Wednesday, May 6, 2020

Interlocutory Injunctions and Cease and Desist Letters: Everything You Ever Wanted to Know

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

McHaffie J’s decision in Fluid Energy Group v Exaltexx is a tour de force on an important issue, namely the availability of an interlocutory injunction based on s 7(a) of the Trademarks Act to enjoin cease and desist letters directed at third parties doing business with the defendant in an infringement action. The decision covers many issues, both procedural and substantive, that will be relevant to any situation involving threatening cease and desist letters. McHaffie J’s decision complements that of Manson J in Excalibre 2016 FC 1279 (aff’d on cross-appeal 2019 FCA 121, appeal dismissed for delay 2019 FCA 22), awarding damages under s 7(a) for letters threatening to bring infringement actions against end-users of the defendant’s product that was ultimately held to be non-infringing: see here, here and here. Both decisions are fully reasoned, and we now have a good body of recent law on the application of s 7(a) to cease and desist letters. The entire decision will be required reading on the issue, and as I have little to add to McHaffie J’s analysis, for the most part I will simply summarize the issues and highlight a few choice passages. This post will focus on the application of s 7(a) to cease and desist letters, and the next post will consider the interlocutory injunction issues.

Fluid and Exaltexx are competitors in the sale of “safe acids” to the oil and gas industry. These are strong acids that have been modified by blending them with additives to be more environmentally and dermatologically safe [8]. In the underlying action, the patentee, Fluid, asserts that Exaltexx infringes its patents relating to safe acids. After commencing the action, Fluid sent cease and desist letters to various companies doing business with Exaltexx, including two chemical suppliers and a small trucking company that hauls product from Exaltexx to one of its customers [23]. These letters made broad-ranging assertions of infringement covering Exaltexx products, and alleged that the recipients of the letters were also infringing or inducing infringement by doing business with Exaltexx [3], [15]. The letters threatened patent litigation against the companies if they refused to comply with the demand to immediately cease and desist [3]. The letters were intended to induce those companies to stop doing business with Exaltexx, and at least one, and possibly two, of the companies did cease doing business with Exaltexx as a result of the letters [118].

For example, the only involvement of the small trucking company, Hommy Trucking, was in transporting product from Exaltexx to its clients [76]. Fluid’s letter to Hommy asserted, inter alia, that “by storing for sale, transporting, importing, shipping, distributing, supplying, selling and/or using the Infringing Products in Canada, [Hommy] has infringed, is continuing to infringe, and/or has induced and procured others to infringe, the Fluid Patents,” and “If [Hommy] refuses to comply with this demand, Fluid will take legal action to protect its intellectual property and patent rights without further notice” [15, bold in original letter]. Hommy sought advice of counsel, who responded to Fluid by saying “My client has no knowledge or insight as to whether your clients [sic] threatened action is valid or frivolous. All they know for sure is that your request affects their bottom line.” McHaffie J noted that [106]:

This is the very concern raised by threatening letters of this nature, namely that the potential for expensive litigation will result in compliance regardless of the merits of a particular infringement allegation.

A related concern arises in the context of patent assertion entities that may level unfounded threats against end-users (see the 2016 US FTC Study on Patent Assertion Entity Activity Ch 3). The basic problem in both cases is that the party receiving the threatening letters has much less at stake in respect of the allegedly infringing product than does the manufacturer, and so it will not be cost-effective to mount a substantive defence. The difference is that PAE threats against end-users are typically intended to elicit low-value settlements; the end-users are targeted so as to avoid provoking a challenge to the validity of what are often weak patents. In this case, the effect of Fluid’s letters to suppliers was to put pressure on Exaltexx by impairing its ability to carry on its business [116].

Exaltexx brought this motion for an interlocutory injunction to enjoin this conduct. McHaffie J granted an interlocutory injunction prohibiting Fluid from sending letters to any of Exaltexx’s suppliers alleging that they infringe Fluid’s patents, or demanding that they stop dealing with Exaltexx, or threatening legal proceedings for dealing with Exaltexx or its products. Exaltexx also sought to enjoin Fluid from alleging that Exaltexx’s products infringe: McHaffie J denied this request.

