Canada: The Ideal Cease And Desist Letter – Informative And Only Covertly Threatening?

The oft-used cease and desist letter ("C&D letter") may have significant implications for both intellectual property ("IP") owner and alleged infringer alike. Although the test for an improper C&D letter may be well-established, there have been relatively few cases where such letters have been held to be improper, and no reported cases dealing with actual quantification of resulting damages. This fact, combined with the reality that interlocutory injunctions remain a difficult remedy to obtain in Canada, may very well mean that IP owners should consider taking the risk of sending out threatening communications to an infringer's customers. In certain circumstances, improper/threatening letters may practically provide IP owners with a remedy that is otherwise unattainable in Canada, and the closest thing to an interlocutory injunction. At the same time, lawyers must be vigilant to ensure IP owners are aware of the risks of sending unlawful cease and desist letters. Lawyers themselves should also ensure compliance with ethical obligations regarding due diligence evaluations that should be conducted prior to sending out any such letters (whether improperly threatening or not).

Analysis

A recent (and perhaps rare) example of an impeacher successfully bringing a misleading advertising claim against an unsuccessful patentee aptly illustrates the particular circumstances that assist in making such a claim. In Excalibre Oil Tools Ltd. v Advantage Products Inc.1, the court found the patentee had violated section 7(a) of the Trade-marks Act by sending overtly threatening letters to Excalibre's mining customers. Section 7(a) states:

7. No person shall

(a) make a false or misleading statement tending to discredit the business, wares or services of a competitor;

The seminal C&D case from the Supreme Court of Canada ("SCC"), S & S Industries Inc. v Rowell2, established the test for section 7(a) as follows:

  1. A false or misleading statement;
  2. Tending to discredit the business, wares or services of a competitor; and
  3. Resulting damage.

Significantly, this SCC decision held that no malice was required for section 7(a) (unlike common law actions of injurious falsehoods and trade libel). The court rationalized that an abusive patentee without malice should not be permitted to avoid the "forthright course" (of actually carrying out a lawsuit) and instead rely on empty threats against a purchaser. The SCC found a section 7(a) violation3 based on a warning notice in a magazine following settlement of an infringement case against a bra wire customer, and warning letters to a customer:

You are hereby advised that unless you inform us within the week that you will immediately cease and desist from the manufacture, sale and use of such flat arcuate wires for use in brassieres, you will leave us with no other alternative but to forward the matter to my Canadian associates for institution of legal proceedings for infringement of the aforesaid patent. Your reply is awaited.

...

that in order that we may best protect our interests, we would be forced to go to the stores and involve them in law suits

The patented products in Excalibre related to mining production accessories (anchors) that assist with pump stability. The court easily characterized the patentee API's letters as "contain[ing] explicit threats of litigation":

API demands Husky immediately cease sourcing the CTA torque anchor. Husky is encouraged to review the attached SOC and assess their own liability in this infringement of API's exclusive rights. ... Should Husky choose to continue along their current path, API will be compelled to amend their litigation to include Husky.

...

The Canadian Patent Act also provides API with similar right [sic] of enforcement against purchasers and as against users of patented torque anchors which are not obtained from authorized sources, including Bronco Energy. ... Unless Bronco Energy advises this office, by May 23rd, of their immediate cessation of the above infringing activities, API will amend their litigation to include Bronco Energy.

Causation, often the more difficult requirement, was also met. Fact witnesses indicated these letters resulted in them no longer purchasing the impeacher CTA's product. "There is an indisputable nexus arising between the impugned letters and resulting loss of business and damage, even if unquantified, to the Excalibre Parties." A significant factor in finding such a nexus was the particular industry. The mining business was characterized as particularly litigation adverse. One customer (interestingly who was not subpoenaed, such that presumably impeacher Excalibre was aware of what he would say in advance) was involved in drilling on native reserves at the time. They testified "they could not afford interruptions in business or bad publicity". Another customer, Husky, appeared to be the "ideal" customer for a section 7(a) claim resulting from a cease and desist letter. Husky (under subpoena) indicated it was "very litigation averse and that its legal strategy was to take the easiest, most non-confrontational route, because the company did not want to spend any money on litigation". Indemnification would not even have changed Husky's decision to stop purchasing the impeacher's product.

