April 15, 2014

VT Federal Court Rules in Favor of Vermont and Against Alleged Patent Troll in Preliminary Decision

Vermont Attorney General William Sorrell won a major victory in his groundbreaking effort to use state law to crack down on “patent trolls.”

In State of Vermont v. MPHJ, LLC, the Vermont federal court has rejected the preliminary bid of MPHJ, an alleged “patent troll,” to avoid facing possible liability under Vermont consumer protection law.

Vermont’s federal judge William Sessions granted the State’s motion to remand the lawsuit back to Vermont state court for further handling, and refused to consider MPHJ’s motion to dismiss the case altogether. That is, the Court agreed with Vermont’s Attorney General that the State’s case against MPHJ does not require a resolution of federal patent issues and therefore belongs in Vermont’s state court, not federal court.

Given the current lack of federal law to broadly protect against bad faith claims of patent infringement, Vermont’s Attorney General is attempting to use state law – specifically, Vermont’s consumer protection statute – to protect Vermont’s business community against such claims. His lawsuit against MPHJ is part of that effort.

The Vermont lawsuit against MPHJ, filed in May, 2013, was the first state case against a company for alleged patent troll behavior. Attorney General Sorrell originally filed the lawsuit in Vermont state court alleging that MPHJ, a Delaware company, had violated Vermont’s consumer protection law by sending a series of “cease-and-desist” letters to Vermont businesses and non-profit organizations in a scheme to collect money. In these letters, MPHJ asserts that the recipients are violating MPHJ’s patent and threatens them with legal action if they do not pay a “licensing fee” to MPHJ. MPHJ claims it has patent rights to certain scanner-to-email technology and that any business that is using such technology without a license is infringing MPHJ’s patent. Representatives of Vermont’s business community who have received such letters from MPHJ and other alleged “patent trolls” complain bitterly that this “trolling” behavior is having a debilitating effect on their businesses and on the Vermont economy in general. The State alleges that the sending of these threatening letters to small businesses and non-profit organizations is a practice that MPHJ has engaged in throughout the country, and is unfair and deceptive because the letters contain false statements intended to induce the recipients into paying a licensing fee to MPHJ.

MPHJ “removed” the State’s lawsuit to federal court. In so doing, MPHJ contended that the federal court has exclusive jurisdiction because addressing the State’s claims against MPHJ would require the Court to determine the validity and/or enforceability of MPHJ’s patent, and patent law is a purely federal law issue. MPHJ also argued that it has federal rights under patent law and the First Amendment to send letters to alleged patent infringers.

In granting the State’s motion to remand the case back to state court, Judge Sessions rejected MPHJ’s arguments. He held that the State’s case against MPHJ does not challenge the validity of MPHJ’s claimed patent rights. Rather, the State’s case is based exclusively on Vermont state law: MPHJ’s alleged bad faith conduct in the way it is pursuing alleged infringers in Vermont, i.e., by sending threatening letters that contain false or misleading statements. Thus, Judge Sessions concluded, the federal court did not have jurisdiction over the State’s lawsuit against MPHJ, and MPHJ had improperly removed the case to federal court. Accordingly, he sent the case back to Vermont state court, where it had originally been filed by the Attorney General.

This is an important ruling because it says that a state can pursue consumer protection-type claims against a patentholder based on the patentholder’s conduct towards alleged infringers, regardless of whether the patent is or is not valid, and regardless of whether the businesses that received the threatening letters do or do not infringe the patent. This ruling could be cited by other courts in the country for the proposition that a state can pursue state-based (non-federal) claims, in state court, against a patentholder for conduct unrelated to whether the patent is valid or is infringed.

Of course, this decision is a jurisdictional ruling and not a decision on the merits of the State’s consumer protection claims against MPHJ.

In addition to this lawsuit, which attempts to use existing Vermont consumer protection law to stop an alleged “patent troll,” in May, 2013 Vermont became the first state in the nation to enact state legislation specifically targeted against “patent trolls.” 9 V.S.A. §§4195-4199. The legislation was the product of a cooperative effort of the Vermont business community, the Vermont Attorney General, and Peter Kunin and Eric Poehlmann of the Downs Rachlin Martin law firm. The legislation gives the Vermont Attorney General, and private companies, the ability to bring a lawsuit against patentholders who – acting in bad faith — threaten to sue, or actually sue, a Vermont company. For the first time, Vermont companies now have a tool to help level the playing field against patent trolls. Following Vermont’s innovative lead, many states have now proposed state-level anti-troll legislation. And, there is now also anti-troll legislative activity at the federal level.


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