Federal Circuit Sends Bad-Faith-Patent-Assertion Case back to State Court

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:

  1. 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.”
  2. 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.
  3. 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.

About Dennis Crouch

Law Professor at the University of Missouri School of Law. Co-director of the Center for Intellectual Property and Entrepreneurship.

18 thoughts on “Federal Circuit Sends Bad-Faith-Patent-Assertion Case back to State Court

  1. Speaking of Tr011s, any update on the Executive response to Ron Katnelson’s filing (the anti-propaganda filing)…?

    It is now what, double the nominal time for reply?

  2. IPO NEWS: “States Use Consumer Protection Laws to Deter “Patent Trolls”
    “Last week the Wall Street Journal published an opinion article reporting that 27 states have [already] passed new consumer protection laws to deter demands by “patent trolls.”
    [And recently a patent suit defendant in FL reportedly raised their state’s law as one of its defenses [or counterclaims?]]

    [Logical conclusion? Any judicial decision declaring all these state laws unconstitutional may well will end up at the Sup. Ct.?]

  3. So MPHJ letter contained number of things that are mentioned as not-to-do under “Bad Faith Assertions Of Patent Infringement”.

    They included (I am assuming) the patent number, the technology it mentions, factual allegations, they failed to conduct an analysis beforehand, demanded payment of license fees etc.

    This case serves as an example for others in future that what they shouldn’t do in their patent enforcement campaign.

    -Nitin Balodi

  4. The new AIA “counterclaim” rule is that a the presence of a “patent-related” counterclaim not only provides the Federal Circuit with appellate, it but it also provides that only a Federal District Court may initially decide the counterclaim. This seems proper.

    Of course, “patent-related” seems itself to be a defined term under Gunn. The relatedness seems to be along the lines of “substantiality” that the court in U.S. v. Lopes used to limit the authority of congress under the commerce clause so that congress would not essentially have the same unrestricted police powers that a state has.

    United States v. Lopez, 514 U.S. 549, 115 S. Ct. 1624, 131 L. Ed. 2d 626 (1995).
    link to scholar.google.com

    “We pause to consider the implications of the Government’s arguments. The Government admits, under its “costs of crime” reasoning, that Congress could regulate not only all violent crime, but all activities that might lead to violent crime, regardless of how tenuously they relate to interstate commerce. See Tr. of Oral Arg. 8-9. Similarly, under the Government’s “national productivity” reasoning, Congress could regulate any activity that it found was related to the economic productivity of individual citizens: family law (including marriage, divorce, and child custody), for example. Under the theories that the Government presents in support of § 922(q), it is difficult to perceive any limitation on federal power, even in areas such as criminal law enforcement or education where States historically have been sovereign. Thus, if we were to accept the Government’s arguments, we are hard pressed to posit any activity by an individual that Congress is without power to regulate.

    Although Justice Breyer argues that acceptance of the Government’s rationales would not authorize a general federal police power, he is unable to identify any activity that the States may regulate but Congress may not. Justice Breyer posits that there might be some limitations on Congress’
    565
    *565 commerce power, such as family law or certain aspects of education. Post, at 624. These suggested limitations, when viewed in light of the dissent’s expansive analysis, are devoid of substance.”

    Id. at 564-565.

    1. Not sure your Lopez beats Filburn, given the nature of patents as necessarily Federal with no State action whatsoever.

      Your “police action” simply pails to the actual Article I Clause 8 directive.

    2. Ned,

      I am interested in your view of the stronger “voice” : the AIA or Gunn.

      To wit, from the write-up above, “without disrupting the federal-state balance approved by Congress. Gunn (interpreting pre-AIA law).

      We though now have the AIA. If Gunn is to be limited (in the patent context) to pre-AIA law, the “answer” appears straight forward, does it not?

      1. This may depend a little bit on whether Gunn is seen as simply interpreting the statute or is it placing a Federalism limit on the power of federal courts. My general take is that the AIA does shift the balance-point more in favor of Federal Jurisdiction both by introducing the arising-under-counterclaim rule and by expressly denying state court jurisdiction over those claims.

        1. …and yet another torpedo aimed at the good ship AIA Titanic below the waterline of that purposefully bulkhead-less ship.

          If a judicial decision released after passage, but using pre-AIA law effectively nullifies a direct portion of that law, whither shall thou goest? (what do you do with an “all-float-or-sink-together” law when yet another portion sinks?)

      2. From Gunn, “As our past cases show, however, it is not enough that the federal issue be significant to the particular parties in the immediate suit; that will always be true when the state claim “necessarily raise[s]” a disputed federal issue, as Grable separately requires. The substantiality inquiry under Grable looks instead to the importance of the issue to the federal system as a whole.”

        If every tangential federal issue were sufficient to render unconstitutional state statutes designed to protect its people against fraud, then we would not have a federal system at all. I think this is the point of the substantiality inquiry both for Gunn and for Lopez, the latter being the case that imposed a substantiality limit on the commerce clause primarily because without that limit the government of the United States would effectively have general police powers which the founders intended be reserved to the states and denied to the federal government.

        1. Thanks Ned, but here we have distinguished the gen eral police powers concern and instead are centered around the most definite federal item of patents.

          It was the new patent law that is in the cross hairs here, and for which I was looking for your view of the relative weights.

          From what I gather so far (but I am not certain I understand your position on what I explicitly asked), you appear to favor Gunn trumping the AIA. If so, what then of the AIA and its “take it ALL or nothing” manner of that law as passed purposefully by Congress?

  5. I think a lot of the confusion stems from a typo. The post says that “the Federal Circuit has affirmed – finding essentially that the Vermont complaint does even implicitly raise the BFAPIA issue”, when I think it intended to say that “the Vermont complaint does NOT even implicitly raise the BFAPIA issue”.

    To clarify, an original complaint was filed requesting an injunction requiring compliance with “Vermont law”. After the complaint was filed, the Vermont Bad Faith Assertions of Patent Infringement Act (BFAPIA) was passed. The original complaint was subsequently amended after passage of the BFAPIA, but that portion of the complaint was not amended, and Vermont specifically said that they did not intend for their amendments to implicate the newly-passed BFAPIA.

    The Federal Circuit finds that the amended complaint does not implicate the BFAPIA, which was the only basis for removal, so the lower court correct decided that removal was not proper based on the arguments presented.

    1. To clarify, the BFAPIA was the only basis for removal relied on under 1442(a)(2), which was what was being appealed. Removal may have been proper under 1454, but this was not on appeal, so the Federal Circuit did not address it.

  6. Sorry, this case summary is uncharacteristically poor for Patentlyo as it’s unclear in the extreme. What was the issue, what was the holding, and how did the Federal Circuit get there?

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