Vermont v. MPHJ Tech (Fed. Cir. 2015)
In an interesting opinion, the Federal Circuit has rejected MPHJ’s plea to get into Federal Court. The State of Vermont sued the patent holder for violations of Vermont Consumer Protection Act (VCPA) stemming from MPHJ’s patent enforcement campaign. The letter campaign had three stages:
- Letter from the shell company stating that “we have identified your company as one that appears to be using the patented [scanner-to-email] technology” suggesting that “you should enter into a license agreement with us at this time.”
- Follow-up letter a few weeks later from the Farney Daniels firm stating that a prior-non response is considered “an admission of infringement” and implying that litigation would commence if the recipient did not enter into a license agreement.
- A third follow up following the pattern of the second.
These actions prompted the Vermont Attorney General to sue under the VCPA – alleging unfair and deceptive trade practices based upon MPHJ’s “threating litigation even though litigation was unlikely, targeting small businesses, placing the burden on the recipient to do the investigation, using shell corporations to minimize liability; and stating in its letters that it would bring suit immediately absent a license, the licensing program was successful with many businesses taking part, and the average license was $1000/employee.” The state demanded a permanent injunction requiring that MPHJ comply with state law.
After VT filed its original complaint (but before it filed its amended complaint), the state enacted the “Vermont Bad Faith Assertions of Patent Infringement Act” (BFAPIA) that creates a new Vermont cause of action for “bad faith assertion of patent infringement” based upon factors such as “the contents of the demand letter, the extent of any pre-assertion investigation, demands for payment of a license fee in an unreasonably short time, and deceptive assertions of infringement.”
MPHJ alleges that the proposed injunction would force it to comply with BFAPIA, but that law is preempted by the US patent laws and – as such – that the case should be removed to Federal Court.
The Federal District Court denied MPHJ’s first removal request (based upon the first complaint) and second removal request (based upon the VT amended complaint). It is that second denial that was appealed and the Federal Circuit here has affirmed the denial – limiting the appeal question to the BFAPIA issue and finding that the VT injunction does not raise the BFAPIA enforcement issue – especially since Vermont stipulated during oral arguments that they were not seeking an injunction that would require compliance with that statute.
Federal Circuit Jurisdiction: The most interesting aspect of the decision is Judge O’Malley’s discussion of Federal Circuit jurisdiction post-AIA and post-Gunn.
The America Invents Act amended Title 28 to now grant Federal Circuit appellate jurisdiction “in any civil action arising under, or in any civil action in which a party has asserted a compulsory counterclaim arising under, any Act of Congress relating to patents.” 28 U.S.C. § 1295(a)(1). This change extends the Federal Circuit’s jurisdiction to include cases where the patent issues arise only in a compulsory counterclaim (formerly, the focus was only on the complaint). The new statute also added additional language that “no state court shall have jurisdiction over any claim for relief arising under any Act of Congress relating to patents,” 28 U.S.C. § 1338(a), and a new removal statute indicating that “a civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents . . . may be removed to [federal] district court . . . .” 28 U.S.C. § 1454.
At the same time, in Gunn (2013) the Supreme Court contracted Federal Circuit jurisdiction to cases where (1) federal patent law creates the cause of action or (2) where, although the claim arises under state law, that a federal patent law issue is: (a) necessarily raised, (b) actually disputed, (c) substantial, and (d) capable of resolution in federal court without disrupting the federal-state balance approved by Congress. Gunn (interpreting pre-AIA law).
Here, MPHJ asserts that the Federal Circuit has jurisdiction over the appeal because its Counterclaim (No. 5) raises a patent law issue. In particular, MPHJ asked for “a declaratory judgment that the VCPA is invalid or preempted by the First, Fifth, and Fourteenth Amendments, the Supremacy and Patent Clauses, and Title 35 of the U.S. Code.”
Walking through this morass, the Federal Circuit first ruled that the counterclaim is a compulsory counterclaim because of its close factual and logical relationship with the main claim found in the complaint. The next question under Section 1295(a)(1) then, also answered affirmatively here, is whether the counterclaim “arises under” federal patent law. Although not a cause of action, the federal circuit found that the preemption defense is an important and necessary federal patent question whose resolution will have a broad impact on the federal patent system as a whole.
Whether federal patent laws preempt or invalidate the VCPA as applied has considerable significance beyond the current case. A hypothetical finding that the VCPA is not invalid or preempted in state court would affect the development of a uniform body of patent law, as such a decision would be binding in Vermont, but would not be in other states with similar laws or in federal court. The facts of this case are fundamentally unlike Gunn, in which the Court recognized that the federal issue was a “backward-looking . . . legal malpractice claim” that would be unlikely to have any “preclusive effect” on future patent litigation and was, therefore, not substantial. As an “as applied” challenge, counterclaim 5 depends to a certain extent on the specific facts of this case, but the 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.
With that, the Federal Circuit found that it does indeed have appellate jurisdiction to hear the appeal.
At this point, you may be seeing a disconnect between the ultimate holding that I first described (effectively denying removal) and the new statute permitting removal of cases “in which any party asserts a claim for relief arising under any Act of Congress relating to patents” (§ 1454) – especially since the court just decided that the court here decided that MPHJ had indeed asserted a claim for relief arising under federal patent law. The resolution of that seeming conflict is procedural – “MPHJ has not appealed the district court’s ruling pursuant to 28 U.S.C. § 1454 [and thus] we have no occasion to address … how that newly enacted provision should be interpreted.”
The complicating factor is that it looks like the State court will now need to dismiss MPHJ’s preemption counterclaim because it arises under the patent law. 1338(a) and, at that point, MPHJ would seemingly have standing to file a federal declaratory judgment action raising preemption.