintains that federal "arising under" jurisdiction is established because the validity, infringement, and enforcement of the patents referenced in the letters fall within the original and exclusive jurisdiction of the federal courts. See 28 U.S.C. § 1338. MPHJ also asserts that subject matter jurisdiction can be sustained on diversity grounds based on the theory that the State brought the suit on behalf of Vermont businesses, thereby making them the real party in interest for purposes of diversity jurisdiction.
There are several motions pending before the Court. The State has moved to remand the case to state court on the grounds that the complaint does not raise a claim arising under federal law and that the State is not a citizen for purposes of diversity jurisdiction. MPHJ has moved to dismiss the case for lack of personal jurisdiction and requested that the Court decide the issue of personal jurisdiction before turning to the question of subject matter jurisdiction, ECF No. 16. In response, the State has moved to stay briefing and decision on MPHJ's motion to dismiss until the motion to remand has been decided, ECF No. 20. MPHJ has also filed a motion for sanctions under Fed.R.Civ.P. 11 and 28 U.S.C. § 1927, ECF No. 38. After a hearing on the pending motions on February 25, 2014, the State also filed a conditional motion to clarify and/or amend the complaint. Finally, MPHJ has moved for summary judgment under Rules 12(d) and 56.
The Court's jurisdiction has been challenged for lack of subject matter jurisdiction (by the State) and for lack of personal jurisdiction over MPHJ (by MPHJ). The Court has the discretion to consider these jurisdictional issues in the order of its choosing. Because the Court determines that it does not have subject matter ...