Court Issues New Decision

Vermont’s Lawsuit against Alleged Patent Troll Can Stay in Vermont State Court

Case Not About Federal Patent Rights and Does Not Belong In Federal Court

A federal appeals court has just affirmed Vermont federal Judge Sessions’ second decision to “remand” the case against MPHJ – the alleged “patent troll” – back to Vermont state court.

Procedural History Of The Case:

Vermont Attorney General William Sorrell originally filed this lawsuit against alleged “patent troll” MPHJ Technology Investments, LLC in Vermont state court claiming that MPHJ’s bad faith sending of numerous patent infringement letters to Vermont businesses and non-profit organizations violated Vermont consumer protection law. (The AG’s Complaint was not based on Vermont’s new Bad Faith Assertions of Patent Infringement Act (i.e., the “anti-patent troll” law), as that law had not yet been passed when the AG filed his Complaint).  MPHJ “removed” the case to federal court arguing that the case was really about its federal patent rights and therefore belonged in the federal court system.  The AG moved to “remand” the case back to state court and federal Judge Sessions did so, agreeing with the AG that the case was not fundamentally about MPHJ’s patent rights but rather about its behavior within Vermont.  MPHJ appealed that remand decision, and lost.  The federal appeals court agreed with the AG and with Judge Sessions that the case did not implicate patent law.  Therefore, the case was back in state court as originally filed.  The AG then amended its Complaint against MPHJ.  Thereupon MPHJ again removed the case to federal court.  MPHJ argued that the AG’s amendment invoked the new anti-troll law (even though the amended Complaint made no mention of the law), and that that law is unconstitutional, and therefore provided a basis for removing the case to federal court.  The AG responded by again moving to remand the case, stating emphatically that the amended Complaint did not implicate the anti-troll law and that the AG was not suing MPHJ under that law, but only under pre-existing Vermont consumer protection law.  Again Judge Sessions remanded, agreeing with the AG that the amended Complaint did not invoke the anti-troll law.  Again MPHJ appealed that remand order.  And, again, the same federal appeals court has now shot down MPHJ’s (second) appeal – agreeing with the AG and with Judge Sessions that the AG’s case against MPHJ is not based on the anti-troll law and has nothing to do with federal patent rights.

But What About Vermont’s Anti-Troll Law?

What is interesting about this decision – and about this entire case – is that it is about the legality or illegality of a patent-holders alleged trolling activities, but it is NOT about Vermont’s new anti-troll law. MPHJ’s second attempted “removal” of this case to federal court was an attempt to make this case about the constitutionality of the anti-troll law.  But that attempt did not work. This decision does not decide whether Vt.’s anti-troll law is or is not constitutional, nor whether it does or does not interfere with a party’s patent rights. The whole point of this jurisdictional decision is that that issue was not before the court, because, in turn, the AG is not suing under that law. Thus, this particular case will not involve, and will not test, Vermont’s first-in-the-nation state anti-troll statute.

So one might well ask: why is Vermont’s Attorney General so determined not to use the anti-troll law against an alleged patent troll?  Wouldn’t a state attorney general want to use his latest and greatest weapon to go after an alleged patent troll, and rise up, so to speak, against a challenge to the constitutionality of that law?  I assume the answer is, essentially, because the conduct by MPHJ that the AG is suing over in this case took place before the anti-troll law went into effect, and the lawsuit was filed before the law went into effect. Trying to apply that law retroactively against MPHJ might be problematic.  If MPHJ were to be found liable under the new anti-troll law, it could argue on appeal that that law shouldn’t have been applied to them in the first place because it wasn’t in effect at the time of their activities.

So What Now?

So what now?  After two years of procedural and jurisdictional battles that had nothing to do (at least in the view of the AG and the federal courts) with the merits of the consumer protection case, will the case now proceed in state court to litigation on the merits? 

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In a negligent misrepresentation claim, the Vermont Supreme Court strictly construed plaintiffs’ need to prove direct reliance on the alleged misrepresentation. Lacking such proof, the claim failed. To assert a viable consumer protection claim, plaintiffs must prove not merely that defendant made a statement, but that defendant was directly involved in the transaction at issue.  Because it was not, the claim failed.

The case is Glassford v. Dufresne & Associates, P.C., 2015 VT 77 (June 12, 2015).  Plaintiffs-homeowners alleged negligent misrepresentation and violation of the Vermont Consumer Protection Act. Superior Judge Toor granted summary judgment for defendant, and the Vermont Supreme Court affirmed.  