Urgent motion
There were two preliminary procedural issues. First, Fluid had commenced an action against Exaltexx but Exaltexx had not counterclaimed when it brought the motion seeking an interlocutory injunction. This is evidently because of the urgent need to ensure its suppliers would keep doing business with Exaltexx: the motion was brought within a week of Exaltexx becoming aware of the letters sent to its suppliers [30]. McHaffie J held that “a counterclaim must be considered a separate proceeding for purposes of Rule 372" [28] and that the motion that therefore been brought “before commencement of proceedings” so the urgency and undertaking requirements of Rule 372 had to be met [30]. On the facts, the requirement of urgency was met [30].

Undertaking as to damages
Second, Exaltexx argued that it should not be required to give the usual undertaking as to damages since it was not seeking to enjoin Fluid from engaging in a revenue-producing activity by competing or selling product [37]. McHaffie J rejected this submission: “An undertaking as to damages is required here. While the injunction sought does not prevent Fluid from competing, it seeks to stop Fluid from engaging in activity relating to its commercial operations that could have an impact on its business” [38]. While that makes sense in principle — damages are “theoretically possible” [39] — it’s not clear to me what type of damages might actually be assessed if Fluid ultimately prevails. But it will, in any event, be for Fluid to establish those damages [39]; and if Exaltexx is right that there can be no substantial damages arising, then Exaltexx will not be required to pay any damages even if Fluid is ultimately in a postion to seek to enforce the undertaking. The safest course is therefore to require Exaltexx to give the undertaking.

Trademarks Act s 7(a) and Cease and Desist Letters
As noted, the primary substantive basis for Exaltexx’s motion was s 7(a) of the Trademarks Act, which provides that “No person shall make a false or misleading statement tending to discredit the business, goods or services of a competitor.” The elements of an action based on s 7(a) are: (a) a false or misleading statement; (b) tending to discredit the business, wares or services of a competitor; and (c) resulting damage [49]. The three part RJR-MacDonald [1994] 1 SCR 311 test for interlocutory injunctions requires showing (i) a serious question to be tried on the merits; (ii) irreparable harm if the injunction is not granted; and (iii) the balance of convenience favours the granting of the injunction [41].

Putting these tests together, the first branch of the RJR-MacDonald test requires an assessment of the substantive elements of s 7(a), albeit only to show that a “serious question” arises on the facts. McHaffie J’s analysis began with a very useful review of the law relating to s 7(a) as it applies to cease and desist letters [47]-[57], showing that in broad terms, “it is clear that cease and desist letters that assert patent infringement may form the basis for an action under subsection 7(a), and that an injunction may issue in the appropriate case to enjoin the issuance of such letters” [57].

McHaffie J’s subsequent discussion of the specifics of the “serious question” branch provides further useful analysis of all three elements of s 7(a).

Privilege and Cease and Desist Letters
On the falsity element, Fluid had enclosed a copy of the Statement of Claim against Exaltexx in its cease and desist letters to the suppliers. Fluid argued that the reference to the Statement of Claim cannot form the basis of a claim under subsection 7(a) as the pleading is subject to privilege. McHaffie J rejected this, noting that privilege “does not mean that statements that are contained in a pleading can be repeated out of court with impunity” [61].

Fluid also argued that Business Depot 2008 FC 737 held that the protection given to pleadings is extended to “statements made after litigation has commenced” [64]. McHaffie J disagreed (my emphasis):

[68] Justice de Montigny [in Business Depot] was simply recognizing that subsection 7(a) could not be based on privileged statements, including a report on the commencement of an action, i.e., a statement made after an action has been launched. There certainly does not appear to be any policy basis to allow a plaintiff a wholesale freedom to make false statements outside the scope and requirements of litigation, immune from a claim under subsection 7(a), simply because an action has been commenced.

