Thursday, May 7, 2020

Appropriate and Inappropriate Use of Cease and Desist Letters

Fluid Energy Group Ltd v Exaltexx Inc 2020 FC 81 McHaffie J
2,892,876 / 2,961,777 / 2,961,787 / 2,961,792 / 2,961,794 / 2,961,783

In the action underlying this motion, Fluid brought an infringement action against Exaltexx, and then sent cease and desist letters directed at third parties doing business with Exaltexx. In this decision, McHaffie J granted an interlocutory injunction based on s 7(a) of the Trademarks Act, enjoining Fluid from sending such letters. Yesterday’s post provides an overview of the facts and discusses McHaffie J’s analysis of the “serious question” branch of the RJR-MacDonald [1994] 1 SCR 311 test for interlocutory injunctions, including his treatment of the substantive elements of s 7(1). This post deals with the remaining aspects of the interlocutory injunction analysis. The overarching message I take from McHaffie J’s decision is that cease and desist letters serving the “laudable purposes” of “providing notice of a legal claim and a potential lawsuit, allowing the recipient to assess the claim and their conduct, and initiating discussions leading to resolution of the dispute before litigation is commenced,” are appropriate and will not be enjoined; but letters intended to put pressure on a defendant to settle regardless of the merits are an abuse of the legal process and will not be permitted.

Irreparable harm
The second branch of the RJR-MacDonald requires a showing of irreparable harm. McHaffie J noted that in the Federal Court’s jurisprudence, “the threshold for establishing irreparable harm is a high one” [111], but he went on to say:

[112] [T]he irreparable harm requirement is not an independent silo, such that a stronger substantive case may lower the threshold on irreparable harm. I take into account the fact that on the evidence before me, there is a fairly strong case that Exaltexx will be able to establish at trial that Fluid’s allegations that Hommy Trucking and Panther are infringing its patents are false or misleading, regardless of the outcome of the infringement claim against Exaltexx.

In support, he cited inter alia, the statement by the SCC in Google v Equustek 2017 SCC 34 [25] that the “fundamental question is whether the granting of an injunction is just and equitable in all of the circumstances of the case.” This strikes me as somewhat of a deviation from the Federal Courts’ usual practice of considering irreparable harm to be a separate threshold, so that the motion for an interlocutory injunction might be dismissed for failure to establish irreparable harm, without ever reaching the balance of convenience: see eg TearLab 2016 FC 606 [82] aff’d 2017 FCA 8. Perhaps I’m reading too much into it, but it is a very welcome emphasis, consistent with the risk-balancing nature of injunctive relief noted by McHaffie J at [36], that is recognized in most jurisdictions: see here.

McHaffie J’s final comments on “the fundamental question” are also of interest:

[127] As the Supreme Court of Canada stated in Google v Equustek, the ultimate or fundamental question is whether granting an injunction is just and equitable in the circumstances: Google v Equustek at paras 1, 25. While the three-part test from RJR-MacDonald is designed to address this question, I consider it appropriate to briefly address the fundamental question separately.

This is helpful reminder that the three-part RJR-MacDonald test is a guide to addressing the “fundamental question,” not a straightjacket. Again, this is consistent with Sharpe’s summary of the modern cases, describing the test for irreparable harm as “a relative and flexible one,” in which irreparable harm “can only be defined in the context of the risk-balancing exercise” (¶ 2.450*).

While McHaffie J’s comments arguably push back against the usual Federal Court approach of considering irreparable harm to be an threshold test that must be satisfied independently – a silo, if you will – his decision is nonetheless consistent on the facts with the standard FC approach. Even though it is very rare for the FC to find the irreparable harm test to be satisfied in a patent case, the facts in this case were unusual, as Exaltexx is a small company and the damage to its reputation and relationships might well threaten its existence [116]. This is quite different from the typical case in which a patentee is seeking to enjoin an alleged infringer from selling allegedly infringing products, and the nature of the damage is lost sales.

Inference of harm from threatening letters is difficult to rebut
Apart from the general approach, a couple of McHaffie J’s comments on the facts are worth noting. Fluid argued that that Exaltexx has failed to show irreparable harm because Exaltexx had not established a “wholesale refusal” to do business with Exaltexx: only one of the companies targeted by the cease and desist letters had expressly decided not to do business with Exaltexx on the basis of the letters [118]. McHaffie J rejected this contention:

[119] By resisting this motion, Fluid is seeking to be able to send equivalent letters to each and every supplier dealing with Exaltexx’s products, including any who might replace suppliers like Hommy Trucking, demanding that they cease doing so. It is a strained argument for Fluid to suggest that they ought to be permitted to do so because their initial letters were not fully effective in achieving their stated goal.