The case involved defendant’s certification to the Agency of Natural Resources that the septic system in plaintiffs’ new home had been installed, and that it operated, as permitted.  Vermont law (10 V.S.A. § 1973) requires such a certification.  The builder of the home hired defendant to make the certification.  Defendant filed the certification with the Agency shortly before plaintiffs purchased the home from the builder.  Within a few weeks of their closing on the house, plaintiffs’ septic system failed.  Plaintiffs contended that the soil placed over the system was improperly graded.  Defendant contended that the house was too large; that plaintiffs operated a daycare center that added to the wastewater entering the system; and that plaintiffs’ horses were allowed to walk over the system.  Plaintiffs alleged that defendant:  1) failed to properly inspect the system, and 2) misrepresented the proper construction of the system in the certification to the Agency.

The superior court granted judgment for defendant on the negligent misrepresentation claim because plaintiffs never saw the certification until the lawsuit commenced, and so couldn’t have relied on it in making their decision to purchase the home.  The court granted judgment for defendant on the consumer protection claim because the parties did not contract with each other for a sale of goods or services.

On appeal, with respect to the negligent representation claim plaintiffs argued that they effectively relied on the certification because, even though they did not see it before they closed on the home, defendant had a “duty” to furnish it to them.  Furthermore, they argued, because their closing attorney received a copy of the certification just before the closing, they relied on it through their agent.

As had the superior court, the Vermont Supreme Court analyzed the negligent misrepresentation issue under the Restatement (Second) of Torts § 552.  The Court determined that plaintiffs – homebuyers purchasing a newly-constructed septic system – were among the class of people for whom the certification requirement in 10 V.S.A. § 1972 was intended.  Thus, defendants could be liable to plaintiffs.  However, plaintiffs’ claim failed because they demonstrated no direct reliance on the certification (i.e., the alleged misrepresentation), as § 552 requires.  The Court surveyed case law from around the country and determined that in negligent misrepresentation claims plaintiffs must demonstrate that they directly relied on the alleged misrepresentation.  Because plaintiffs here did not ever see the certification before they closed, they could not have relied, and did not rely, on what it said.  The fact that their closing attorney saw the certification did not satisfy their burden to show direct reliance on it. The attorney’s knowledge of the certification could not substitute for actual reliance by plaintiffs on its contents. Accordingly, the Court affirmed the superior court’s judgment for defendant on the negligent misrepresentation claim.

On the consumer protection claim, the superior court ruled for defendant because the parties were not in privity. On appeal, the Supreme Court held that privity is not required on a consumer protection claim, but that the defendant must still be directly involved in the transaction that gives rise to the alleged liability.  Here, defendant’s filing of the septic certification with the Agency was an act unrelated to the sale of the home to plaintiffs.  The filing was unrelated to the issue of who bought or owned the home.  There was no interaction between plaintiffs and defendant.  Accordingly, defendant could not be liable under the consumer protection act and the Court affirmed judgment for the defendant on this claim.

It should be noted that one justice vigorously dissented.  

A copy of the decision is attached hereto and is available at

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Vermont was the first state in the country to sue an alleged “patent troll” for consumer protection violations.

Vermont’s case against MPHJ Technology Investments, LLC (MPHJ) is now over two years old and virtually nothing has been decided.  No discovery has been done; no documents have been produced; and no depositions have been taken.  But much time has been spent; much ink has been spilled; many, many briefs have been filed; and much money has been spent.  In the two years, only a jurisdictional battle has been fought:  whether the case involves MPHJ’s patent rights, and therefore is governed by federal law, and therefore belongs in federal court – as MPHJ contends.  Or – as the Attorney General contends – whether it is merely about state law, i.e., whether MPHJ’s sending of patent infringement “cease and desist”-type letters to many Vermont companies, which letters the Vermont Attorney General contends contained false statements, violates Vermont consumer protection law, regardless of whether MPHJ’s patents are valid and enforceable, such that the case belongs in state court.  This is stuff only a legal wonk could love.

While all this jurisdictional back-and-forth has played out over the last two years, involving two appeals to higher federal courts, MPHJ has recently “upped the ante,” so to speak, by filing a separate lawsuit against Attorney General Sorrell, claiming that Vermont’s efforts to stop or restrict MPHJ’s activities in Vermont infringe MPHJ’s federal civil rights.

Thus, there are now two legal cases involving the alleged "patent troll" MPHJ and the Vermont Attorney General pending in Vermont.  In the second case, federal Judge William Sessions just issued an important decision.

