California Bar Journal
OFFICIAL PUBLICATION OF THE STATE BAR OF CALIFORNIA - AUGUST 2000
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This month’s article and test provided by the State Bar’s
Intellectual Property Law Section

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MCLE SELF-STUDY

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Intellectual Property Rights

Walking a fine line to both protect your rights and stay out of trouble

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By ROBERT F. HELFING
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Robert F. HelfingYou receive an angry phone call from a long-time corporate client: A competitor, he says, has adopted a similar trademark, or has begun distributing a catalog containing his copyrighted photographs, or is selling products bearing his patented designs. And he wants you to do something about it. Right now.

No problem, you tell him, you’ll send off a “cease-and-desist” letter, demanding that the infringing conduct cease, threatening litigation if it does not. You might even send a warning to the competitor’s customers. Often, you tell your client, the sending of a cease-and-desist letter is enough to induce infringers to terminate the accused conduct, possibly even to extract concessions or even compensation from them. At the very least, it serves to shut off any claim of innocent infringement, subjecting the infringer to increased liability. In any event, you say, there is no harm in sending a cease-and-desist letter.

This article is for those who do not question the wisdom of that last bit of advice. A cease-and-desist letter is a dangerous weapon for the owners of intellectual property. The letter can, however, also become a dangerous weapon against them. The purpose of a cease-and-desist letter is to cause a competitor to terminate a presumably gainful business practice. The letter is intended to, and often does, cause loss to business rivals. If used improperly, cease-and-desist letters — and other extra-judicial tools such as press releases — may subject the issuer to liability under various legal theories including unfair competition, tortious interference with business relationships, defamation, trade libel, even violation of antitrust law. They may also have adverse procedural and evidentiary consequences if the dispute is ultimately litigated.

This article traces the line that the holders of intellectual property rights must walk in staying out of trouble while protecting those rights.

In good faith

As stated by the Supreme Court in a case early in the 20th century, intellectual property rights “would be of little value if infringers of them could not be notified of the consequences of infringement or proceeded against in court. Such action, considered by itself, cannot be considered illegal.” Virtue v. Creamery Package Mfg., 227 U.S. 8, 37-38, 33 S.Ct. 202, 208, 57 L.Ed. 393 (1913). It is fair to say that the holder of intellectual property rights is permitted to notify others of a genuine belief that they are infringing those rights. Further, the holder of rights is not liable for the loss caused by threats against others merely because it is mistaken in the belief that its rights were infringed. Kaplan v. Helenhart Novelty Corp., 182 F.2d 311, 314 (2nd Cir. 1950).

Thus, in Concrete Unlimited Inc. v. Cementcraft Inc., 776 F.2d 1537 (Fed.Cir. 1992), the Federal Circuit found that the plaintiff’s patent was invalid. However, in holding that the plaintiff was not liable for the loss of business caused by threats made to the defendant’s customers prior to the finding of invalidity, the court stated that the plaintiff “did only what any patent owner has the right to do to enforce its patent, and that includes threatening alleged infringers with suit.” 776 F.2d at 1539.

The license to assert intellectual property rights, however, is not without limitation.

Anticompetitive intent

Most cease-and-desist letters are written with anticompetitive intent — that is, the purpose of the letter is generally to cause the recipient to stop competing through the use of an infringing trademark, product or artistic work. The fact that the intellectual property holder is moved by commercial interest does not color its motives with bad faith. Mallinckrodt Inc. v. Mediport Inc., 976 F.2d 700, 710 (Fed.Cir. 1992). However, the initiation of legal proceedings with predominantly anticompetitive intent may constitute unfair competition. One district court framed the issue by stating that a lawsuit over intellectual property rights is an unfair method of competition if it is used “as a deliberate weapon of business aggression rather than an instrument for adjudicating honest disputes.” T.N. Dickinson v. LL Corp., 27 U.S.P.Q. 145 (D.Conn. 1985).

