United States District Court, D. Vermont
MPHJ TECHNOLOGY INVESTMENTS, LLC, inclusive of its subsidiaries, Plaintiff,
WILLIAM H. SORRELL, in his official capacity as Attorney General of the State of Vermont, Defendant.
OPINION AND ORDER
WILLIAM K. SESSIONS III, District Judge.
This case revolves around the State of Vermont's enforcement efforts against Plaintiff MPHJ Technology Investments, LLC ("MPHJ") for alleged patent trolling. The State claims that MPHJ, through shell subsidiaries, sent false and misleading letters to various Vermont entities alleging patent infringement and demanding the purchase of licenses. In 2013, the State sued MPHJ in state court under the Vermont Consumer Protection Act, 9 V.S.A. §§ 2451 et seq. ("VCPA"). That case (the "State Action") is currently pending.
In the instant case, MPHJ seeks to enjoin the State's enforcement activities, both present and future, including the State Action. In addition to challenging the claims brought under the VCPA, MPHJ requests injunctive and declaratory relief with respect to the recently-enacted Bad Faith Assertions of Patent Infringement Act, 9 V.S.A. § 4195-4199 ("BFAPIA"). The State has not taken any enforcement action under the BFAPIA. MPHJ further accuses the State of selective prosecution and a taking with regard to its patent rights.
Now before the Court is a motion to dismiss filed by the Defendant, Vermont Attorney General William Sorrell. ECF No. 19. The Attorney General argues that this case should be dismissed in its entirety on the basis of Younger abstention; that MPHJ lacks standing; that the claims are not ripe; that MPHJ has failed to state a claim for selective prosecution; and that any claim for damages, fees, or costs is barred by sovereign immunity. For the reasons set forth below, the motion to dismiss is granted in part and denied in part.
Factual and Procedural Background
MPHJ owns several patents relating to networked scanning systems. It contends that its patents are of the type that manufacturers of system components (such as servers, scanners, and desktops) will not be held liable for infringement, and that only end-users will be clear infringers. MPHJ also claims that infringement by end-users can be reasonably suspected, but not confirmed, through public records. To confirm infringement, a written inquiry is required.
MPHJ (or its subsidiaries) allegedly sent letters of inquiry to a series of Vermont businesses. The first such letter would inform the suspected infringer that it had been identified as a user of patented technology, and required a response either confirming or denying infringement. ECF No. 18-6. If MPHJ did not receive a response to the first letter, a law firm hired by MPHJ would send a second letter notifying the potential infringer that the matter had been referred to counsel "to work out a license with you, " or to determine "whether additional steps might be required." ECF No. 18-7 at 2. If still no response, a third letter would issue from the law firm threatening legal action. ECF No. 18-8.
The State of Vermont, through the Attorney General's office, undertook an investigation of MPHJ's communications with Vermont businesses. Ultimately, the State filed suit against MPHJ alleging violations of the VCPA. In support of its claims of unlawful trolling, 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. The State also alleged that although MPHJ had threatened litigation, it had not retained local counsel or filed a single suit. Accordingly, the State's pleading accused MPHJ of sending the letters of inquiry in bad faith.
MPHJ now brings this federal suit against Attorney General Sorrell arguing, among other things, violations of its First Amendment rights. The First Amended Complaint consists of three Counts, each of which is divided into subparts. Count I focuses on MPHJ's intent to send letters in the future. In Count I-A, MPHJ claims that the BFAPIA is invalid or preempted under federal law, and seeks declaratory and injunctive relief barring any enforcement efforts under that statute. Count I-B alleges that the VCPA is invalid or preempted. Count I-C contends that Vermont's long arm statute is invalid as applied to MPHJ. Count I-D attacks the VPCA and the BFAPIA under the Dormant Commerce Clause, while Count I-E seeks a declaration that patent enforcement would not be baseless. Count I-F asks for costs and attorney's fees under 42 U.S.C. § 1988 on the basis of Defendant Sorrell's allegedly unconstitutional conduct.