But before turning to that decision, some background.  In the original case, State of Vermont v. MPHJ, the Vermont Attorney General sued MPHJ in Vermont state court, claiming that MPHJ's activities in sending threatening "cease and desist"-type letters to Vermont companies violates Vermont's consumer protection law.  As noted above, all of the activity in that case so far has involved whether the case belongs in state or federal court.  MPHJ has twice tried to "remove" the case to federal court on the grounds that no matter how Attorney General Sorrell frames his Complaint, it is fundamentally about MPHJ’s federal patent rights.  Federal Judge Sessions has twice ruled against MPHJ and "remanded" the case back to state court, finding that the case is not about the validity of MPHJ’s patents per se, but only about its allegedly fraudulent activity in sending threatening letters to Vermont companies, which is a matter of state consumer protection law, not patent law, and, hence, there is no federal jurisdiction.  The first time Judge Sessions remanded the case, MPHJ appealed the remand order but it was affirmed by the federal appeals court, confirming that there was no issue of federal law and that the case belongs in state court where the Attorney General had filed it.  In its second attempt at removal, MPHJ argued that an amendment to the Attorney General’s Complaint invoked Vermont’s brand new anti-troll act, 9 V.S.A. § 4195 (effective July 1, 2013), which gave MPHJ a new basis for seeking federal jurisdiction.   The Attorney General responded that the Amended Complaint does not in fact invoke the anti-troll act and that the suit against MPHJ in no way relies on the anti-troll act but rather only upon pre-existing consumer protection law.  Judge Sessions agreed with the Attorney General, again sending the case back to state court.  MPHJ is now appealing that second remand order.

In the second case, MPHJ v. Sorrell, filed in federal court and also before Judge Sessions, MPHJ is the plaintiff.  MPHJ alleges that the State of Vermont is violating MPHJ’s federal civil rights by interfering (supposedly) with MPHJ’s rights to enforce its patents by sending its "cease and desist" letters into Vermont.  In the latest activity in that case, Judge Sessions has just thrown out most of the MPHJ’s Complaint.  See Opinion and Order dated June 3, 2015.  The only claim that Judge Sessions has allowed to proceed, for the time being at least, is MPHJ’s challenge to the constitutionality of the new anti-troll act.  Although MPHJ is not currently being sued under that act, Judge Sessions found that MPHJ’s fear of future prosecution under that act is justified because MPHJ: a) says that it does plan to continue its practice of sending “cease and desist” letters to suspected Vermont infringers, and b) can reasonably fear that that activity will be prosecuted under the anti-troll act.  Thus, MPHJ will be allowed to challenge the constitutionality of that act.

Thus, both of the Vermont lawsuits involving MPHJ and its alleged “patent trolling” activities will continue to grind away. 

There will surely be more to come.

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Federal Court Denies Vermont’s Motion to Dismiss Food Producers’ Lawsuit against Labeling Law, But Denies Food Producers’ Motion to Enjoin Enforcement of the Law Prior to Trial

A long-awaited court preliminary decision on Vermont’s first-in-the-nation GMO labeling law was issued Monday (April 27, 2015).

Vermont’s GMO labeling law, Act 120, was passed and signed in May, 2014 and is scheduled to take effect in 2016.  It requires certain foods sold in Vermont to be labeled as containing GE ingredients and bans such foods from being labeled or marketed as “natural.”  A food industry group, the Grocery Manufacturers Association (GMA), sued the State of Vermont over the law and sought an injunction.  Vermont countered by moving for the dismissal of the entire lawsuit.  The Vermont federal court addressed the competing motions by issuing a preliminary decision on the constitutionality of the law.  In its analysis, the court addressed the two key aspects of Act 120: 1) the requirement that food producers label their products as containing GE ingredients (the “affirmative labeling requirement”), and 2) the ban on the use of the term “natural.”

1. Discriminatory Effects Under The U.S. Commerce Clause: Court holds that Act 120’s ban on the use of the term “natural” violates the Commerce Clause, but its affirmative labeling requirement does not.

In the lawsuit, GMA claims that Act 120’s ban on the use of the term “natural” on signs and advertising violates the Commerce Clause of the U.S. Constitution. The court stated that although under the Constitution the states retain some regulatory power concerning matters of legitimate local concern, they cannot regulate commerce, such as advertising, that takes place in other states and between and among other states.  Therefore, the court denied Vermont’s motion to dismiss this claim. This is a win for the plaintiffs (GMA).

The GMA also claims that Act 120’s affirmative requirement that manufacturers label their products as “produced with genetic engineering” violates the Commerce Clause by “discriminating” against manufacturers who sell products nationally.  The court found this argument unpersuasive because, as difficult or as expensive as it might be for manufacturers to label products separately for the Vermont market, the labeling requirement only applies to products sold in Vermont, not elsewhere. Therefore, the affirmative labeling requirement does not violate the Commerce Clause and the court granted Vermont’s motion to dismiss on this claim.  A win for Defendants (Vermont).

