Fun With Jurisdiction: Patent Trolls Can't Escape Vermont Lawsuit

By Casey C. Sullivan, Esq. on October 05, 2015 | Last updated on March 21, 2019

There's nothing surprising about a bad faith patent infringement claim. Patent trolls are legion. Those unscrupulous individuals and companies extort payment against alleged infringers based on shoddy patents or questionable infringement. And while the practice has lead for calls for patent reform, little action has been taken on the federal level.

Vermont recently stepped into that void, suing a patent holder for violations of its state consumer protection act. Those patent holders sought to remove the suit to federal court, on the basis of federal preemption. The Federal Circuit does have jurisdiction to hear those appeals, the Federal Circuit ruled on Wednesday, just not in this case.

Your Typical Patent Troll

MPHJ Technology Investments operated from the standard playbook when it came to threatening patent litigation. It picked up some patents connected to scanner-to-email technology -- the kind used by pretty much any office -- and began sending letters to small businesses, saying that their scanning infringed MPHJ's patents and threatening litigation if the businesses didn't hand over licensing fees. Follow up letters claimed that a non-response was "an admission of infringement."

Vermont sued MPHJ under the Vermont Consumer Protection Act, alleging that MPHJ was involved in a host of unfair and deceptive trade practices. Soon after the state brought its action, Vermont adopted the Vermont Bad Faith Assertions of Patent Infringement Act (BFAPIA), which specifically targeted patent trolling.

Vermont's Preemption Problems

The problem with the BFAPIA, however, is that it attempts, as a state law, to regulate assertions made under the federal Patent Act. That leads to obvious preemption problems, which MPHJ raised when attempting to remove the case to federal court.

But wait, you ask, wasn't Vermont's action brought under the state consumer protection law, not the BFAPIA. Indeed, and the state insisted that BFAPIA was not part of its complaint and that it was not trying to challenge the validity of the patents themselves. Still, MPHJ argued, Vermont's suit would force it to comply with BFAPIA even if that law wasn't the grounds for the action itself.

Jurisdiction Won...

The Federal Circuit was in a tricky position when it came to jurisdiction, as Patently-O deftly pointed out. The Federal Circuit has jurisdiction "in any civil action arising under" federal patent law, even when those patent laws related to compulsory counterclaims. MPHJ's claim that Vermont law (both its consumer protection law and BFAPIA) were preempted by federal patent law provides that jurisdiction, the circuit found. Sure, a preemption claim is not one created by patent laws. But, under the Supreme Court's 2013 ruling in Gunn v. Minton, the Federal Circuit can hear state claims, related to patents, that are substantially connected to the federal system.

... But the Appeal Lost

Et voila: jurisdiction. But, not exactly. While the Fed Cir recognized its general jurisdiction over counterclaims alleging federal preemption, a procedural error kept MPHJ out of federal court. MPHJ filed for removal under 28 U.S.C. 1442(a), which allows removal for infringement of property rights derived from a federal officer. That's the wrong removal statute, the Federal Circuit ruled. MPHJ should have sought removal under 1454 instead -- a much more common approach. Since it did not, it was left to face Vermont back in Vermont courts -- for the time being, at least.

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