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IP Alert: Federal Circuit Addresses Consumer Protection Claim Against Non-Practicing Entity

August 14, 2014

On August 11, 2014, the Court of Appeals for the Federal Circuit, in State of Vermont v. MPHJ Technology Investments, LLC, denied an appeal from an order remanding to state court a consumer protection claim brought by the State of Vermont. This case is of interest because it marks what may be the first occasion that the Federal Circuit has considered an issue relating to state efforts to regulate the assertion of patents.

MPHJ Technology Investments, LLC, is a non-practicing entity that purports to own patents relating to network scanner systems. MPHJ sent letters to several Vermont companies asking each either to confirm that it was not infringing MPHJ’s patents or to purchase a license. If a targeted company failed to respond, MPHJ sent a second letter, this time including an attached complaint, indicating that MPHJ would sue that company for patent infringement.  

On May 8, 2013, the State of Vermont, through its Attorney General, sued MPHJ in Vermont state court, alleging that MPHJ violated the Vermont Consumer Protection Act. Specifically, Vermont alleged that MPHJ’s violation occurred when MPHJ engaged in unfair and deceptive trade practices by sending letters containing threatening, false, and misleading statements. Vermont also sought a permanent injunction barring MPHJ from threatening Vermont companies with patent infringement lawsuits.  

Federal law provides that certain state court actions may be “removed” to federal court, including state court actions that raise federal claims. MPHJ attempted to remove the case to the federal district court, the District of Vermont, asserting that the general “federal question” jurisdictional statute created federal jurisdiction. Vermont then moved to remand the case back to state court, arguing that the district court lacked subject matter jurisdiction because Vermont’s complaint did not necessarily raise a substantial question of patent law required to invoke the alleged subject matter jurisdiction. 

In its motion to remand, Vermont argued that its entire claim was based on Vermont state law relating to MPHJ’s allegedly false and misleading statements. MPHJ disagreed and asserted that the Vermont’s complaint raised substantial questions relating to patent law. Vermont asserted that MPHJ had done no due diligence to confirm whether the recipients of the letters were likely infringers and sought to enjoin MPHJ from asserting its patent rights in Vermont. MPHJ responded that the court would have to assess the adequacy of MPHJ’s pre-suit patent infringement investigations — i.e., the court would necessarily have to examine the patents, construe the patent claims, and apply the claims to the accused systems. 

The district court disagreed and noted that the need to examine the fact-based level of MPHJ’s pre-suit investigations would arise only as MPHJ’s defense to Vermont’s general claim that MPHJ was not actually prepared to sue the target companies as stated in the letters. Further, the district court noted that Vermont could easily avoid delving into patent law by establishing that MPHJ was unprepared to bring litigation with other, non-patent related evidence (e.g., MPHJ had not retained local counsel; MPHJ had never brought patent enforcement litigation). Thus, at least one arguable theory existed to support Vermont’s claim, and that theory did not rely on a resolution involving patent law because the adequacy of MPHJ’s pre-suit investigation would only arise through a defense asserted by MPHJ. 

MPHJ also argued that Vermont’s complaint was preempted by MPHJ’s federal right to enforce its patents. The district court allowed Vermont to conditionally clarify the scope of the requested injunctive relief to only prevent MPHJ from sending letters that violate state law. The district court then held that the MPHJ’s preemption argument was an affirmative defense to its allegedly unfair and deceptive practices, and that a defense cannot provide a basis for federal subject matter jurisdiction. The court therefore granted Vermont’s motion to remand. 

On MPHJ’s appeal from this order, the Federal Circuit did not reach the merits of the parties’ opposing arguments. Instead, the court found that it lacked appellate jurisdiction over the order to remand because the order was grounded in a lack of subject matter jurisdiction. Section 1447(d) of Title 28 applies to remand orders based on a defect in removal procedure or lack of subject matter jurisdiction and provides that “[a]n order remanding a case to the State court from which it was removed is not reviewable on appeal or otherwise[.]” The Federal Circuit explained that section 1447(d) precludes any second-guessing of the lower court’s subject matter determination “no matter how plain the legal error in ordering the remand.” The court dismissed MPHJ’s appeal.

Although the Federal Circuit appeal turned on an obscure jurisdictional statute of general applicability, and not on any substantive patent law issues, the MPHJ case is noteworthy because it is possibly the first Federal Circuit case to address efforts by states to limit non-practicing entities. Notably, the Federal Circuit issues the MPHJ decision as a precedential opinion, even though the case did not explicate any substantive patent law issues. Recently, a number of states have begun to attempt to limit the actions of patent holders, and it is expected that the MPHJ case will not be the last time that the Federal Circuit or other federal courts will address the issues raised by such state activity.


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