2. Federal Preemption: Court holds that Act 120’s GE labeling requirement is partially pre-empted by federal law.

The GMA claims that Act 120’s affirmative labeling requirement is pre-empted by certain federal laws that mandate what must be stated on the labels of food products.  With respect to non-meat foods, the court found that none of the several federal laws that dictate what must be stated on a food label (ingredients, nutrition information, etc.) prevent a state from requiring that additional information also be on the label.  Therefore, the affirmative labeling requirement is not federally pre-empted as to non-meat foods and the court granted Vermont’s motion to dismiss on this claim.  Another win for Vermont.

On the other hand, the court found that federal statutes that regulate meat and foods that contain meat are strict as to what a label must say and cannot say.  Therefore, Act 120’s affirmative labeling requirement, as it pertains to any GMO foods that contain meat, is federally pre-empted and the court denied Vermont’s motion to dismiss this claim.  A win for the plaintiffs.

3. First Amendment: The court believes that Act 120’s affirmative labeling requirement is not barred by the food producers’ free speech rights under the First Amendment, but denied Vermont’s motion to dismiss the First Amendment challenge because the court recognizes that this is a serious question of law as to which courts might disagree; but the court finds that Act 120’s ban on the term “natural” does violate the First Amendment.

The GMA claims that the affirmative labeling requirement infringes its free speech rights under the First Amendment.  The court found that Act 120 regulates only “commercial” as opposed to “political” speech and that courts apply a very low level of constitutional scrutiny to laws that regulate purely commercial speech.  The court therefore found GMA’s First Amendment claims against the affirmative labeling requirement to be unpersuasive.  Nevertheless, given the seriousness of this issue, the court denied Vermont’s motion to dismiss GMA’s First Amendment challenge to the affirmative labeling requirement.  A tenuous win for plaintiffs.

The GMA also claims that the ban on the use of the term “natural” violates its First Amendment rights.  Here, the court agreed with GMA because Vermont does not define anywhere what “natural” supposedly means.  Therefore, its use by food producers is not inherently misleading.  Act 120’s ban on the use of this term as it applies to foods that contain or may contain GE ingredients violates the First Amendment and the court denied Vermont’s motion to dismiss GMA’s challenge to the ban on the use of the term “natural.”  A win for plaintiffs.

4. Preliminary Injunction: The court denied GMA’s request that enforcement of Act 120 be enjoined prior to the trial of this lawsuit.

Although the court found that GMA is likely to prevail on certain of its claims (as explained above), it did not find that GMA proved that it will suffer “irreparable harm” if the enforcement of Act 120 is not enjoined prior to the trial of this lawsuit.  

Thus, this decision is a mixed bag. It expressed skepticism towards many of GMA’s claims that Act 120 is unconstitutional, but denied Vermont’s preliminary motion to dismiss most of those claims.  At the same time, it found that, prior to a trial on the merits, GMA was not entitled to enjoin the enforcement of Act 120, which becomes effective in 2016.

Walter Judge is a commercial litigator at Downs Rachlin Martin, Vermont’s largest law firm. 


UPDATE:  The Grocery Manufacturers Association (GMA) and the other plaintiffs have today (May 6, 2015) filed an appeal of the Vermont federal court's denial of their request for an injunction to block the law from taking effect. The appeal is to the United States Court of Appeals for the Second Circuit, in New York City, which is the federal appeals court that has jurisdiction over appeals from federal courts in Vermont, New York, and Connecticut.  In a statement, the GMA says, “The court’s opinion in denying our request to block the Vermont law opens the door to states creating mandatory labeling requirements based on pseudo-science and web-fed hysteria. If this law is allowed to go into effect, it will disrupt food supply chains, confuse consumers and lead to higher food costs.” 

Click here to read a copy of the Notice of Appeal.


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I have previously reported on the Vermont Supreme Court’s strict adherence to the Economic Loss Rule (ELR), and noted that some observers might find this surprising, since the  Vermont Supreme Court is generally regarded as “liberal” and sympathetic to claimants/victims/plaintiffs.  Yet the Court has repeatedly denied tort-based recovery to claimants, citing the ELR.  The Court’s adoption and adherence to the ELR goes back as far as 1998.  In Paquette v. Deere & Co., 168 Vt. 258, 719 A.2d 410 (1998), the Court rejected the negligence claim of owners of a defective motor home.  The plaintiffs there had not suffered any physical injury, but claimed that they had suffered economic damages – recoverable in tort, according to them – because of the defective and unsafe nature of their mobile home.  The Court held that allowing a negligence claim in such circumstances would vastly expand tort liability and completely subsume warranty law into tort law.  And that adherence continues unabated in a series of decisions up to 2012.  In Long Trail House Condominium Assoc. v. Engelberth Construction, Inc., 2012 VT 80 (Sept. 28, 2012) the Court affirmed the complete dismissal of a condominium owners association’s defective construction claims against the building contractor, because their only claim was a negligence claim, which the Court found to be barred by the rule. 