The kind of claim qualifying as a “weapon of business aggression” was illustrated in International Industries & Developments Inc. v. Farbach Chemical Co., 241 F.2d 246 (6th Cir. 1957). In that case, the plaintiff owned a patent for a “dip-type silver cleaner.” The patentee issued 8,000 letters through its “Washington patent attorney” to manufacturers, dealers, jobbers and retailers of dip-type silver cleaners. The letter referred to its patent, and noted that the plaintiff had licensed its patent rights to five specific brands. The letter concluded:

“Please consider this your formal notice that no manufacturers of brands other than those listed above have been licensed by our client, and that any persons, firms or corporations manufacturing, advertising, selling or distributing dip-type silver cleaning liquids or powders in violation of our client’s patent rights, do so at their peril. Any infringement will be liable to prosecution.”

The defendant received the letter but was undeterred. It distributed its own brand of dip-type silver cleaner, and was sued by the plaintiff. The court found that the plaintiff’s patent was not infringed. It also held the plaintiff liable for damage to the defendant’s business because the letter falsely suggested that only its licensees were permitted to distribute a dip-type silver cleaning liquid.

No bright line exists to distinguish proper from improper intent. How-ever, International Industries v. Farbach Chemical and other cases suggest that the courts will sniff out anticompetitive intent where the legal merit of a claim is dubious. For instance, even if there is an honest legal dispute at the bottom of a claim, the claimant may be liable if false representations are made in the cease-and-desist letter.

In Gardiner v. Gendel, 727 F.Supp. 799 (E.D.N.Y. 1989), the plaintiffs sent a cease-and-desist letter to the defendants and their customers during the pendency of a design patent application. The letter stated that the defendants were infringing their “patent rights,” that the plaintiffs “have and continue to vigorously enforce” those rights, and that the plaintiffs would sue for patent infringement unless the defendants provided assurance that they would stop manufacturing, selling or using their design. When the letter was sent, however, the plaintiff had no patent rights, only a pending application. The court found that the plaintiffs had engaged in unfair competition in issuing false threats of infringement prior to the existence of any rights.

With the holding of Gardiner in mind, however, Scosche v. Visor Gear, 121 F.3d 675 (Fed.Cir. 1997), shows that the balance between permissible and impermissible representations is a delicate one. The parties in that case were competing manufacturers of compact disc holders designed to attach to the sun visor of an automobile. Prior to the issuance of its patent, Visor Gear advised a potential customer of its “belief” that the Scosche product fell within the scope of claims of Visor Gear’s pending patent application. After the patent issued, Visor Gear contacted several Scosche distributors and advised them of its belief that Scosche’s product infringed the patent. The court held that Visor Gear’s communication prior to issuance of the patent had accurately set forth the status of Visor Gear’s application, and expressed Visor Gear’s genuine belief that the Scosche product would infringe the patent once it issued. Regarding the letter to Scosche’s distributors, the court stated that there was nothing improper in a patentee’s attempt to enforce its rights by advising potential infringers of a good faith belief that a particular product infringes.

The teaching of these cases is that threats of liability for infringement cannot be based upon rights that do not exist, but that the holder of rights may express a good faith belief that conduct will infringe once the right is perfected.

Measuring good faith

Published opinions provide little guidance about the level of certainty required to negate a claim of bad faith. Clearly, however, it is not enough that the claimant believes infringement has occurred if that belief is not supported by a reasonable inquiry into the facts of the case.

In Judin v. United States, 110 F.3d 780 (Fed.Cir. 1997), the plaintiff was the owner of patents for a method of micro-optical imaging. He sued the United States and Hewlett-Packard after observing bar code scanners at a post office. Before filing suit, he did not ask the Postal Service for a sample of the device or otherwise attempt to obtain one. Further, his attorney made no investigation other than to observe the accused device from a distance. Instead, the attorney deferred to his client’s conclusion that the accused device infringed his patents, relying upon the client’s experience and credentials in the industry. The court imposed sanctions upon the plaintiff, finding that there had been no reasonable inquiry to determine whether the suit was well-grounded in fact and warranted by law. Sanctions were also imposed against the attorney for failing to undertake an independent investigation.

The cases already discussed in this article suggest that liability of the rights holder may be based upon false statements in a cease-and-desist letter or upon the absence of a direct and thorough inspection of the allegedly infringing product prior to the issuance of a threat of litigation. Although both elements were present in Accent Designs Inc. v. Jan Jewelry Designs Inc., 827 F.Supp. 957 (S.D.N.Y. 1993), the court found no liability for statements made, not only to the purported infringer, but also to its customers.

