Thursday, March 7, 2024

Trademarks Act 7(a) Unjustified Threats Claim Fails on Second Branch

Valley Blades Ltd v Usinage Pro-24 Inc (Nordik Blades) 2023 FC 1749 St-Louis J

2,856,940 2,965,426 2,992,233 / Segmented Snow Plow Blades

Valley Blades and Nordik Blades are direct competitors in the market for snowplow blades [206]. Valley Blades brought a declaratory action seeking to have Nordik’s 940 patent declared invalid, and Nordik responded with an action claiming that Valley Blades infringed Nordik’s 426 and 233 patents. The patents are all related — the 426 is a divisional of the 940 and the 233 is a divisional of the 426 [46] — and the actions were consolidated Patent [46]. The action was bifurcated and infringement was conceded [7].

St-Louis J found that all the asserted claims were obvious in a very straightforward decision which turned entirely on the facts [88]–[174]. A previous post discussed the two other validity attacks, based on overbreadth and wilful misleading. This post deals with Valley Blades claim under 7(a) of the Trademarks Act for damages for business lost as a result of demand letters sent by Nordik to Valley Blades’ clients. Unusually, in this case the claim was dismissed in part because the demand letter was found not to discredit Valley Blades wares, even though the allegations of infringement were in fact false.

Subsection 7(a) of the Trademarks Act provides that “No person shall make a false or misleading statement tending to discredit the business, goods or services of a competitor.” The essential elements of such an action are (a) a false or misleading statement; (b) tending to discredit the business, wares or services of a competitor; and (c) resulting damage: S&S Industries [1966] SCR 419, 424. As McHaffie J noted in Fluid Energy 2020 FC 81 [49], quoted at [233], “It has long been recognized that a false allegation that a competitor infringes a patent may fall within subsection 7(a). This is so even if the falsity of the allegation may not be established until later, such as after a finding that the patent is invalid.” S&S Industries was itself such a case.

There are five key cases, all dealing with communications to customers of a competitor alleging that the competitor’s product infringed the patentee’s patent. In S&S Industries [1966] SCR 419 the SCC held the patentee liable pursuant to 7(a) for losses after a trial holding the patent invalid. The central holding is that there is no requirement of malice, so that an action under 7(a) may be sustained even though the falsity of the allegation — that is, a finding that the patent is invalid — is not established until later. Then, in M&I Door Systems (1989), 25 CPR (3d) 477 (FCTD) 523–24 Cullen J found the patent at issue to be invalid, but dismissed a counterclaim based on 7(a) on the basis that the cease and desist letters were “more informative than threatening” and apparently also because the allegation of infringement was “sincerely believed.” Cullen J cited no authority for this distinction—indeed, he cited no authority at all, not even S&S Industries. He decision seems to to be at odds with S&S Industries, as discussed here. There is no certainly no basis for the distinction between threatening and informative letters in S&S Industries, and the reference to the patentee’s sincere belief is clearly inconsistent with the SCC decision.

The distinction between threatening and informative letters was then picked up by Hughes J in Supertek 2016 FC 986 [10]–[11] and Manson J in Excalibre Oil Tools 2016 FC 1279 [282] (discussed here), though in both cases the letters at issue were held to be threatening, so that the second branch of the test was satisfied: see here. (In Excalibre, Manson J held the patentee liable under 7(a), while in Supertek, Hughes J that the third branch of the test, causation, had not been satisfied: see here.) Most recently, in Fluid Energy 2020 FC 81, the defendant in an infringement action sought an interlocutory injunction prohibiting the patentee from sending cease and desist letters to its suppliers, on the basis that the letters were actionable under 7(a). As discussed here, McHaffie J undertook a through review of the relevant law, again picking up the distinction between informative and threatening letters by way of Manson J’s Supertek decision. On the facts, he found the letters to be threatening and granted the injunction.

At this point, the distinction between threatening and informative letters seems to be established, though it is difficult to reconcile with S&S Industries, and the only case to actually dismiss a 7(a) action on this basis is M&I Door Systems. As I’ve said in posts on Excalibre and Supertek, here and here, I am not a proponent of this distinction.

The problem is to balance two competing concerns. If the patent is invalid, it is wrong to allow the patentee to use a cease and desist letter to divert business away from a competitor. If the patentee does so, it is not obtaining any legitimate reward for innovation — if the patent is not valid, it has not delivered the quid pro quo of a new and useful invention. If the litigation system were perfect, the competitor could bring a declaratory action for invalidity as soon as the allegation was made, and have the patent instantaneously declared invalid. If the patent is invalid, the business gained by the patentee from its cease and desist letter is simply exploiting the delays inherent in a real world litigation system, while at the same time chilling the legitimate competition which is the lifeblood of a healthy economy.

On the other hand, if the patent is valid, the patentee is entitled to those sales, and the customers should made aware that they exposing themselves to liability by purchasing potentially infringing goods. The problem is to try to balance the risk of illegitimate chilling of competition against the interest of both the patentee and the customers in the customer being made aware of the risk of infringement.

One approach is to hold the patentee liable for threatening letters but not for informative letters. This is appealing because delivering information about the potential for infringement is the socially beneficial aspect of the cease and desist letter.

However, this is not a satisfactory solution. If the patent is not valid and the letter diverts trade away from a legitimate non-infringing competitor, then the social harm arises, no matter how politely the letter is phrased. And any letter that conveys the necessary information — that the competitor’s product potentially infringes — will have a chilling effect, no matter how politely it is phrased. Any customer who consults a lawyer will be reacting to the prospect of a lawsuit, not to the tone of the letter.