Now, in Walsh v. Cluba, the Court has arguably taken the ELR even further.  In Walsh, the Court applied the rule to bar the plaintiff’s negligence claim even though the claim involved  physical damage to real property.  Walsh was a commercial landlord.  Cluba was his tenant.  After signing the lease, Cluba formed the corporation Good Stuff, Inc., a retail company, and turned over possession of the leased premises to Good Stuff.  But Walsh never formalized the lease arrangement with Good Stuff – Cluba remained the tenant on the lease.  After Cluba and Good Stuff vacated the premises, Walsh sued Cluba under the lease (i.e., in contract) for unpaid rent, attorneys’ fees, and physical damage to the premises.  Walsh also sued Good Stuff in negligence (as noted, there was no lease/contract with Good Stuff) for the unpaid rent and for damaging the premises.  At the close of Walsh’s case at trial, the court granted Good Stuff’s motion for judgment as a matter of law, on the grounds that the Economic Loss Rule precluded Walsh’s tort claims against Good Stuff because the parties’ dispute was completely covered by Walsh’s and Cluba’s contractual relationship (i.e., the lease), which required Cluba to leave the premises in the same condition in which he took them.  Walsh argued that the ELR should not bar his negligence claims against Good Stuff because there was more than purely economic harm at issue – there was real physical damage to Walsh’s property.  The trial court was unpersuaded by this argument.  Walsh appealed. 

The Vermont Supreme Court was similarly unmoved by Walsh’s argument.  The Economic Loss Rule generally bars tort claims where the parties have a contractual relationship.  Even though Walsh had no lease (contract) with Good Stuff, the Vermont Supreme Court found that his claim for damages to the premises was governed exclusively by his lease with Cluba.  As he had below, Walsh argued that the ELR does not apply because there was physical damage.  The Vermont Supreme Court was unpersuaded and affirmed the trial court’s grant of judgment as a matter of law to Good Stuff.  The Court reasoned that the well-recognized “other property” exception to the ELR does not apply where there is a contract (i.e., the lease) that touches upon the “other property.”  In other words, the provision in the lease that required Cluba to return the premises to Walsh in the same condition as when they were leased, barred a separate negligence claim by Walsh for damage to his property.

A vigorous dissent argued that the existence of a lease (contract) between Walsh (the landlord) and Cluba (the tenant) should not preclude a tort claim by Walsh against a stranger to the contractual relationship (Good Stuff) where Good Stuff caused real physical damage to Walsh’s property.  Indeed, the dissent’s position seems to be that Walsh should have a tort claim not only against Good Stuff, but against Cluba, where Cluba and Good Stuff caused physical damage to Walsh’s property.

As the dissent argued, this decision by the Vermont Supreme Court is arguably much more than merely a reaffirmation of the Economic Loss Rule.  It is arguably a broad expansion of the rule; essentially a holding that the existence of a contract between A and B negates any independent tort duty by B not to damage A’s property. 

This is an interesting decision from the Vermont Supreme Court given that other state supreme courts have recently cut back on the application of the ELR. 

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This is a relatively new legal subject, so there isn’t much law out there.  In December, 2011, a Pennsylvania federal court answered this question in the negative.  In the case of Eagle v. Morgan, Linda Eagle, the founder of a company, Edcomm, had developed a significant LinkedIn presence closely connected to Edcomm. In 2010, Edcomm was purchased.  In 2011, she was terminated and Edcomm took over her LinkedIn account. She sued Edcomm.  Shortly thereafter, she regained control of her LinkedIn account and refused to return it to Edcomm. Edcomm counterclaimed against her in her lawsuit, contending that by regaining control of the LinkedIn account and refusing to return it to Edcomm, she had misappropriated Edcomm’s trade secrets.  She moved to dismiss Edcomm’s misappropriation claim. With little analysis, the court dismissed the claim, stating that the LinkedIn contacts on the Eagle/Edcomm account were “generally known . . . or capable of being easily derived from public information.”

In March, 2012, a Colorado federal court came to a different conclusion. In Christou, et al. v. Beatport, LLC, a nightclub company sued an ex-employee for stealing the company’s MySpace “friends” list.  The ex-employee moved to dismiss the lawsuit, arguing that a MySpace “friends” list couldn’t be a trade secret.  The court denied the ex-employee’s motion, holding that a company’s MySpace profiles and friends list can be a trade secret because, online, a MySpace profile contains a lot more information than just the “friend’s” name.  It gives the owner of the profile the “friend’s” personal information, including interests, preferences, and contact information that can have commercial value. It allows the “friend” to be contacted and advertised to.  This information goes beyond what is publically available. Duplicating all the information available from the “friends” list would be time-consuming and costly. The public can see the names of the company’s “friends” online, but the public does not have all the other information that the company gets by virtue of having these “friends.”  