In Accent Designs, the defendants were owners of a patent for mounting gems in jewelry by means of a channel setting. Defendants made threats and “unfair representations” to the plaintiffs and to its customers, based upon the claim that the plaintiffs were infringing the patent. One of the defendants had even made the false statement that it had sued the plaintiffs. In two instances the defendants had sent the cease-and-desist letters without even having seen samples of the infringing products, but after only viewing photographs of them in catalogs. The claims of infringement proved erroneous, but the court nonetheless held there was sufficient likelihood of infringement to justify the defendants’ conduct.

No empty threats

In published cases, liability for the issuance of cease-and-desist letters has most often been found where the holder of rights threatens a lawsuit with no genuine intention to file one.

In Betmar Hats Inc. v. Young America Hats Inc., 116 F.2d 956 (2nd Cir. 1941), for instance, the owner of a patent covering the design of a ladies’ hat repeatedly issued “circulars” to the trade warning the plaintiffs’ customers that its hats infringed the patent, but did not file suit. Finally, the plaintiff sued to enjoin the patentee from issuing further warning notices or threatening letters. The Second Circuit Court of Appeals directed the lower court to issue the injunction, stating that “persistent threats to the trade, unsupported by any attempt to have the patentee’s claims established by suit, will not be permitted.” The court went so far as to state that “it was the defendant’s duty to seek to have its design patent adjudicated in a suit to obtain an injunction and damages for infringement instead of seeking relief by repeated threats.” 116 F.2d at 95; see also Mallinckrodt Inc. v. Mediport Inc., supra, 976 F.2d at 710.

How soon must the holders of rights act?

In Sun-Maid Raisin Growers v. Avis, 25 F.2d 303, 304 (N.D.Ill. 1928), the patentees began by sending a “notice of infringement.” The alleged infringer challenged the patentee to file suit. Ten months later, after having been rebuffed in their attempt to sell the patent to Sun-Maid, the patentees sent letters threatening suit. Eight months after that, the claimants sent letters to customers of Sun-Maid, also threatening them with litigation. In the following month, Sun-Maid filed suit to enjoin the threats. The court issued the injunction, stating:

“The proper forum for the trial of the controversy between plaintiff and defendants is the court, not circulars and futile correspondence . . . . Where as here, there is an entire failure thus upon the patentee’s part to assert its rights in a proper forum, the court can only conclude there is some ulterior motive in his actions.”

In Atlas Underwear Co. v. Cooper Underwear Co., 210 F. 347 (E.D.Wis. 1913), the court stated that, where the holder of rights believes that widespread infringement is rapidly developing, it must promptly file suit. Atlas was a 1913 case that involved a pioneer patent on a style of men’s underwear known as a “union suit.” The style became so popular that, according to the patent owner, the Cooper Underwear Co., it became subject to “wholesale piracy” throughout the trade. For a period of more than a year, Cooper issued repeated circulars by mail and in trade journals, threatening suit and other dire consequences to various competing manufacturers and their customers, but not initiating litigation. Finally, one of the competing manufacturers sued Cooper. The court granted an injunction against further threats, stating that the patentee had a duty to promptly bring suit rather than “inaugurating and carrying on a system of terrorizing the trade.” 210 F. 347 at 350.

The Atlas court found that the patentee had a duty to act promptly based upon its claims of rapid and widespread infringement. Other courts, however, have found a duty to act promptly in less compelling circumstances. In Art Line Inc. v. Universal Design Collections, 966 F.Supp. 737, 744 (N.D.Ill. 1997) , Universal was a manufacturer of lawn statuary, specifically, of realistic animals. At a trade show in August 1996, Universal learned that a competitor, Art Line, was marketing a statuary line of similar animals. Universal took no action until January 1997, when it learned that one of its major accounts had decided to carry Art Line’s animals. Universal then sent cease-and-desist letters to various customers of Art Line, stating that their sale of “certain” products may violate Universal’s copyrights and subject them to an infringement suit. Only in one of the letters did Universal identify Art Line products. In February, Art Line filed suit, seeking a declaratory judgment that its products did not infringe Universal’s copyright. Universal filed a counterclaim for copyright infringement in March, seven months after it learned of the allegedly infringing statues, and two months after its cease-and-desist letters.

