Wednesday, November 30, 2016

Informative v Threatening Letters

Excalibre Oil Tools Ltd v Advantage Products Inc 2016 FC 1279 Manson J
            2,264,467 / 2,373,734 / 2,386,026 / torque anchor

E Mishan & Sons, Inc v Supertek Canada Inc 2016 FC 986 Hughes J
            2,779,882 / Industrial Design 146,676 / expandable garden hose

Yesterday’s post described the unjustified threats action under s 7(a) of the Trade-marks Act, and discussed its rationale, which is to prevent a patentee from interfering with the business of a competitor by persuading end-users, who are not interested in being caught up in litigation, to abandon the competitor’s wares. In light of that rationale, I must doubt the validity of the distinction between cease and desist letters that are threatening and those that merely informative. On the authority of Cullen J’s decision in M&I Door Systems Ltd v Indoro Industrial Door Co Ltd (1989), 25 CPR (3d) 477 (FCTD), it is said that the latter may engage s 7(a), while the former do not. As Mason J explained in Excalibre v API:

[282] Informative letters set out a patentee’s rights and provide information that will enable the recipient to understand what may constitute infringement. Threatening letters contain explicit or veiled threats that the recipient will be sued if they do not change a particular course of conduct.

Manson J accepted this distinction [282], as did Hughes J in Supertek [10]-[11], but neither actually applied it to defeat the action. Both held on the facts that the communications in question were threatening, in Excalibre J because the letters contained explicit threats of litigation [284], and in Supertek because the defendants had “deliberately and skilfully conducted themselves so as to leave [the recipient] with the impression,” that it would be sued for patent infringement [27]. The only case I have found in which the court dismissed the claim for a remedy under s 7(a) because the communication, while false, was “more informative than threatening” is M&I Door Systems itself (523).

M&I Door Systems cited no authority for this distinction. Indeed, Cullen J did not cite any authority at all on the interpretation of s 7(a) – not even the leading case, S. & S. Industries Inc. v. Rowell [1966] SCR 419. And M&I Door Systems is very difficult to reconcile with S. & S. Industries. Cullen J gave two main reasons for tempering his response to the claim under s 7(a). One reason is that the patent is prima facie valid and “the patentee has the right to act on that basis” (523). This point was the appellant’s main contention in S. & S. Industries (426), and it was rejected. As Gill notes, Cullen J’s holding on this point is “[s]eemingly in direct contradiction to the Supreme Court’s pronouncement in S. & S. Industries”: A. Kelly Gill Balancing Necessary Monopolies and Free Competition: Threats of Patent Infringement and Trade Libel (1998) 14 CIPR 125, 132. Gill was of the view that M&I Door Systems imposed a desirable limitation on the scope of s 7(a); while don't agree on the policy point, I do agree with his legal analysis that M&I Door Systems is inconsistent with S. & S. Industries. The other main point made by Cullen J is that if he had held the patent valid, he would have had “little or no difficulty” in holding that it was infringed (523). This seems ancillary to the point regarding the prima facie validity of the patent, as the only basis for distinguishing between a false statement relating to validity and a false statement relating to infringement is that the patent is prima facie valid, while the patentee bears the burden of proving infringement. In holding that the prima facie validity of the patent was irrelevant, the SCC in S. & S. Industries implicitly rejected this distinction. Section 7(a) itself refers only to a “false or misleading” statement, and makes no distinction as to the reason why the statement is false. A third consideration noted by Cullen J was that the president of the patentee corporation, who sent the letters in question, was honestly convinced that the defendant’s products were infringing (523). Again, this goes to the absence of malice, and is irrelevant under S. & S. Industries. On the whole, I must wonder whether S. & S. Industries was even cited to Cullen J. Section 7(a) was raised as a counterclaim in an action for infringement, and the discussion of the issue was one page in a 47 page decision, the remainder of which dealt with validity and infringement. Perhaps the litigation effort was similarly apportioned.

Nor can a safe harbour for purely informative statements be justified as balancing the rights of the patentee to enforce its patent against the rights of the competitor to be free of unjustified interference. Even without any safe harbour for purely informative statements, the patentee will only be liable for damages under s 7(a) if it makes false statements that cause damage to the competitor by wrongly discrediting its wares. Why should the patentee escape liability if it has couched its false statements in the form of information rather than threats? Such a distinction seems to reflect the mala fides basis for the action which was rejected by the SCC in S. & S. Industries. Moreover, it is a very fine distinction, which may appeal to lawyers, but is unlikely to impress the practical business people who receive these letters, and who, as the facts in Excalibre show, may well not choose not to take legal advice at all. This opens the door to a patentee with a patent it knows to be weak, to nonetheless effectively halt its competitor’s sales. 

It may be suggested that without some kind of safe habour s 7(a) would be hard on small patentees who are legitimately trying to protect their patent rights. But adding in a safe harbour of this kind will be equally hard on small rivals who are legitimately trying to market a product which is in fact non-infringing. As Spence J pointed out in S. & S. Industries [1966] SCR 419, 423, the most straightforward means for a patentee to enforce its rights is to sue the manufacturer and join end-users, in which case the patentee may be able to obtain an interlocutory injunction restraining the allegedly infringing sales, but only on giving an undertaking in damages:

The injunction having been granted only upon his undertaking to pay the damages incurred thereby should he fail, he proceeds at his own risk. There would seem to be no valid reason why rather than choosing that forthright course he should be permitted to proceed by threats against the purchasers from the alleged infringer without rendering himself liable for damages unless his mala fides could be proved.

When seeking an interlocutory injunction, a good faith and reasonable belief in its claim does not shield the patentee from giving an undertaking. The threatened action against and end-user achieves the same end as an interlocutory injunction, namely to halt the competitor's sales, and accordingly, the SCC held that a reasonable belief in the validity of the claim is not a shield against s 7(a) either. By the same token, a patentee seeking an interlocutory injunction cannot avoid giving an undertaking in damages by asking politely, and neither should that shield it from liability under s 7(a).

A stronger justification for a safe harbour of this type is that without some kind of safe harbour the patentee would adopt what the UK Law Commission, No 360, ¶ 124 has described as “a ‘sue now – talk later’ culture because once infringement proceedings are issued, the provisions no longer apply.” Whether that is an adequate justification, given that any such safe harbour is liable to be abused, is a question for another day.

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