 You 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. |