In September, 2014, another federal court held that LinkedIn contacts could be a trade secret.  In Cellular Accessories For Less, Inc. v. Trinitas, LLC, a company sued an ex-employee who had left to form a competing company and taken his LinkedIn contacts with him. The ex-employee moved for dismissal of the lawsuit.  The court denied his motion, holding that the LinkedIn contacts that he had developed while working for his former company could be the company’s trade secret. The company had encouraged the employee to develop LinkedIn contacts during the employment.  The court said that the LinkedIn contacts may – or may not – have been viewable by other LinkedIn users; the ex-employee’s motion papers did not say whether the contacts were publically viewable.  Since they may not have been publicly viewable, they could be the company’s trade secrets.  

There you have it. What do you think?

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The Sharon Academy v. Massachusetts Bay Insurance Company, et al., Vermont Superior Court, Docket No. 442-7-13 Wncv (Feb. 25, 2015).

Relevant Facts:

Student goes on a study-abroad program in India (“Program”) sponsored by a Vermont school (“School”). The program is run and managed by a coordinator (“Coordinator”), and has both U.S.-based and Indian national employees in India.  Shortly after arriving, the student claimed that she was sexually assaulted by one of the Indian national employees of the program. Eventually the student files a lawsuit against the school and the coordinator in Vermont (“Underlying lawsuit”).  The underlying lawsuit alleges that the school and the coordinator were negligent in hiring and supervising the Indian national who (allegedly) assaulted the student. The school refers the claim to its insurer (“Insurer”). The insurer denies coverage under both a primary CGL policy and an umbrella policy. The insurer contends that the alleged assault occurred in India, which is not within the “coverage territory” of the CGL policy. Therefore, there is no coverage under that policy or under the umbrella. The school then sues the insurer for breach of contract and bad faith and, in the alternative, sues its insurance broker for failing to procure coverage. The school moves for summary judgment against the insurer, requesting a determination that the underlying lawsuit is covered. The insurer cross-moves for:  1) a determination of no-coverage, 2) to strike the school’s bad faith claim, and 3) for a determination that if it is required to cover the underlying lawsuit, it can choose defense counsel, rather than having to retain defense counsel of the school’s choosing.  The court granted the school’s motion, finding that the underlying lawsuit is covered under both the CGL and umbrella policies; that the insurer breached the policy by refusing to defend; and that the insurer must reimburse the school for reasonable defense costs incurred to date. However, the court rules that the insurer can retain defense counsel of its own choosing.

Here is a brief review of the court’s decision:

The primary CGL policy:

The court begins by citing and quoting cases that stand for the long-standing principles that if the claims in the underlying suit might be covered by the policy, the insurer must provide a defense, and that any ambiguities in the policy will be construed in favor of coverage.

The court notes that the policy includes a sexual molestation endorsement that includes the disputed “coverage territory” language. The sexual assault alleged in the underlying lawsuit describes injury that comes within the endorsement. The issue is whether the assault occurred within the “coverage territory.”  “Coverage Territory” in the endorsement is the United States, but also “all other parts of the world if the injury or damage arises out of the activities of a person whose home is in the U.S. but who is away for a short time on the insured’s business.” Thus, more specifically, the issue is whether the alleged assault arose out of the activities of a person whose home is in the U.S. but who was in India on the school’s business.  

Acknowledging that the “coverage territory” term of the policy has apparently not been litigated in Vermont and has been little-litigated elsewhere, the court concludes that there is coverage because the alleged sexual assault arose out of the student’s activities, and she lives in the U.S. but was in India for a short time on the school’s business.  

The court then rejects the insurer’s argument that the “coverage territory” definition above refers only to the alleged assaulter, i.e., the Indian national employee of the program.  The insurer argues that it was the assaulter’s, and only the assaulter’s, activities that specifically “caused” the alleged harm to the student, and that he, as an Indian national, is not within the coverage territory.  The insurer argues that, notwithstanding the allegations in the underlying lawsuit, the program's U.S.-based employees did not cause the student's harm.  The insurer argues that the phrase “arises out of” must be narrowly construed to mean “causation,” and that the assaulter – not the school, nor the program or its U.S.-based employees, nor the coordinator – is the only person who actually “caused” the student’s harm.  The court disagrees. It finds that the phrase “arises out of” is a broad term that includes much more than “causation.” The policy could have used the term “causation” instead of “arising out of,” but didn’t. The policy could have defined “arising out of,” but didn’t.

Because the court concludes that the student is a covered person, it does not address the school’s argument that its teachers/employees – who are alleged in the underlying lawsuit to have been negligent – are covered persons.

