• Patent Infringement Accusations: Discretion is the Better Part of Valor (and the Best Part of a Patentee's Litigation Avoidance Strategy)
  • June 19, 2003 | Author: Michael A. Cicero
  • Law Firm: Womble Carlyle Sandridge & Rice - Atlanta Office
  • Persons fortunate enough to have read Aesop's Fables as schoolchildren may remember that many of those fables ended with a one-line "moral of the story" to guide the reader through life. In legal matters, a familiar proverb can sometimes serve the same function, distilling the result of complex legal analyses into a single line that drives a point home better than any legalese ever could. Litigation avoidance policy of patent owners lends itself to just such a resolution, to wit: "Discretion is the better part of valor." Popularized by Shakespeare, this proverb has been explained as: "It is better to be prudent than merely courageous."1

    When confronted with the situation of potentially infringing activity by a competitor, patentees2 would do well to keep this proverb in mind. Understandably, a competitor's infringement can cause distress and anger, and in righteous indignation, the patentee may feel the need to "vent" about the situation by publishing infringement accusations either directly to the potential infringer or to other persons in the trade. However, the patentee should refrain from doing so without first seriously considering traps for the unwary. Infringement accusations directed at the potential infringer frequently result in declaratory judgment lawsuits. Furthermore, accusations published to other persons in the trade can lead to charges of trade libel and/or tortious interference with contractual and business relations. Either scenario casts the patentee in the role of "Defendant," perhaps in a courtroom far from home.

    How, then, to address the potential infringement? The patentee should contact its counsel to assess its options and not take matters into its own hands. The attorney could craft a letter that notifies the competitor of the patent but that stops short of creating a reasonable apprehension on the part of the competitor that it will be sued. Alternatively, given timing considerations and the state of the law, the patentee may elect to first file an infringement lawsuit in the most convenient forum available and then either work toward a settlement or proceed with the litigation.

    In terms of statements to other persons in the trade, a patentee is protected from liability in notifying others of a competitor's activity that, in good faith, is felt to be an infringement. However, if that accusation is proven wrong, the patentee is vulnerable to the accusation that the patentee published its statements in bad faith. If the competitor succeeds in persuading a jury that bad faith is present, the patentee faces legal claims of trade libel and tortious interference with contractual or business relations, which could result in punitive damages. Therefore, before publishing any infringement accusations to the trade, the patentee must determine whether the benefits of doing so outweigh the potential risks.

    Avoidance of Declaratory Judgment Lawsuits

    A "declaratory judgment action" is essentially a "preemptive strike." A person or organization faced with an adverse potential legal claim need not be forced to sit back and wait for a lawsuit where it will be a defendant. Under the appropriate circumstances, it may elect to go on the offensive as a plaintiff, and file suit to ask the court to resolve the legal issues that are presented by the potential claim, and to hold that the plaintiff is not liable on the potential claim. For instance, an insurance company may bring a declaratory judgment action, asking a court to declare that the company is not liable for a claim under the policy in question.

    Under the Federal Declaratory Judgment Act,3 the same type of relief is potentially available to persons accused of patent infringement. Availability of declaratory relief turns on whether there is an "actual controversy" within the meaning of the Act. Two requirements must be met before a court can find that an "actual controversy" exists; specifically, there must be:

    "(1) an explicit threat or other action by the patentee, which creates a reasonable apprehension on the part of the declaratory plaintiff that it will face an infringement suit, and (2) present activity which could constitute infringement or concrete steps taken with the intent to conduct such activity."4

    Regarding the first requirement, "[t]he reasonableness of a party's apprehension is judged using an objective standard."5 "To invoke the court's declaratory judgment jurisdiction, a plaintiff must show 'more than the nervous state of mind as a possible infringer,' but 'does not have to show that the patentee is 'poised on the courthouse steps.'"6 Under this objective standard, the court "must first look for any express charges of infringement, and if none, then to the 'totality of the circumstances.'"7 If there is an explicit charge, "'certainty has rendered apprehension irrelevant, and one need say no more'" - the first requirement is easily satisfied.8

    The second declaratory judgment requirement simply looks to whether the declaratory judgment plaintiff's present activities could be considered an infringement. "[A]n actual controversy cannot be based on a fear of litigation over future products."9 This is a plain requirement that is usually not contested in cases analyzing declaratory judgment jurisdiction. In fact, the parties frequently stipulate to this requirement, leaving the first requirement as the sole issue fought over.10 The second requirement is scrutinized more closely when the patentee tries to dismiss the action by filing a covenant not to sue the declaratory judgment plaintiff.11

    In the absence of an express charge of infringement, there are no bright-line rules to determine whether a party's apprehension of getting sued is reasonable, though examples do provide some guidance. In one case, a letter stating that "your product falls literally within the language of a least claim 1 of the . . . patent whereby some type of licensing arrangement would be desirable" was held not to cause a reasonable apprehension of suit. Instead, it was viewed by the court as an attempt to "open legitimate business negotiations."12 On the other hand, if the same type of letter is sent under circumstances where the sender and recipient have a litigious history with one another, it could very well create a reasonable apprehension.13

    Thus, rather than directing an express infringement accusation to its competitor, the patentee should consult with its counsel to determine whether a letter to the competitor is warranted, and if so, how the letter should be worded, with a view toward minimizing the chances of triggering a valid declaratory judgment action by the competitor.