Aside from this issue of privilege, McHaffie J had little difficulty concluding on the facts that there was a serious question as to whether the allegation that Exaltexx’s suppliers were infringing was false: “Indeed, counsel for Fluid conceded that if all that Panther is doing is supplying hydrochloric acid—which is the only evidence before the Court—they would not have breached the patents” [74].

Remarkably, however, Exaltexx did not meet the very low bar required to establish a serious question as to the falsity of the allegation that Exaltexx’s products themselves were infringing. This was simply because of the remarkably weak and indirect evidence brought to bear on the question by Exaltexx was not enough to carry its burden on the issue [94]. It was for this reason that McHaffie J declined to grant the interlocutory injunction related to statements about Exaltexx’s products.

A scale from informative to very threatening
On the second element of 7(a), discrediting a competitor, McHaffie J noted the distinction drawn by Manson J in Excalibre [281]-[283] between cease and desist letters that are “informative” and those that are “threatening” [51], [98]. Interestingly, while Manson J’s decision on its face appears to draw a binary distinction, McHaffie J at one point described it as a “scale from ‘informative’ to ‘threatening,’” saying that in this case, “Fluid’s letters fall at the ‘very threatening’ end” [117]. (“Very threatening” is a phrase that does not appear in Excalibre.) This strikes me as a welcome refinement of Excalibre. As discussed here, I am not sure that a strict distinction between “informative” and “threatening” letters is sound, which might imply that “informative” letters are shielded entirely; but a scale of severity strikes me as a useful concept, particularly in the context of discretionary relief, such as interlocutory injunction.

In any event, the main question was whether the letters were threatening. McHaffie J stated

[99] The letters sent by Fluid are clearly “threatening” cease and desist letters, as they directly allege infringement, demand that the recipient cease their conduct (paragraph 5), and threaten serious legal action if they do not do so (paragraph 6).

He also noted:

[101] While not determinative, I note that unlike the initial letter sent to Exaltexx, the letters sent to Panther and Hommy Trucking do not invite any discussion or explanation as to why the recipient might not be infringing. Rather, they simply assert infringement based on a wide variety of alleged conduct (much of which the recipients do not undertake) relating to a wide variety of products, and state that Fluid will take legal action if the recipient does not comply with the demand to immediately cease and desist. The seriousness of this threat of legal action was underscored by providing a copy of Fluid’s claim against Exaltexx and GlobalQuimica, which claims $100,000,000 in damages.

These and other comments made by McHaffie J will provide guidance as to how to draft cease and desist letters that avoid falling afoul of s 7(a).

Resulting damage
McHaffie J noted some controversy as to whether it is necessary to prove loss to obtain an injunction — see my discussion here — but he did not need to resolve it [103]. The fact that one supplier, Hommy Trucking, had ceased to do business with Exaltexx was a clearly established fact that allowed McHaffie J to conclude without difficulty that there was a serious question to be tried on this point [105-06].

Fluid argued that there was no evidence with respect to the reaction of one recipient, Panther, to the cease and desist letter. This was ultimately immaterial given that other damages had been established, but McHaffie went on to remark 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.

An interesting issue will arise in a case in which it is clear that the patentee desired and intended the recipients to stop doing business with the defendant, yet it is not proven that any particular supplier has actually ceased to do business. Suppose, for example, that Hommy had notified Exaltexx immediately and Exaltexx had brought an urgent motion before Hommy, or any other supplier, had decided whether to comply. It is arguably perverse to deny the injunction simply because the alleged infringer had managed to act before the letters had had their desired effect. Would it lie in the mouth of the patentee to say it should be allowed to continue sending such letters until the intended harm is actually inflicted? That is a question for another day.

Consequently, McHaffie J held that the “serious question” branch of the RJR-MacDonald test had been satisfied. Tomorrow’s post will consider McHaffie J’s approach to the remainder of the RJR-MacDonald test.

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