We’re going to take a quick time-out from standard-essential patent issues for a minute for a brief post on non-practicing entities.  These NPEs are getting more and more attention from industry, regulators, and Congress, with a multitude of recent legislation (e.g., the SHIELD Act, the Patent Quality Improvement Act and the End Anonymous Patents Act) being introduced to address NPE-related issues.

Today brought the publication of what looks like is the first lawsuit of its kind — a complaint brought by a state attorney general (here, Vermont’s) against a non-practicing entity, alleging that the NPE’s patent assertion activities constitute unfair and deceptive trade practices under Vermont state law. (The suit was actually filed May 8, but it became publicly available today when the defendant was served.)  The complaint was filed against MPHJ Technology Investments LLC, a company that has been characterized by some as the “scanner troll” — because it has sent demand letters to thousands of businesses that use scan-to-email technology.

We’ll let you read the complaint [LINK] and the press release [LINK], and Ars Technica‘s Joe Mullin already has a good article on the suit.  Essentially, though, it looks like the Vermont AG alleges that MPHJ and 40 shell companies violated Vermont Consumer Protection Act by sending demand letters in bad faith to numerous Vermont businesses — and that MPHJ never investigated whether these entities infringed, never actually intended on enforcing its patents, and simply wanted to extract settlements under the mere threat of litigation.  The complaint seeks an injunction against MPHJ, as well as full restitution to the Vermont businesses and civil penalties of up to $10K for each violation.

While state law claims relating to patent infringement assertions are not automatically preempted by federal law, there are inevitably going to be preemption and/or Noerr-Pennington immunity issues that will have to be sorted out here.  The first thing that comes to mind is Innovatio IP Ventures’ successful motion to dismiss unfair competition and RICO claims earlier this year.  The court there noted that under the Federal Circuit case of Globetrotter Software, Inc. v. Elan Computer Grp., Inc., 362 F.3d 1367 (Fed. Cir. 2004), state law claims based on a patent-holder’s assertion of infringement can survive federal preemption only to the extent that those claims are based on a showing of ‘bad faith’ action in asserting infringement — and that in order to have been made in “bad faith,” an assertion must have been both objectively baseless and brought without a subjective expectation of success.  Of course, the complaint appears to imply that MPHJ’s claims objectively and subjectively baseless, so we will have to see how the lawsuit plays out.  It will be interesting, that’s for sure.

Coincidentally (or perhaps not), Vermont is also the state where a state law was recently passed that specifically targets bad-faith NPE patent assertions (a bill that will likely face its own preemption issues).  That bill is expected to be signed into law any day now.