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State v. Sorrell

United States District Court, D. Vermont

January 9, 2015

STATE OF VERMONT, Plaintiff, Counterclaim Defendant,
MPHJ TECHNOLOGY INVESTMENTS, LLC, Defendant/Counterclaim Plaintiff. and WILLIAM SORRELL, in his official capacity as Attorney General of the State of Vermont, Counterclaim Defendant,



Plaintiff State of Vermont brings this action under the Vermont Consumer Protection Act ("VCPA") against Defendant MPHJ Technology Investments, LLC ("MPHJ"). The State claims that MPHJ, through shell subsidiaries, sent false and misleading letters to various Vermont entities alleging patent infringment and demanding the purchase of licenses. MPHJ has answered and filed counterclaims for declaratory judgment as to (1) the validity or preemption of the State's statutory causes of action under federal law and (2) the validity and infringement of the MPHJ patents. The case was initiated in state court, and MPHJ removed to this Court.

This is MPHJ's second removal. In the first, which did not involve any counterclaims, MPHJ claimed the State's action under the VCPA would impact its patent rights. The Court concluded the State had not raised any issues of federal law and remanded the case to state court.

The State subsequently amended its pleading, deleting a single phrase from its prayer for relief and adding no new substantive claims. MPHJ responded with an answer and counterclaims for declaratory relief, asserting that the Amended Complaint necessarily implicates a recently-passed Vermont statute pertaining to assertions of patent infringement, and that the new statute violates federal law. The State denies that this new statute is a part of its Amended Complaint. MPHJ's counterclaims also ask for confirmation of its patent rights, and for a finding that the VCPA violates federal law.

Upon MPHJ's second removal, the State has again filed a motion to remand and, in the event the Court chooses not to remand, a motion to dismiss. Those two motions are now pending before the Court. For the reasons set forth below, the motion to remand is granted and the motion to dismiss is denied as moot.

I. Factual and Procedural Background

In May 2013, the State filed its original Complaint in this case under the VCPA, Vt. Stat. Ann. tit. 9 §§ 2451 et seq., claiming MPHJ had engaged in unfair and deceptive business practices in Vermont. The State alleged that MPHJ, through various shell subsidiary companies, sent letters to businesses and non-profits in Vermont claiming patent infringement. The letters requested either the purchase of a license, or confirmation that the recipient was not infringing the patents. The letters also represented that the licensing program had received a largely positive response, and that many recipients of such letters had paid for a license. Follow-up letters were sent from a Texas law firm threatening legal action if the recipient did not respond. Some Vermont businesses claimed that they only received the follow-up letters and not the original letter.

The State's initial Complaint alleged that these letters were false, deceptive, and misleading in violation of the VCPA because: (1) MPHJ did no due diligence to confirm whether the recipients were likely infringers; (2) MPHJ targeted small businesses in commercial fields unrelated to patent law; (3) MPHJ had not actually received a positive response regarding its licensing program; (4) only a very small fraction of recipient businesses had purchased licenses; (5) as of the time of the Complaint, neither MPHJ nor its shell companies had filed a single lawsuit; (6) as of the time of the letters, MPHJ had not retained local counsel; (7) the shell companies claimed to possess exclusive licenses, but in fact did not; and (8) the shell companies often targeted businesses outside the geographic regions in which they were legally permitted to enforce the patents.

The initial Complaint requested relief in the form of a permanent injunction prohibiting MPHJ from engaging in further business activity "that violates Vermont law, " and "requiring Defendant to stop threatening Vermont businesses with patent-infringement lawsuits." ECF No. 1-1 at 11. The Complaint also sought full restitution for businesses that suffered damages, civil penalties, costs and fees to the State, and any other relief the Court deemed appropriate.

In June 2013, MPHJ removed the case to this Court, asserting federal question and diversity jurisdiction. MPHJ maintained that the Court had federal question jurisdiction because the validity, infringement, and enforcement of the patents referenced in the letters fell within the Court's exclusive jurisdiction. MPHJ also claimed that the State was filing on behalf of Vermont businesses, thereby establishing diversity jurisdiction. The Court disagreed, concluding that "the State's complaint brings claims solely under state law for unfair and deceptive practices and its claims are premised on multiple theories that do not implicate federal patent law." State v. MPHJ Tech. Inv., LLC, 2014 WL 1494009, at *6 (D. Vt. Apr. 15, 2014). The Court also found that the State was the true party in interest, and was not a citizen for purposes of diversity jurisdiction. MPHJ appealed the Court's ruling to the United States Court of Appeals for the Federal Circuit, which dismissed the appeal for lack of jurisdiction under 28 U.S.C. § 1447(d).[1]

The State subsequently amended the Complaint, deleting its request for an injunction barring threatening communications with Vermont businesses. This was the State's only change to its pleading. Like the original Complaint, the Amended Complaint continues to request an order enjoining violations of "Vermont law."

On September 9, 2014, MPHJ responded with an answer, counterclaims, and a second notice of removal. MPHJ's removal notice asserts that the State's request for an injunction against violations of "Vermont law" necessarily implicates the recently-enacted Vermont Bad Faith Assertions of Patent Infringement Act (the "BFAPIA" or "Act"), Vt. Stat. Ann. tit. 9 §§ 4195-99. That Act was signed by the Governor on May 22, 2013, and took effect on July 1, 2013. The Act was therefore not in effect when the State filed its initial Complaint on May 8, 2013, but was in effect when the State amended its pleading in 2014.

The BFAPIA targets bad faith patent infringement claims. The Act sets forth a number of factors for a court to consider when determining bad faith, including whether a demand letter includes: the patent number; the name and address of the patent owner; specific information about the alleged infringement; a demand for payment of a license fee or response within an unreasonably short period of time; or meritless assertions of patent infringement. Courts may also consider actual or threatened lawsuits based upon similar assertions of infringement, the patent owner's investment in the use of the patent, and whether the patent has been successfully enforced through litigation. Vt. Stat. Ann. tit. 9 § 4197.

In passing the Act, the Vermont legislature "recognize[d] that Vermont is preempted from any law that conflicts with federal patent law, " and characterized the statute as "narrowly focused... to facilitate the efficient and prompt resolution of patent infringement claims, protect Vermont businesses... while at the same time respecting federal law and being careful not to interfere with legitimate patent enforcement actions." Id. § 4195.

The notice of removal submits that the BFAPIA "affects the validity of certain laws of the United States, including but not limited to: Title 35 of the United States Code... the First, Fifth and Fourteenth Amendments to the U.S. Constitution, the Supremacy Clause, and the Patent Clause of the U.S. Constitution." ECF No. 1 at 2. MPHJ also argues that the Act discriminates against certain types of patent owners. MPHJ's counterclaims echo the allegation that the BFAPIA violates federal law. In addition, the counterclaims seek declaratory relief with respect to the alleged infringement and validity of MPHJ's patents, and claim that the VCPA violates federal law.

The State insists that the BFAPIA is not a part of its Amended Complaint, just as it was not a part of the original Complaint. The State also contends that the validity of MPHJ's patents is not at issue, and that MPHJ's second effort at removal is untimely. Accordingly, the State has again moved to remand. The State also moves, in the alternative, to dismiss MPHJ's ...

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