The umbrella policy:

The court notes that the umbrella policy contains two separate endorsements that exclude coverage for sexual molestation. But one of the endorsements (the 12/05 endorsement) contains an exception, which exception provides that the exclusion does not apply if there is coverage for sexual molestation in the underlying insurance (which, as explained above, the court found there was). The court rejects the insurer’s argument that only the endorsement without the exception (the 01/07 endorsement) should apply because that endorsement has a later date on it. The court finds that the two competing endorsements in the umbrella policy create an ambiguity that is to be construed against the insurer. The court rejects as unreasonable the insurer’s argument that the long string of numbers on the bottom of each page of the policy, including the two exclusionary endorsements, would inform the policyholder (the school) that the endorsement with the exception is overruled by the one without the exception because the latter one was added into the policy later. The court finds that the typical policyholder would not understand that an endorsement containing a string of numbers ending in “07” means that the endorsement is added later – and therefore invalidates – an endorsement containing a string of numbers ending in “05.”

Thus, the insurer must provide coverage for the school, and is in breach of the policy.

Defendant Coordinator:

The court agrees with the insurer that there is a fact dispute over whether the coordinator was an employee of the school, and therefore covered, versus whether she was an independent contractor. Therefore, the court denies summary judgment to the school on this issue.

The School’s Bad Faith Claim:

The court denies the insurer’s request that the school’s bad faith claim be stricken.  The court finds that the insurer’s behavior in this case could amount to bad faith. The court will allow the school to have discovery on this issue.

The School’s Defense Costs To Date:

The court agrees that, because the school was entitled to coverage all along, the insurer is liable to the school (but not to the coordinator – at least yet) for reasonable defense costs incurred to date.

Choice of Defense Counsel:

The court finds that although the insurer must provide a defense, it can do so with independent counsel of its own choosing, not the school’s existing, or preferred, defense counsel.  It relies on a 2011 Vermont superior court decision, Northern Ins. Co. v. Pratt, from another judge (now a Vermont federal judge) for this decision.  The Vermont Supreme Court has not yet addressed the issue of whether an insured can choose its own defense counsel, at the insurer’s expense, where there is a coverage conflict between the insured and the insurer.

Note that the court’s analysis under the CGL policy is different from the main argument that the school made. The school pointed out that the underlying complaint alleges that the school’s teachers/employees were negligent in hiring and supervising the Indian national who allegedly assaulted the student. The school argued that these persons were covered under the “coverage territory” definition in the policy because they were based in the U.S. Instead, the court found coverage based on the activities of the (allegedly assaulted) student in India. The school did cite to the court one case (Spears v. Nationwide) that construed this same “coverage territory” language in a situation where the insured’s employee was in the Ukraine and was the victim of an automobile accident there. In that case, the court found that the employee – the accident victim herself – was covered because the accident arose out of her activities. In this case the court did not cite Spears as support for its conclusion.  

Disclosure: the author of this article represents the insurance broker in this case.


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Alleged “patent troll” strikes out for second time in its efforts to have the Vermont Attorney General’s “unfair patent enforcement” lawsuit adjudicated in federal court.

In May 2013 the State of Vermont sued MPHJ Technology Investments, LLC for alleged consumer fraud arising from its numerous “cease and desist” letters sent to Vermont business and non-profit entities, claiming patent infringement and demanding licensing fees.  Since then, the parties have been disputing which court system the case should be heard in.  The Vermont federal court has, once again, “remanded” the case against MPHJ back to Vermont state court.

Vermont initially sued MPHJ in state court.  MPHJ “removed” the case to federal court, arguing that the case was about patent law and therefore belonged in federal court.  The federal court “remanded” the case back to state court, agreeing with the State that the case was not about MPHJ’s patents or about patent law, but only about the legality of MPHJ’s campaign of sending cease and desist letters into Vermont.

In its most recent attempt to obtain federal jurisdiction, MPHJ argued that, after the State filed its original Complaint against MPHJ, Vermont passed its “Bad Faith Assertions of Patent Infringement” law (i.e., the “anti patent troll” law) and that the interim enactment of this law gave MPHJ new grounds for federal court jurisdiction.  In response, the State and the federal court disagreed, pointing out that the State never attempted to incorporate that new law into its Complaint in this case.

Indeed, it is not clear that there would be federal jurisdiction even if the State had incorporated the new anti-troll law into its Complaint.  The Jan. 12, 2015 order from federal judge William Sessions concludes that this lawsuit is a matter for state (and not federal) court because the State’s case is not about the validity of MPHJ’s patents (which would give rise to federal court jurisdiction), but, instead, only about the legality of MPHJ’s activities in seeking to get Vermont businesses and non-profits to pay it licensing fees under Vermont consumer protection laws.  As it did the first time (and lost), MPHJ might attempt to appeal this most recent order to the federal appeals court.

