Yesterday the United States District Court for the District of Nebraska entered an order in Activision TV, Inc. v. Bruning (Civil Action No. 8:13-cv-00215), ordering outgoing Nebraska Attorney General Jon Bruning (pictured left) to pay $325,000 for attorneys fees and costs to ActiveLight, Inc. (formerly Activision and referred to as “plaintiff”) and to pay another $400,000 in attorneys fees and costs to MPHJ Technology Investments, who had intervened in the matter. Making this sanction even more painful is the fact that the grand total of $725,000 amounts to almost 10% of the 2014 budget for the Attorney General’s Office.
Bruning had demanded that the attorneys for ActiveLight and MPHJ stop engaging in patent enforcement activities in the State of Nebraska, a gross overreach of his authority as a State Attorney General and done with little or no investigation that would suggest any violation of State law. The order signed by United States District Judge Joseph F. Bataillon approved a Joint Motion for Entry of Judgment Awarding Attorneys Fees filed by MPHJ, ActiveLight and the State of Nebraska.
The genesis of the dispute is grounded in what otherwise should have been a patent infringement matter where the State of Nebraska, like all States, has no authority to act. The grievance that lead to ActiveLight and MPHJ suing the Nebraska Attorney General relates to Bruning’s issuance of a cease and desist order against counsel for ActiveLight (then Activision) preventing the law firm of Farney Daniels from engaging in any patent enforcement activity within the State of Nebraska on behalf of clients of the firm. Because counsel for ActiveLight also represent MPHJ Technologies the cease and desist order that barred ActiveLight’s attorneys from engaging in any patent enforcement activity in Nebraska also significantly impacted MPHJ Technologies.
But how is it possible that the Attorney General for the State of Nebraska could get into trouble going after MPHJ Technologies? The Attorney General for the State of New York and the Federal Trade Commission have both settled investigations into false and misleading demand letters sent by MPHJ Technologies. See FTC Bars Patent Assertion Entity from Using Deceptive Tactics and NY Attorney General Settles Investigation into Patent Troll. How could Nebraska have been ordered to pay $400,000 in attorneys fees to an entity that has become the poster-child for pre-patent litigation abuse? It seems the answer to that question is equal part political grandstanding, exercise of power without an underlying investigation, and wading into a matter where the State has no authority to act.
Nebraska’s Cease and Desist Order
As previously mentioned, this tale starts with a cease and desist letter sent by Attorney General Bruning to Farney Daniels LLP, the attorneys for ActiveLight, who also represent MPHJ Technologies. The letter read in part as follows:
It has come to the attention of this office that your firm has issued demand letters upon several entities based in or with a substantial presence in the State of Nebraska alleging the infringement of certs patents. It is our further understanding your firm or the entities on whose behalf your firm has mad such allegations are non-practicing entities with regard to the vast majority of the patents in question, and that several of your infringement assertions are unsubstantiated and contain false, misleading, or deceptive statements. If the later is true, it could constitute a violation of the Nebraska Consumer Protection Act…
It is notable that this is not the first time your firm or an entity on whose behalf your firm ostensibly represents has been the subject of an investigation by this office. Accordingly, we are concerned that Farney Daniels has exhibited a pattern and practice within Nebraska of deceptively alleging patent infringement and subsequent litigation. [ ]
The possible violations specified in this letter are serious and require your immediate and unconditional cooperation. Given the significant ramifications posed to Nebraska consumers and businesses by your potential unlawful conduct, I hereby demand that you immediately cease and desist the initiation of any and all new patent infringement enforcement efforts within the State of Nebraska pending the outcome of this office’s investigation…
(bold in the original).
Bruning, likely for political reasons, wanted to insert himself into the ongoing debate about patent infringement, non-practicing entities and patent trolls. This was clearly an overreach given that patent law is federal in nature and the existence of well-established laws that preempt state regulation in an area so thoroughly dominated by the Federal government. Indeed, it is hard to imagine another area where the Federal government more thoroughly dominates the space. Patents are one of the few items specifically provided for in the U.S. Constitution, which is not a document known for its length and specificity. Patent litigation occurs only in Federal Court, and the arm of the government that issues patents, the United States Patent and Trademark Office, is an agency within the United States Department of Commerce.
In my opinion it was an egregious abuse of power on the part of the Nebraska Attorney General to interject himself into this matter in this way. Forbidding a patent owner from enforcing rights in a State shows either a breathtaking naiveté or reckless and obnoxious political grandstanding. Neither should be acceptable from the top law enforcement officer in a State. It seems that Judge Bataillon agrees.
In the Memorandum Order entered on September 2, 2014, Judge Bataillon found “as a matter of law that the state law claims raised by Nebraska are preempted, further finding that Nebraska had failed to produce any evidence that the patent infringement claims were objectively or subjectively baseless claims or brought in bad faith.