On motion by Art Line, the court issued an order enjoining Universal from notifying anyone of the alleged infringement. The court found that Universal had made no false statement in its cease-and-desist letters. Nonetheless, the injunction issued based upon Universal’s delay in issuing the cease-and-desist letters, and in its failure to promptly follow those letters with an infringement suit.

At least one court, however, has rejected the contention that a simple delay in filing suit after notice justifies injunctive relief against the sending of further notices. The court noted that, inasmuch as the recipients of the cease-and-desist letter are entitled to seek declaratory relief at any time, the filing of a suit to delineate the rights at issue “is as timely as [the recipients of the threat] choose to make it.” Kaplan v. Helenhart, supra, 182 F.2d at 314.

Because the assertion of intellectual rights tend to ring hollow without the threat of litigation, cease-and-desist letters generally contain such threats. It should be borne in mind, however, that monetary exposure, or at least injunctive relief, is possible where litigation is threatened with no genuine intent to file suit. It should also be noted that a delay in initiating suit may serve as a basis for the infringer to assert an unclean hands defense. Hall v. Wright, 240 F.2d 787, 795-796 (9th Cir. 1957); Panay Horizontal Show Jar Co. v. Aridor Co., 292 F. 858 (7th Cir. 1923). Further, conduct which fails to rise to the level of unfairness may nonetheless provide a basis for the application of an unclean hands defense. Thus, even if a delay in asserting rights does not subject the claimant to liability, it may provide a defense to infringement.

Defenses

First Amendment: There is little room for the successful assertion of a constitutional defense to claims based upon improper threats of infringement. False commercial speech is not protected by the First Amendment. Central Hudson Gas & Electric Corp. v. Public Service Comm’n, 447 U.S. 557, 563, 65 L.Ed.2d 341, 100 S.Ct. 2343, 2350 (1980) (there is “no constitutional objection to the suppression of commercial messages that do not accurately inform the public about lawful activity”); Bates v. State Bar of Arizona, 433 U.S. 350, 383, 97 S.Ct. 2691, 2709, 53 L.Ed.2d 810 (1977); Transgo Inc. v. AJAC Transmission Parts Corp., 768 F.2d 1001, 1021-1022 (9th Cir. 1985). Inasmuch as liability in this context is premised upon bad faith or falsity, it will rarely occur that a cease-and-desist letter is sufficient to both establish liability and support a First Amendment defense in the same case.

Litigation Privilege: Statements made by parties in relation to a judicial proceeding are absolutely privileged. California Civil Code 47(b); Silberg v. Anderson, 50 Cal.3d 205, 215 (1990). Unlike evidentiary privileges which function by excluding evidence, Civ. Code 47(b) operates as a limitation on liability. This means that the privileged communication cannot itself be used as a basis of a claim. Moore v. Conliffe, 7 Cal.4th 634, 638 (1994). As a privilege grounded in California law, federal courts apply Civ. Code 47(b) only where state law provides the “rule of decision.” Federal Rule of Evidence 501; Religious Technology Center v. Wollersheim 971 F.2d 364, 367 (9th Cir. 1992). The privilege has broad potential application to the facts under discussion here because unfair competition and most of the other legal theories underlying claims triggered by the issuance of cease-and-desist letters are grounded in state law.

The privilege applies to any communication which (1) was made in a judicial proceeding; (2) had some connection or logical relation to the action; (3) was made to achieve the objects of the litigation; and (4) involved litigants or other participants authorized by law. Hagendorf v. Brown, 699 F.2d 478, 480 (9th Cir. 1983). Cease-and-desist letters are generally sent as a prelude to litigation. While the statute refers to statements made “in” a judicial proceeding, pre-litigation communications are protected by the privilege if they relate to a proceeding “that is contemplated in good faith and under serious consideration.” Fuhrman v. California Satellite Systems, 179 Cal.App.3d 408, 421 (1986); Premier Communications Network Inc. v. Fuentes, 880 F.2d 1096, 1102-1103 (9th Cir. 1989).