Fluid also argued that Exaltexx’s could counteract any harm to its reputation through its own communications. McHaffie similarly rejected that argument:

[120] Again, it is a strained argument that Fluid should be permitted to continue to send potentially false allegations of infringement, demands to cease dealing with Exaltexx’s products, and threats of litigation, all without notice to Exaltexx, on the basis that Exaltexx could or should counter those threats through its own statements or an indemnity.

Similarly, in the context of the “resulting damage” element of 7(a), McHaffie J stated that:

[108] it is clear that Fluid’s desire and intent from the Panther letter was that Panther stop supplying Exaltexx. It hardly lies in the mouth of Fluid to argue that it should be allowed to continue sending such letters on the basis that one supplier may have decided not to comply.

Taken together, these statements indicate that once it has been established that very threatening cease and desist letters have been sent, the party sending the letters may have some difficulty rebutting evidence that harm resulted, whether for the purpose of s 7(a) or the irreparable harm requirement of the RJR-MacDonald test. On the facts, this does not (quite) amount to a presumption of harm; there was clear evidence that Hommy Trucking had ceased doing business as a direct result of the letters. But it is nonetheless clear that the court will not be sympathetic to a party’s efforts to continue sending threatening letters with potentially false allegations of infringement.

Appropriate role for cease and desist letters
After these findings on irreparable harm, the balance of convenience clearly favoured granting the injunction, as Fluid had filed no evidence of any harm it would suffer if prevented from writing further cease and desist letters [122]. Instead, Fluid relied on an arguments to the effect that it was entitled to vigorously assert its patent rights [123]. McHaffie J rejected these arguments, noting that there is nothing in the requested injunctions that would prevent Fluid from “appropriately enforcing its patent rights, either through litigation or through bona fide pre-litigation communications” [124].

While McHaffie J did grant the requested injunction, he repeatedly stressed “the important and typically constructive role of cease and desist letters, and the importance of allowing intellectual property rights holders the ability to enforce those rights in practical and effective ways, including outside or before the litigation process” [129]. His decision in no way calls into question the appropriate use of such letters, but rather recognized that they must be employed in a proportionate manner:

[125] As noted at the outset, cease and desist letters form a common part of litigation in Canada and can be a valuable part of enforcement of rights including intellectual property rights. In the present case, however, by sending highly threatening letters to companies against whom it has suspect infringement claims, Fluid has gone beyond the appropriate and valuable use of cease and desist letters. If the result is that they become less able to use them as a tool in enforcing their patent rights until the determination of those rights, it is a result of their own actions to date and the resulting impact on Exaltexx.

[128] In this action, Fluid alleges that a competitor’s product infringes its patents. That claim is clearly contested, and the determination of that claim will be made on its merits in this Court at the appropriate time. In the interim, Fluid has engaged in a letter writing campaign raising serious and aggressive threats of litigation, including against parties—such as Hommy Trucking and Panther—for whom a claim of patent infringement appears, on the evidence before the Court at this time, tenuous at best. To the extent that Fluid did not know that these parties’ only involvement with Exaltexx was as suppliers, I cannot find that this excuses writing letters of such a broad and threatening nature. If anything, this lack of knowledge would simply make the letter writing reckless. The letters were far from being “very carefully worded and circumspect,” to use the language of Justice Cullen in M&I Door Systems Ltd v Indoco Industrial Door Co Ltd (1989), 25 CPR (3d) 477 (FCTD) at paragraph 101. To the contrary, they appear on their face to be designed for maximum threatening effect, with the goal of having suppliers cease doing business with Exaltexx regardless of the merits of a claim against those suppliers and well before determination of their claim against Exaltexx.

I take this to say that cease and desist letters serving the “laudable purposes” of “providing notice of a legal claim and a potential lawsuit, allowing the recipient to assess the claim and their conduct, and initiating discussions leading to resolution of the dispute before litigation is commenced,” are appropriate and will not be enjoined; but letters intended to put pressure on a defendant to settle regardless of the merits are an abuse of the legal process and will not be permitted.

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