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Assuming Vermont's GMO labeling law survives a court challenge, beginning in July, 2016, all producers of food products sold in Vermont that contain genetically modified ingredients will be required to label the products as containing GE ingredients (unless the GE component is below 1 percent of the total weight of the product). The label must be “clear and conspicuous” and must be no smaller than the size of the words “Serving Size” on the “Nutrition Facts” label required by federal law.

There will be three (3) labeling options: “Produced with Genetic Engineering”; “Partially Produced with Genetic Engineering”; and “May be Produced with Genetic Engineering.” Producers can use the label “Partially Produced with Genetic Engineering” if the product contains less than 75 percent GE material by weight. Producers can use the label “May be Produced with Genetic Engineering” only if the manufacturer does not know, and cannot reasonably determine in good faith and with due diligence, if the ingredients are genetically engineered. The Vermont Attorney General can determine whether a producer has used good faith in using this option. A producer is exempt from the labeling requirement if it obtains sworn affidavits from its suppliers that the ingredients are not genetically engineered or GMOs.

Retailers who sell raw commodities that contain or are the product of genetic engineering (e.g., raw corn in the produce section at the supermarket) must also label the product at the point of sale.

Producers/retailers are free, if they wish, to include a disclaimer that the U.S. Food and Drug Administration does not consider genetically engineered food to be materially different from non-GE food.

In addition to having to label their products, as described above, producers of food products containing GE ingredients cannot use the word “natural” or words of similar import (e.g., “all natural” or “naturally made”) on the product.

There are significant exceptions to the law. Pure meat and dairy products are completely exempted, as are alcoholic beverages. Food intended for immediate consumption (e.g., restaurant food, deli food, take-out, etc.) is also exempted. Also, food products containing small amounts of GE ingredients that are only used as processing aids do not need to be labeled. Lastly, also exempt are products that have been certified as “organic” or GE-free by an organization acceptable to the Vermont Attorney General (e.g., the Non-GMO Project).

The Vermont Attorney General is empowered to investigate and enforce the law.

Compliance with this law could be extremely challenging for both national and local food producers, for a variety of reasons. For national food producers, compliance with the law could mean: a) labeling ALL of their products nationwide just to comply with the Vermont law, even though Vermont constitutes only a tiny subfraction of the national market share; or b) specially-labeling the package on products intended exclusively for the Vermont market (if it is even feasible to do so), or c) changing their distribution systems to keep non-labeled products out of the Vermont market. Some observers have wondered whether some national producers will simply no longer ship their products into Vermont, rather than create special packaging and distribution just for the tine Vermont market.

For small or local producers, it could be an extreme hardship to: a) determine if their ingredients are genetically engineered, and/or then b) attempt to source only non-GE ingredients for their products. In addition, what if a national producer relabels its product to comply with Vermont law, but then a neighboring state passes a GMO labeling law with different labeling requirements than Vermont's? How many different state-specific packages would a national producer have to make for a single product?

Of course, the constitutionality of the law is currently being challenged in federal court by food manufacturers, and a decision in the lawsuit is pending.


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In a significant decision issued on Friday, July 18, 2014, involving a retail store, the Vermont Supreme Court has abolished the old premises liability distinction between “business invitees” (i.e., customers) and licensees (other visitors).  The Court has now formally adopted a general negligence standard of reasonable care applicable to both types of visitors.  The case is Demag v. Better Power Equipment, Inc., 2014 VT 78.  

This case involved a visitor who was on the defendant’s business premises not as a customer, but as a vendor providing a service to the business.  He fell into a storm drain in the business’s parking lot because the drain cover had been dislodged by a snowplow.  The owners of the business claimed not to know that the storm drain cover had been dislodged.  The visitor sued the business.  The trial court classified the visitor as a “licensee” (i.e., not a customer) – as opposed to an “invitee” (i.e., a customer) and granted summary judgment to the business, reasoning that the business owed a lower standard of care to a licensee.  In other words, because the visitor was a licensee, the owners owed him no legal duty to be aware that the storm drain cover had been dislodged and posed a danger to him.  The Vermont Supreme Court reversed, ruling that there should no longer be any distinction in Vermont between a licensee and an invitee.  

In 99% of cases, this decision will generally not affect retail or business establishments, because, with respect to customers, they were already held to the higher standard for “invitees.”  However, sometimes the person who is injured in or around a business establishment might be a vendor.  In such cases, the business establishment can no longer argue that it has a lower standard of care because the vendor was a “licensee.”  The legal standard will now be the same regardless of whether the plaintiff is a customer of the business or a vendor.  Obviously, this decision has implications for business establishments.  While vendors who are injured while on another business’s premises will typically be covered by their own employer’s workers compensation insurance, they can still bring a claim against the business establishment for negligence.  This decision will potentially make their claim easier to prove.

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