Patent Demand-Letter Sender MPHJ Back to State Court

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By Tony Dutra

Sept. 28 — MPHJ Technology Investments LLC, the most highly publicized patent royalty “demand letter” sender, lost again in its attempt to force the State of Vermont to face it in federal court.

The state's confirmation that its injunction request against MPHJ was based only on Vermont's “old” consumer protection statute was enough for the U.S. Court of Appeals for the Federal Circuit on Sept. 28 to affirm a district court's judgment that MPHJ must fight that request in state court. MPHJ attempted to get the case moved to the federal courts based on the federal preemption in patent law.

Vermont's original injunction request was made before new patent-specific legislation was passed, although subsequent requests by the state were made after the new law took effect.

This means that the appeals court has yet to resolve whether Vermont's 2013 Bad Faith Assertions of Patent Infringement Act is preempted by federal law. The BFAPIA was the first of over 20 state laws specifically intended to stop the proliferation of demand-letter abuse—an assertion of infringement that threatens a lawsuit unless a royalty is paid, with insufficient information for the recipient to identify the charge.

State legislatures moved in, feeling that Congress wasn't acting fast enough to stem abuses. However, federal legislation to provide uniformity—in place of a patchwork of state laws that vary as to what constitutes a bad faith assertion—is under consideration.

Comments About Patent-Specific Laws

The court did not make a specific ruling about the BFAPIA or other state laws targeting patent demand letters.

However, the court gave a preview of two key decisions it will have to make if it is charged with considering an appeal challenging the validity of a patent-specific state law based on federal preemption.

MPHJ's argument for federal jurisdiction was based on 28 U.S.C. §1442(a)(2), the “federal officer removal statute.” Under that law, MPHJ would have to show that Vermont's action was “against or directed to the holder of a property right” and that the property right was “derived from a federal officer.”

The court noted that it was not deciding here whether a patent is a property right in Section 1442(a)(2) terms. And it was further leaving open whether only the inventor derived the right from the federal officer—the director of the Patent and Trademark Office in this case—or whether “derived” could be extended to include a purchaser of the property right, such as non-practicing entity MPHJ.

Separately, in a footnote, the court cited statements by Judge William K. Sessions III of the U.S. District Court for the District of Vermont criticizing the state for “requesting an order to prevent the exercise of patent rights, broadly speaking, not related in any way to deception or violation of the [VCPA].”

No Reason to Put VCPA Case in Federal Court

The Vermont Consumer Protection Act (VCPA) allows the state to file a complaint against a party charged with “unfair trade practices” and “deceptive trade practices.”

Vermont charged MPHJ under that act because of MPHJ's practice of sending a series of three letters to Vermont small businesses claiming infringement of patents related to scanning a document and sending it to an e-mail address. MPHJ asked for $1,000 per employee. The second and third letters—sent by Farney Daniels PC, MPHJ's counsel—implied that MPHJ would sue absent payment. MPHJ did not sue any Vermont business that received the letters.

MPHJ failed to remove the case to federal court in 2014, but meanwhile Vermont passed the BFAPIA.

MPHJ's fight the second time around depended on reading the complaint to imply that MPHJ had to comply with that patent-specific consumer protection statute. The Federal Circuit rejected the argument.

Vermont's injunction request would prohibit MPHJ “from engaging in any business activity in, into or from Vermont that violates Vermont law.” MPHJ argued that Vermont law now included the BFAPIA.

First, the court said, that part of the injunction request didn't change during the first remand, leaving the presumption that Vermont did not mean it to be expanded to cover the BFAPIA. And in oral argument, counsel for Vermont confirmed the presumption.

“We hold the State to its concession at oral argument; it has expressly disavowed any request to enjoin MPHJ’s conduct under the BFAPIA,” the court said.

Court Had Jurisdiction Despite Gunn

Prior to reaching its final decision, the court had to determine whether it had jurisdiction over the case.

The U.S. Supreme Court in 2013 chastised the Federal Circuit for being too willing to determine that a complaint “arises under patent law,” as is required for its jurisdiction. Gunn v. Minton, 133 S. Ct. 1059, 2013 BL 43481, 105 U.S.P.Q.2d 1665 (2013). The panel thus had to find that MPHJ's counterclaim—that even the VCPA was preempted by federal law—fell into the “special and small category of [state law] cases” that Gunn allowed the Federal Circuit to handle.

The court did so here because “resolution of this case would assist in delineating the metes and bounds of patent law and clarifying the rights and privileges afforded to patentees in pursuing patent infringement claims.”

Judge Kathleen M. O'Malley wrote the court's opinion, which was joined by Chief Judge Sharon Prost and Judge Pauline Newman.

Vermont was represented by Bridget C. Asay of the Vermont office of the Attorney General. William B. Farney of Farney Daniles PC, Georgetown, Texas, represented MPHJ.

To contact the reporter on this story: Tony Dutra in Washington at adutra@bna.com

To contact the editor responsible for this story: Mike Wilczek in Washington at mwilczek@bna.com

Text at http://www.bloomberglaw.com/public/document/State_of_Vermont_v_MPHJ_Technology_Investments_Docket_No_1501310_.