State of Vermont v MPHJ Technology Investments: A Case Study in the Timeliness and Basis of Removal

In State of Vermont v MPHJ Technology Investments, what appears initially as a factual simple matter, presents a complex procedural lesson in the timeliness and basis for removal of a matter from state court to federal court.

The Simple Facts
In 2012, a number of Vermont businesses began receiving correspondence from MPHJ shell corporations alleging patent infringement. As a pattern, a business would receive an initial letter from the MPHJ corporation saying that the business had been identified as using patented technology. The letter included a survey to determine infringement and offered a licensing arrangement. If there was no response from Letter No. 1, Letter Nos. 2 and 3 would follow from MPHJ’s counsel, stating that the lack of a response was an admission and implying that litigation would follow.

The State of Vermont received a number of complaints from businesses, and in 2013 filed a complaint against MPHJ, alleging unfair trade practices and deceptive trade practices under the Vermont Consumer Protection Act (VCPA). The State sought to permanently enjoin MPHJ from (1) “engaging in any business activity in, into or from Vermont that violates Vermont law” and (2) “threatening Vermont businesses with patent-infringement lawsuits. MPHJ then attempted several procedural moves to remove the case to federal court.

First Procedural Move – MPHJ attempts to remove the action to federal court
MPHJ removed that case to federal court asserting diversity and federal question jurisdiction because as MPHJ argued, issues of validity, infringement and enforcement of patents are solely in the purview of the federal court. In remanding the matter to state court for lack of subject matter jurisdiction, the district court held that the complaint filed by the State of Vermont did not facially challenge the validity of the patents or require that infringement be determined.

MPHJ filed an appeal to the Federal Circuit; however the appellate court found that it did not have jurisdiction as 28 U.S.C. § 1447(d) provides that remand orders are not reviewable on appeal or otherwise.

Up to this point in the procedural history of the matter, procedural anglings of this case were not so complicated but, this is the point at which close attention is required for the subsequent procedural moves.

Second Procedural Move – MPHJ filed its answer and counterclaims in state court
Following the Federal Circuit’s refusal to hear an appeal of the first remand, MPHJ filed its answer and counterclaims in state court. MPHJ asserted that the State’s request to enjoin MPHJ from violating Vermont law (notably the State had amended its complaint to remove the second request for permanent injunction) required compliance with the then recently enacted Vermont Bad Faith Assertions of Patent Infringement Act (BFAPIA), which had been enacted prior to the State’s complaint, but had not become effective until after the State had filed its complaint. Specific to this case, the BFAPIA provided a number of factors a court can consider when determining a bad faith assertion of patent infringement. MPHJ alleged that the law was preempted by federal law because it allowed a state court to determine deceptive assertion of patent infringement without a determination of the validity of the patents being asserted.

Third Procedural Move – MPHJ files a second notice of removal based on preemption of a Vermont Law
Along with filing an answer, counterclaims, and seeking declaratory judgment of validity, among other demands, MPHJ filed a second notice of removal based on its assertion that the BFAPIA was enforceable against MPHJ and that the BFAPIA was preempted by federal law. The district court found MPHJ’s removal to be untimely first, because the State’s amended complaint did not revive a right to remove and second, even if the passage of the BFAPIA presented a renewed grounds for removal, the statute had been enacted prior to the State’s initial complaint and that MPHJ had in fact cited the statute in its opposition to the first remand motion thus, if the BFAPIA were a basis for removal, MPHJ’s second removal was still untimely. Furthermore, under 28 U.S.C. § 1442, the district court held that the State’s amended complaint did not require compliance with the BFAPIA and the question of preemption was not at issue.

Fourth Procedural Move – MPHJ appeals the district court’s remand only as to timeliness and its 28 U.S.C. § 1442 analysis.
Because § 1442 and § 1443 are exceptions to the § 1447(d) bar on the reviewability of a remand order, on appeal MPHJ sought a review of the district court’s § 1442 analysis that “MPHJ’s answer and counterclaims did not call into question the validity of any federal law.”

As to whether the Federal Circuit had jurisdiction, the Court held the passage of the America Invents Act (AIA) and more specifically, the changes referred to as the “Holmes Group Fix” provide federal courts broader jurisdiction over claims arising under patent laws even when asserted in counterclaims rather than in an original complaint. As such, MPHJ’s counterclaim five (5), which sought relief from the application of the VCPA on preemption grounds in a compulsory counterclaim vested jurisdiction in the Federal Circuit.

Fifth Procedural Move – MPHJ argued that the States request to enjoin MPHJ from violation of “Vermont Law” included violation of the BFAPIA.
Although the BFAPIA is not referenced in the original complaint, or the amended complaint which dropped the second request for permanent injunction and only maintained the first, MPHJ argued that the remaining injunction demand requested that MPHJ be “prohibited from engaging in any business activity in, into or from Vermont that violates Vermont law,” encompassed the BFAPIA. However, along with no facial reference to the BFAPIA in its original complaint or amended complaint, the State at oral argument unequivocally conceded that the BFAPIA was not part of the State’s amended complaint. The Federal Circuit also noted that the language of the complaint stated that the action was being brought under the VCPA and was referred to as a Consumer Protection Complaint. The amendment to the complaint was only in response to the district court’s concern that the second request declaratory judgment was too broad and, other than eliminating that demand, the State had not changed the original complaint.

The Federal Circuit held that there was no grounds for removal under § 1442(a)(2). Because the applicability of the BFAPIA was dispositive, the Appellate Court did not examine whether MPHJ’s second removal was timely.

It appears that the State court will now have to dismiss MPHJ’s preemption counterclaim because it arises under the patent law (§1338(a)) and, at that point, MPHJ would then apparently have standing to file a federal declaratory judgment action raising preemption.

Lesson to Practitioners
The lesson to practitioners from these procedural moves is that the AIA and the Holmes Group Fix give federal courts a broader range of jurisdiction over claims arising under patent law and that such claims even if asserted in a counterclaim give rise to federal subject matter jurisdiction. That being said, if removal is based on § 1442 (a)(2) – where such action or prosecution affects the validity of any law of the United States – (and not based on (§1338(a)) the complaint and demand being asserted to be the basis of removal must be specifically encompass the violating statute. Some may go as far as to argue that the complaint or demand must expressly state that a statute, being argued to be preempted, applies. However, it is arguable that the Federal Circuit’s decision is not so restrictive.