After being removed to federal district court last May, the Vermont Attorney General’s suit against non-practicing entity MPHJ is being sent back to state court. The decision holds that the AG’s unfair competition claims arising from MPHJ’s patent enforcement efforts belong in state court and raises the question of whether other patent demand letter jurisprudence will be formed by patch-work state competition claims in lieu of a uniform federal law.

Background

MPHJ is widely regarded as a non-practicing entity whose patent portfolio includes a number of patents directed to scan-to-email technology. Over the past several years, MPHJ has sought to enforce these scanner patents against a large number of businesses through an extensive demand letter writing campaign.

Vermont’s attorney general initially filed suit in Vermont’s Superior Court last May, alleging that MPHJ’s local patent assertion efforts constitute unfair and deceptive trade practices in violation of state unfair competition laws. See our May 22, 2014 post for more information. MPHJ moved to have the action heard in federal court, and action was removed to district court in June 2014. The Vermont Attorney General then moved the district court to have the action returned to state court, arguing the claim that MPHJ has violated state consumer protection laws must be heard in state court. In response, MPHJ argued that the suit involved questions of federal patent law and as such was properly before the District Court.

The District Court’s Ruling

U.S. District Court Judge William Sessions agreed with Vermont’s position, ruling that the case “is premised solely on Vermont state law, not federal patent law” and belongs in state court. In reaching this decision, Judge Sessions reasoned that the suit claims MPHJ violated state unfair competition law without raising claims related to the infringement or validity of MPHJ’s patents:

Instead, the state is targeting bad faith conduct irrespective of whether the letter recipients were patent infringers or not, on the basis that MPHJ’s bad faith conduct would be unlawful even MPHJ’s patents were valid and the conduct was directed toward actual patent infringers.

The court weighed the claims made in the complaint, such as the allegation that MPHJ’s letters falsely claimed to have performed an infringement analysis and that the letters falsely asserted that most recipients had already taken a license, and found that none involved questions of patent law. From the Court’s perspective, “this case is about consumer protection, not about patents”.

Opponents of the decision will likely question whether it will have a chilling affect on patent enforcement, placing patent owners seeking to enforce their rights at the risk of being subjected to numerous state court challenges across multiple jurisdictions. Opposing Vermont’s motion, MPHJ specifically argued that the suit would undermine the patent system by subjecting patent owners to potential liability for sending licensing demand letters and by providing patent infringers with relative immunity. The court called such arguments a “gross mischaracterization” of the case at hand and indicated the action is directed not to prevent MPHJ from lawfully enforcing its patent rights in Vermont, but rather to prevent MPHJ from engaging in activity that violates state law.

Activity in Other States

Vermont’s AG isn’t the only one giving MPHJ’s scanner-patent-enforcement programs some  unwanted attention. As discussed in our January 22, 2014 post, MPHJ’s counsel received a cease and desist order from Nebraska’s attorney general in July 2013, though MPHJ was able to secure an injunction preventing the order from being enforced. MPHJ also reached settlement with New  York’s attorney general in January, pursuant to which MPHJ is required to repay licensing money received from organizations in New York after a similar letter-writing campaign. MPHJ also filed suit against the FTC in January, preemptively seeking to prevent an enforcement action threatened by the commission. See our March 21, 2014 and January 14, 2014 posts for more information.