    Alternatively, circumstances may favor the filing of a lawsuit to resolve the situation. It has been indicated in a prior article that triggering a valid declaratory judgment action means that the patentee's potential infringement claim would have to be brought as a counterclaim, which would not necessarily be decided under Federal Circuit law, thus injecting an additional layer of uncertainty into the litigation.14 The same result could occur if the competitor wins the "race to the courthouse" and decides to assert claims against the patentee other than declaratory judgment. Once the patentee files the lawsuit first, it can then attempt to settle the dispute without having to sacrifice its choice of forum or application of Federal Circuit law to its patent infringement claim. In such a situation, the patentee has not avoided litigation altogether, but has at least avoided being the defendant.

    Avoidance of Tort Law Claims by the Competitor

    In making statements to members of the trade about potential patent infringement, the patentee is shielded from tort liability provided that the statements are made in good faith. "[F]ederal patent law bars the imposition of liability for publicizing a patent in the marketplace unless that plaintiff can show that the patentholder acted in bad faith."15 In fact, the assertion of patent rights is presumed to have been made in good faith, and only affirmative evidence of bad faith can overcome that presumption.16

    The Federal Circuit has not provided a definition of "bad faith" for this context, though it has cited to fact patterns that would meet the threshold:

    Exactly what constitutes bad faith remains to be determined on a case by case basis. Obviously, if the patentee knows that the patent is invalid, unenforceable, or not infringed, yet represents to the marketplace that a competitor is infringing the patent, a clear case of bad faith representations is made out.17

    If the patentee's statements in the marketplace are proven incorrect, and if the competitor proves bad faith in the making of those statements, the patentee can face liability under federal law, specifically, for trade libel under § 43(a) of the Lanham Act.18 Liability under that statute is premised upon establishing the following elements, in addition to the bad faith requirement:

    (1) [The patentee] made a false or misleading statement in a commercial advertisement about [its] services; (2) the statement(s) actually deceived or had a tendency to deceive a substantial segment of its audience; (3) the deception was material, in that it was likely to influence the purchasing decision; (4) [the patentee] caused [its] false statement(s) to enter interstate commerce; and (5) [the accused infringer] has been or [is] likely to be injured as a result of the false statement(s), either by direct diversion of sales from [itself to the patentee] or by a loss of goodwill associated with [its] services.19

    The patentee, in the event bad faith is shown, also faces liability under state law for tortious interference with contractual or business relations. This tort "'is now recognized virtually everywhere as to any contract, regardless of its character.'"20 "[S]tate law governs the maintenance of orderly contractual relations and this function is not preempted merely because patents and patent issues are presented in the substance of those contracts."21 The precise requirements for this cause of action may vary to state to state, but to illustrate, a cause of action for tortious interference under Georgia law requires, in addition to bad faith, proof that the patentee:

    (1) acted improperly and without privilege, (2) purposely and with malice with the intent to injure, (3) induced a third party or parties not to . . . continue a business relationship with [the accused infringer], and (4) for which [the accused infringer] suffered some financial injury.22

    In addition to an award of actual damages, this state law tort carries the penalty of punitive damages if the interfering party is found to have acted willfully.23

    Interestingly, patentees are not the only parties who can be subject to liability under federal and state law arising from statements concerning patents. Competitors who make false statements about a patent to the trade, such as a false statement that the patent is invalid, can be held liable both under § 43(a) of the Lanham Act and under state tortious interference law.24

    The same circumstances that give rise to tort liability can also give rise to declaratory judgment jurisdiction. For instance, a competitor who becomes aware of a patentee's statements in the marketplace, or even in a patent application document, that it is committing infringement, can develop a "reasonable apprehension" of suit that would support a declaratory judgment action, even though the accusations were not directed to the competitor itself.25

    In view of the risk that a good faith presumption may be overcome in litigation, a patentee should give serious pause before circulating any statements in the trade accusing a person or organization of patent infringement. The patentee should also exercise complete control over dissemination of such statements by any sales representatives and issue instructions to prevent undesired accusations. On the other hand, the patentee may have business reasons to inform the marketplace of its patent, as well as the activity causing concern. Before doing so, however, it should consult with counsel to determine how to minimize liability risks. For instance, before issuing any marketplace statement concerning infringement, the patentee may benefit from a formal opinion by a patent attorney that infringement does in fact exist, since such an opinion may defeat any accusation that subsequent infringement statements were made in bad faith.

    Patentees faced with potential infringement should not take matters into their own hands by publishing accusations to the marketplace, or to the accused infringer, without first consulting their attorneys, lest they find themselves defendants.

    Discretion is the better part of valor.

    1 The American Heritage® Dictionary of Idioms by Christine Ammer, © 1997 by the Christine Ammer 1992 Trust. Shakespeare wrote, as a line for his character Falstaff: "The better part of valour is discretion; in the which better part, I have saved my life." William Shakespeare, The First Part of King Henry the Fourth act 5, sc. 4.

