The latest development in Vermont Attorney General (AG) Bill Sorrell’s landmark lawsuit against alleged patent troll MPHJ, which we have discussed before, counts as a win for the state, as a federal judge yesterday held that the case should be heard by a state court judge.

AG Sorrell filed the case in state court in May 2013 alleging that MPHJ’s practice of sending patent demand letters purportedly in bad faith to individuals, businesses, and non-profits violated Vermont consumer protection law. MPHJ removed the case to federal court (No. 2:13-cv-00170, D. Vt.), arguing that it involved issues of patent law implicating a federal question, as well as asserting that diversity existed between the State of Vermont and MPHJ.

Yesterday, Federal District Judge William K. Sessions III rejected those arguments and ordered the case back to Vermont state court. Judge Sessions rejected the diversity argument quickly, citing the well-established principle that a state is not a “citizen” for diversity purposes. He further held that the AG’s suit based on harm allegedly caused to individuals and businesses did not render those individuals and businesses “real parties-in-interest” for diversity purposes.

Next addressing the federal question argument, the Court held that the state’s complaint is based entirely on Vermont state law, not federal patent law. First finding that federal patent law did not “create” the state’s cause of action, the Court turned to the second potential basis for invoking the federal court’s exclusive jurisdiction over patents: whether the “plaintiff’s right to relief necessarily depends on resolution of a substantial question of federal patent law.” The Court held that this standard was not met, as the state’s complaint on its face does not challenge the validity or scope of MPHJ’s asserted patents, nor would it require any determination of whether infringement actually occurred. Rather, the bad faith conduct alleged by the state—e.g., MPHJ’s purportedly false statements that it had a basis to assert that its patents had actually been infringed, that many businesses had agreed to pay license fees, and that it was prepared to file enforcement litigation—do not depend on whether MPHJ’s patent claims were valid. Further, the Court held that the state’s amended request for a narrow injunction, if granted, would not prevent the company from asserting its patents, but only from doing so in a way that violates Vermont consumer protection law. Finally, although the Court did not address MPHJ’s defenses under the First Amendment and federal patent law, it held that such defenses could not be the basis for federal question removal.

While this decision stands as a victory for AG Sorrell, the case itself is far from over. As the Court noted, MPHJ has asserted constitutional and federal patent law defenses—as it also has in litigation against Nebraska AG Jon Bruning and the Federal Trade Commission seeking to invalidate enforcement actions similar to Vermont’s—that remain pending. The expected substantive decision on those issues will have a far-reaching impact not only on AG consumer protection authority, but on the broader national debate of striking the right balance to protect intellectual property, limit abuse of the judicial system, and encourage innovation and economic growth.