Judge Bataillon also agreed with the plaintiff that the Nebraska Attorney General was acting on behalf of the State and that his cease and desist order constituted an illegal restraint on free speech under the First Amendment, citing the Federal Circuit decision in Concrete Unlimited Inc. v. Cementcraft, Inc, which held that patent owners have a right to enforce its patent and threaten alleged infringers with a lawsuit. Further, Bataillon wrote:
The court also finds that the activity participated in by the plaintiff is protected by the First Amendment. The court concludes that the plaintiff has a right to both enforce its patents and the right to counsel of its choosing. It is clear that on July 18, 2013, the Attorney General issued a cease and desist order against plaintiff’s counsel Farney Daniels. This court has already determined that there was no significant evidence upon which the Attorney General based its cease and desist order, and that the Attorney General provided no procedural process to the plaintiff. The evidence shows that this cease and desist order caused Activision to not use Farney Daniels during parts of this litigation and inhibited plaintiff’s ability to have Farney Daniels send patent letters to businesses in Nebraska, as required under federal law. Further, the Attorney General states in open court that it intended to stop the firm of Farney Daniesl from continuing its patent enforcement-related communications.
The plaintiff also requested a permanent injunction against the Nebraska Attorney General to prohibit any further cease and desist orders or investigations into the plaintiff’s patent enforcement and an injunction preventing the Attorney General from investigating future patent enforcement activity of the plaintiff absent a reasonable basis indicating bad faith. The plaintiff argued that without such an injunction the Attorney General could simply reissue another cease and desist order without any basis to show bad faith activity.
In a rather unprecedented move, Judge Bataillon agreed that a permanent injunction was warranted, but was uncomfortable with the breadth and scope of the injunction requested. Bataillon wrote:
The court is not in the business of telling the state how and when to conduct its investigations, but such investigations must be constitutional and outside of those areas preempted by federal law. The court will enjoin the Attorney General from further pursuing any action against the plaintiff as to these patents and to plaintiff’s patent enforcement activity in relation thereto, including plaintiff’s counsel, unless the Attorney General can make a showing of bad faith, based on actions of plaintiff that show both an objective and subjective baselessness, as to past or future activities.
All of this coupled together with findings by Judge Bataillon that Bruning did little or no investigation prior to sending the cease and desist order should send a shot across the bow of over zealous State Attorney Generals who want to make a name for themselves vilifying patent owners.
But what about MPHJ Technologies?
The crux of the matter again revolves around the cease and desist order issued by the Nebraska Attorney General. In the memorandum in support of the motion for summary judgment MPHJ explained that the Nebraska Attorney General interfered with its right to select counsel by prohibiting their attorneys from engaging in any patent enforcement activity within the States of Nebraska. The problem was that up until this time the only thing that MPHJ had done in Nebraska was to make inquiries about whether companies were infringing their patents.
Indeed, MPHJ explained that the Nebraska Attorney General had inquired of MPHJ about their activities within Nebraska. MPHJ cooperated with the Nebraska Attorney General’s Office and proved that they had not violated any law of the State of Nebraska, but yet the Nebraska Attorney General issued a cease and desist nevertheless. MPHJ argued: “the AG Defendants knowingly unlawfully and improperly issued their Order as it pertained to MPHJ while having in-hand the evidence demonstrating the appropriateness and constitutionality of MPHJ’s conduct.”
As you might expect, Nebraska disagreed with the characterizations of MPHJ, arguing that the State had sufficient evidence to believe that MPHJ was engaging in enforcement that was both objectively and subjectively baseless and in bad faith. The Attorney General argued that MPHJ sent letters to 100 different Nebraska industries, but did not identify any specific businesses that received the letters. The State further argued that MPHJ used shell companies; failed to include the name Farney Daniels or its phone number on the initial inquiry letters; that the letters of inquiries might have been sent several days prior to the time MPHJ had the right to do so; and that the letters had false and misleading representations in them.
Judge Bataillon ruled that the Attorney General alleged no claim that meets the objectively baseless standard necessary for the State to have taken action. He wrote: “The claims made by the Attorney General all involve subjective baselessness, which is an inquiry that comes after a showing of objective baselessness. Therefore, absent evidence of objective baselessness, there can be no cause of action for state law violations.”
Interestingly, in MPHJ’s memo in support of summary judgment the company explains that leading up to the filing of the Motion for Summary Judgment the Nebraska Attorney General pushed to settle the case with MPHJ entering into the same agreement that the company agreed with with the New York Attorney General.
What this all suggests is that the Nebraska Attorney General saw an opportunity to grab headlines, did little or no investigation, and interfered in a federal matter where he had no business, and no authority to act. In New York and at the Federal Trade Commission the investigations undertaken focused on false and misleading claims made in letters sent, which is a State matter, as well as a matter for the FTC. In Nebraska it seems that grandstanding lead to grossly over charging and an abuse of power. Rather than focusing on the law and matters properly entrusted to him and his Office, Attorney General Bruning wanted to prevent Farney Daniels, ActiveLight and MPHJ Technologies from enforcing patents in the State of Nebraska.
Sadly, instead of having a legitimate discussion about whether MPHJ Technologies and its lawyers are bad actors the Nebraska Attorney General grossly overreacted. There is no place for this type of tyrannical overreach on the State level. So in the end, assuming Bruning really wanted to help the people of Nebraska, what he wound up doing was exactly the opposite. He has brought embarrassment upon his Office and saddled the people of Nebraska with a needless $725,000 legal bill all because of his sloppy lawyering, failure to investigate prior and careless disregard for the law.
NOTE: This article was updated at 9:05pm on Wednesday, December 3, 2014, to add mention that the monetary award for attorneys fees and costs amounts to nearly 10% of the annual budget for the Nebraska Attorney General’s Office.