    2 For the remainder of this article, the term "patentee" will be used as a short-hand reference for a patent owner, regardless of whether ownership is acquired through inventorship or instead through an assignment from the inventor(s).

    3 28 U.S.C. §§ 2201 & 2002 (1993).

    4 Hunter Douglas Inc. v. Harmonic Design, Inc., 153 F.3d 1318, 47 USPQ2d 1769, 1774 (Fed. Cir. 1998) (citations omitted; italics in original).

    5 Vanguard Research, Inc. v. PEAT Inc., 64 USPQ2d 1370, 1374 (Fed. Cir. 2002).

    6 Id. (quoting Phillips Plastics Corp. v. Kato Hatsujou Kabushiki Kaisha, 57 F.3d 1051, 1053-54 (Fed. Cir. 1995)).

    7 Shell Oil Co. v. Amoco Corp., 970 F.2d 885, 888, 23 USPQ2d 1627, 1630 (Fed. Cir. 1992) (quoting Arrowhead Indus. Water, Inc. v. Ecolochem, Inc., 846 F.2d 731, 736, 6 USPQ2d 1685, 1689 (Fed. Cir. 1988)).

    8 Genentech Inc. v. Eli Lilly & Co., 998 F.2d 931, 27 USPQ2d 1241, 1244 (Fed. Cir. 1993) (quoting Arrowhead, supra).

    9 Amana Refrigeration, Inc. v. Quadlux Inc., 172 F.3d 852, 50 USPQ2d 1304, 1306 (Fed. Cir. 1999).

    10 See, for example, Ryobi Am. Corp. v. Peters, 815 F.Supp. 172, 26 USPQ2d 1878, 1880 (D.S.C. 1993) ("The parties agree that the [second] prong of the test is satisfied. . . . Therefore, the focus of the inquiry is on the [first] prong of the test.").

    11 "[A] patentee defending against an action for a declaratory judgment . . . can divest the trial court of jurisdiction over the case by filing a covenant not to assert the patent at issue against the putative infringer with respect to any of its past, present, or future acts . . . ." Super Sack Mfg. Corp. v. Chase Packaging Corp., 57 F.3d 1054, 35 USPQ2d 1139, 1143 (Fed. Cir. 1995), cert. denied, 516 U.S. 1093 (1996). However, a mere present intention on the part of the patentee to refrain from suit is not enough to divest the court of jurisdiction. Vanguard, 64 USPQ2d at 1374.

    12 Ryobi, 26 USPQ2d at 1880.

    13 Goodyear Tire and Rubber Co. v. Releasomers Inc., 824 F.2d 953, 3 USPQ2d 1310, 1312 (Fed. Cir. 1987).

    14 Michael A. Cicero, "In the Wake of Holmes v. Vornado: Patent and Copyright Jurisdiction Now Scattered Throughout Court Systems," Southeast Tech Wire (Aug. 20, 2002).

    15 Hunter Douglas, 47 USPQ2d at 1782; Concrete Unlimited Inc. v. Cementcraft, Inc., 776 F.2d 1537, 1539, 227 USPQ 784, 785 (Fed. Cir. 1985) (Patentee "did only what any patent owner has the right to do to enforce its patent, and that includes threatening alleged infringers with suit.").

    16 C.R. Bard, Inc. v. M3 Sys., Inc., 157 F.3d 1340, 1369 (Fed. Cir.), reh'g denied, 161 F.3d 1380 (Fed. Cir. 1998), cert. denied, 526 U.S. 1130 (1999).

    17 Zenith Elecs. Corp. v. Exzec Inc., 182 F.3d 1340, 51 USPQ2d 1337, 1348 (Fed. Cir. 1999).

    18 15 U.S.C. § 1125(a) (1999).

    19 JTH Tax, Inc. v. H&R Block Eastern Tax Svcs., Inc., 128 F.Supp.2d 926 (E.D. Va. 2001); Zenith, 51 USPQ2d at 1343.

    20 Dow Chem. Co. v. Exxon Corp., 139 F.3d 1470, 46 USPQ2d 1120, 1127-28 (Fed. Cir. 1998) (quoting Prosser and Keeton on the Law of Torts 981 (1984)).

    21 Id.

    22Hayes v. Irwin, 541 F. Supp. 397, 429 (N.D. Ga. 1982), aff'd without opinion, 729 F.2d 1466 (11th Cir. 1984), reh'g denied, 733 F.2d 908 (11th Cir. 1984), cert. denied, 469 U.S. 857 (1984).

    23 See, for example, O.C.G.A. § 51-12-5.1 (2001).

    24 Rodime PLC v. Seagate Tech., Inc., 174 F.3d 1294, 50 USPQ2d 1429 (Fed. Cir. 1999).

    25 Champion Int'l Corp. v. Tech. Dev. Corp, 24 USPQ2d 1077, 1078 (S.D. Ohio 1992) (charge of infringement in a Petition to Make Special filed during prosecution of the patent application held to provide a "reasonable apprehension" of a lawsuit).