Count II focuses on the State's enforcement against MPHJ's prior letters, and seeks to enjoin the State from enforcing compliance with the BFAPIA as a remedy. This Count is again broken into five supbarts, alleging preemption and unconstitutionality and requesting fees and costs. Count III alleges a taking in the form of interference with MPHJ's patent rights.
The Attorney General has moved to dismiss, arguing that because of the ongoing State Action this Court should abstain from hearing MPHJ's claims. See generally Younger v. Harris, 401 U.S. 37 (1971). As mentioned above, the Attorney General further argues lack of standing, failure to state a claim, and sovereign immunity. Also before the Court are MPHJ's motion for a preliminary injunction and motion to seal an exhibit.
I. Younger Abstention
The Attorney General first argues for abstention under Younger v. Harris . In Younger, the Supreme Court held 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. 401 U.S. at 54; Gibson v. Berryhill, 411 U.S. 564, 573-74 (1973). " Younger abstention has been extended to civil proceedings and state administrative proceedings, so long as the state court has a means of reviewing constitutional claims." Cecos International, Inc. v. Jorling, 895 F.2d 66, 70 (2d Cir. 1990) (citations omitted). The doctrine applies to cases seeking both injunctive and declaratory relief. See Kirschner v. Klemons, 225 F.3d 227, 235 (2d Cir. 2000).
The Second Circuit previously set forth a test for abstention under Younger, requiring (1) a pending state proceeding (2) that implicates an important state interest, and (3) that "the state proceeding affords the federal plaintiff an adequate opportunity for judicial review of his or her federal constitutional claims." Spargo v. New York State Comm'n on Judicial Conduct, 351 F.3d 65, 74 (2d Cir. 2003). This three-part test was derived from the Supreme Court's opinion in Middlesex Cty. Ethics Comm. v. Garden State Bar Ass'n, 457 U.S. 423 (1982) (" Middlesex ").
The Supreme Court recently held, however, that 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." Sprint Commc'ns, Inc. v. Jacobs, 134 S.Ct. 584, 588 (2013); see id. at 591 ("We have not applied Younger outside these three exceptional' categories, and today hold... that they define Younger 's scope."). In fashioning these categories, Sprint described the Supreme Court's previous applications of Younger to state civil proceedings as follows:
Our decisions applying Younger to instances of civil enforcement have generally concerned state proceedings akin to a criminal prosecution in important respects. Such enforcement actions are characteristically initiated to sanction the federal plaintiff, i.e., the party challenging the state action, for some wrongful act. In cases of this genre, a state actor is routinely a party to the state proceeding and often initiates the action. Investigations are commonly involved, often culminating in the filing of a formal complaint or charges.
134 S.Ct. at 584 (internal citations and quotation marks omitted).
B. VCPA Claims
Here, the Court finds that the State's enforcement of the VCPA meets the Sprint criteria, and is consistent with the Supreme Court's prior applications of Younger. The State Action seeks to impose civil penalties as sanctions for wrongful acts involving alleged violations of Vermont's consumer protection law. Moreover, the State initiated the action after conducting an investigation, thereby echoing the description of a proper abstention scenario set forth in Sprint.
Sprint also noted that while the Middlesex factors are not dispositive, they may be considered. Id. at 593. Here, the first two Middlesex factors are satisfied since there is a pending state proceeding that implicates the important state interest of enforcing its consumer protection laws. Indeed, courts have widely held that state actions to enforce consumer protection statutes are eligible for abstention under Younger. See, e.g., Cedar Rapids Cellular Tel., L.P. v. Miller, 280 F.3d 874, 880 (8th Cir. 2002); Williams v. State of Washington, 554 F.2d 369, 370 (9th Cir. 1977); In re Standard and Poor's Rating Agency Litig., 23 F.Supp.2d 378, 409 (S.D.N.Y. 2014); Bologna v. Allstate Ins. Co., 138 F.Supp.2d 310, 327 (E.D.N.Y. 2001). With respect to the third Middlesex factor, the state courts will provide MPHJ ample opportunity to present its federal constitutional claims. See Spargo, 351 F.3d at 77 (("[I]n conducting the Younger inquiry, considerations of comity preclude[ ] ...