As I have noted in previous posts, here and here, the problem of balancing these legitimate interests in the face of uncertainty over the merits is very similar to the problem faced by courts in granting an interlocutory injunction. In the context of an interlocutory injunction, if the injunction is granted and it ultimately turns out that the plaintiff’s rights are not vindicated, the plaintiff will be strictly liable on the undertaking for any loss to the defendant from having been enjoined for exercising what turn out to have been its legitimate rights.

In my view, the same solution should be adopted in this context. If the patent is ultimately determined to be invalid, a patentee should be strictly liable to its competitor for any lost sales caused by an allegation of infringement made known to a customer or other third party, which causes its competitor to lose sales, whether or not the allegation is made in good faith. Liability should not turn on whether the letter is phrased politely or aggressively, or whether the threat is direct or implicit. If the patentee is confident in the validity of its patent, it can go ahead and send the cease and desist letters to its competitor’s customers, secure in the knowledge that it will ultimately prevail. If it is less confident in the validity of its patent, it can refrain from sending such letters, and instead sue the competitor itself for infringement. If the patentee prevails in that lawsuit, it can get damages for the sales that it would have made. No doubt damages are not a perfect substitute for the sales themselves, but they are a reasonable substitute, and a patentee with a weak patent should not expect perfection. Confining a patentee with a weak patent to damages is surely worth it when the alternative is to allow the patentee to exploit the delays in the litigation system to extract unjustifiably high prices on the basis of an invalid patent.

With all that said, back to the case at hand.

Two statements were at issue. The second communication was a “Notice of patent infringement” sent to a number of Valley Blades’s customers after the patent was issued, threatening to sue “all entities who are purchasing or selling” infringing copies, ie the end-users themselves. In this context, St-Louis J discussed the distinction between informative and threatening letters [235]–[239]. She noted that it was unclear whether this distinction went to the first element (falsity) or second element (tending to discredit), but she in any event held that the Notice was threatening as it directly alleged infringement and theatened legal action [240]. She consequently held that both the first [240] and second elements of the test were satisfied [244]: the Notice was false, given that the patent was invalid, and discredited Valley Blades product by threatening infringement. This much is in line with the cases such as Excalibre and Supertek.

The first communication was a demand letter sent by Nordik to Valley Blades prior to the issuance of the patent, alleging that some of Valley Blades’ products were “exact copies” of Nordik’s product and would infringe the patent once granted [209]. This letter was also sent to one of Valley Blades major customers [209], with the intent of influencing that customer to buy Nordik’s product instead [218]. Ultimately the customer ordered from Nordik, even though Valley Blades offered a steep discount [219].

St-Louis J held this was not enough to establish Valley Blades’ claim under s 7(a). The first element was satisfied, as the statement was indeed false, given that an invalid patent cannot be infringed. But St-Louis J held that the second element was not satisfied. She held that there was “no evidence that Valley Blades’ clients have retained a bad impression of Valley Blades following Nordik Blades’ actions,” and “Valley Blades has not convinced me that the Demand Letter tended to discredit its product or business” [221].

St-Louis J’s analysis on this point was very brief — a single paragraph, after reviewing the facts [221] — and difficult to follow. She referenced the distinction between threatening and informative letters, but it is not clear what role, if any, it played in her reasoning. She found that the second branch was not satisfied because it was not established that the recipients had formed a “bad impression” of the product. This could be taken to imply that she has interpreted “disparagement” in 7(a) as requiring that the communication results in the recipient thinking less of the quality of the wares. If so, that is contrary to S&S Industries, which makes it clear that an allegation that the wares infringe a patent can “disparage” the wares, even without calling the technical merits of the goods into question. Moreover, I don’t see any substantial difference between the letters at issue in this case and those that were found to be threatening in Excalibre and Fluid Energy. Perhaps some distinction might be drawn, but none is immediately apparent, and St-Louis J did not attempt to draw any distinction. (Note that in Supertek the communications were oral.)


St-Louis also held that the third element, resulting damages, had not been established in respect of either the first or second communication.

In respect of the first communication, it was established that the letter was intended to induce the customer to buy Nordik’s product instead of Valley Blades’ product [218], and the customer did indeed purchase Nordik’s product, even though Valley Blades offered a steep discount [219] for a product which Nordik itself stated was a “copy” of Nordik’s product. This did not satisfy St-Louis J that there was a causal link between the letter and the decision to purchase Nordik’s product. This strikes me as an extraordinarily high evidentiary bar.

On the second communication, after receiving the Notice, one of Valley Blades customers returned a product that it had already received — the EconoFlex-M blades — in order to avoid any litigation risk [245]–[246]. However, Nordik argued that Valley Blades had not lost business because Township had accepted a substitute Valley Blades product. In light of this, St-Louis J held that she was not persuaded that Valley Blades had established damages. As discussed here, I am inclined to think that substantial damages should not be an element in the tort itself. In this case, it is clear that Valley Blades had to stop selling one product, and that should be enough. The quantum of the harm should be left to damages inquiry, rather than being used as a substantive threshold. That is particularly important when the harm is prospective, because if substantial damages are an element of the tort, an injunction cannot be granted. That is why the better view is that only potential damage is required, as Manson J noted in Excalibre [286].

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