In both the Fuhrman and Premier cases, a sender of microwave television signals sent form letters to thousands of alleged pirates, threatening legal action and demanding settlement payment. In each case, one of the recipients of the letters sued upon various theories including fraud and intentional infliction of emotional distress. The appellate courts in both cases held that the number of letters alone raised doubt regarding the sender’s intent to litigate.

In sum, the privilege would not apply where a cease-and-desist letter is sent without intention to sue. A claimant who delays in filing suit is vulnerable to the claim that no real intent to sue existed at the time the letter was sent. However, Civ. Code 47(b) arguably precludes liability based upon cease-and-desist letters which simply contain misstatements of fact, if the letter is sent with a genuine intention to sue.

It should also be noted that 47(b) does not apply to communications to non-participants in the action. Susan A. v. Sonoma, 2 Cal.App.4th 88, 93 (1991). For this reason, warning letters sent to customers of the infringer are generally not privileged.

Press releases

The issuance of press releases may also subject intellectual property claimants to liability under the same principles discussed above. It is important to note that extrajudicial statements may result, not only in liability for unfair competition and related torts, but also in the waiver of evidentiary privileges.

In Electro Scientific Industries Inc. v. General Scanning Inc., 175 F.R.D. 539 (N.D.Cal. 1997), Electro Scientific sued General Scanning for patent infringement. Approximately two weeks after the filing of the lawsuit, General Scanning issued a press release, stating that it had been advised by its attorneys that the patents relied upon by the plaintiff were invalid because the plaintiff had failed to advise the Patent Office of prior patents and publications during the application process. The court held that this voluntary disclosure of the legal opinion of its counsel served to waive the attorney-client privilege as to all communications bearing upon its counsel’s advice.

It should also be noted that the liability privilege afforded by Civ. Code 47 does not apply to press releases. For example in Rothman v. Jackson, 49 Cal.App.4th 1134, 1145 (1996), the court found that the defendants’ statements to the press in which they accused plaintiff of leaking information for extortion purposes were found not to have been made to achieve the “objects of the litigation” and thus were not privileged.

Jurisdictional implications

The sending of a cease-and-desist letter may also precipitate unwanted litigation, and may do so in an undesirable forum.

Under the Declaratory Judgment Act, a federal court “may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.” 28 U.S.C. 2201(a). In order for a court to have subject-matter jurisdiction, however, an “actual controversy” must be involved. In the case of intellectual property rights, this requirement generally means that the declaratory plaintiff is presently engaging in activity which could constitute infringement or taking concrete steps with the intent to conduct such activity. Further, there must be an “explicit threat or other action” taken by the holder of intellectual property rights which causes “reasonable apprehension” on the declaratory plaintiff that it faces an infringement suit. BP Chemicals Ltd. v. Union Carbide Corp., 4 F.3d 975, 978 (Fed.Cir. 1993). Usually, the receipt of a cease-and-desist letter is relied upon to satisfy the jurisdictional requirement of a “reasonable apprehension” of suit.

Thus, the unwary holder of intellectual property rights might find itself an unwilling participant in litigation where its resolve in the matter went only as far as the sending of the cease-and-desist letter. Even if the sender ultimately intended to file suit, the issuance of the letter may take out of its hands the ability to choose the litigation forum. In that case, the sender will likely find itself litigating the dispute in its adversary’s backyard. To prevent that result, the cease-and-desist may be carefully crafted to avoid any threat of litigation. See K-Lath, Division of Tree Island Wire (USA) Inc. v. Davis Wire Corp., 15 F.Supp.2d 952 (C.D.Cal. 1998).

Conclusion

Enforcement of intellectual property rights is essential to the maintenance of those rights. A cease-and-desist letter is a useful tool, and is often sufficient in itself to terminate infringing conduct, or at least to set the resolution process in motion. Improvident threats, however, may be as costly as inaction. To avoid claims of unfair competition and related torts, the nature and extent of rights relied upon should not be exaggerated in the cease-and-desist letter. Particular care should be taken in communications to customers of the apparent infringer and other non-litigants. Most importantly, if litigation is threatened, the sender should be prepared to promptly follow through with suit.

Robert F. Helfing is a partner in Segwick, Detert, Moran & Arnold of Los Angeles.