Calculation of the actual damages resulting from Excalibre's lost sales over the applicable 8.5 year period are to be determined in a separate reference. As is often the case it is expected, assuming the decision is upheld on the pending appeal, that the parties will settle such quantum issues in advance of a second hearing/summary trial type proceeding. Notably the court refused to include the impeacher's other accessory mining products in the damages reference as these were "far too remote". As part of this analysis, the court was critical of the absence of mitigation efforts regarding these other accessory products.

Aside from the business consequences of threatening your own potential customers, an IP owner may want to evaluate the positives regarding cease and desist letters, and balance this against the risks associated with more strongly worded letters.

Practice Point

Several practical points may be gleaned from the C&D jurisprudence that should be considered.

From an impeacher/infringer perspective:

  • Section 7(a) is the easiest route to control abusive marketing practices by an IP owner whose IP has been found invalid and/or not infringed. As long as the IP owner gives the impression that your customer would be sued, this is sufficient for a false and misleading statement.
  • Alternatives to section 7(a) in the context of misleading advertising require intent/malice/lack of reasonable grounds for believing the statements are true etc. Such alternatives include: defamation, unlawful interference with economic relations, knowingly making false or misleading representations in promoting one's product (per s. 52 of the Competition Act).
  • Where an indemnity is offered and refused (and a customer stops selling the infringer's product in any event), this may damage one's section 7(a) case. Such circumstances may mean that the "pressure from litigation threats" is now removed, and the decision to stop selling was a business decision (as in E Mishan & Sons4); unless there is a special "litigation averse" market (like mining in Excalibre). This may mean an indemnification should only be given to customers you think will actually accept your indemnity and continue to source your products (meaning you will not need the section 7(a) claim in any event once you have successfully invalidated the IP).
  • As a section 7(a) claim is ancillary relief, one may want to bifurcate this entire issue (to a summary trial type proceeding), or simply bifurcate quantum. The latter may be the preferred route for an impeacher, as there may be years of additional delay in obtaining this ancillary relief, making causation even more difficult to prove. Evidence from threatened customers (who were never sued) may also incidentally assist with one's invalidity position – as this may suggest the patentee believed it had a weak patent (ie. by failing to take the "forthright course" per S&S). The court has sternly criticized parties who were unable to settle the outstanding 7(a) issue and required a Summary Trial.5
  • Careful selection of customer witnesses is important, including whether to avoid subpoenaing one's customers and simply rely on paper trails/emails etc. (assuming such materials are otherwise available than through the testimony of customer witnesses). As an example, the court ironically found that it would have inferred causation using a common sense approach, without the reliable evidence from a Canadian Tire employee witness (given the particularly bullying, shrewd conduct of the patentee). Instead, her evidence, "which nobody could have predicted, put an end to it".
  • For purposes of section 7(a) quantification, provide a reasonable expert report (perhaps because the parties expected to settle, the court in E Mishan & Sons criticized the impeacher's financial expert report as "quite unsatisfactory").
  • As to the debate regarding whether damages are required for a section 7(a) cause of action6, this may in fact be a moot point in the context of C&D letters. The impugned letters are usually only written, and likely to be effective prior to/early in litigation against an impeacher/infringer. A patentee is obviously unlikely to send out C&D letters after it has lost its patent case – whether an injunction issued or not7. As such the only "real" section 7(a) remedy in the context of C&D letters is a monetary remedy which would only be awarded where causation and actual damages have been quantified by the impeacher/infringer. Practically one is only seeking a section 7(a) remedy arising from cease and desist letters sent to one's customers where IP has successfully been invalidated and one in fact has suffered consequential damages. From a procedural perspective, an impeacher should ensure they at least provide some evidence of the existence of damages at the "cause of action" stage (and not wait until quantification, if this has been bifurcated), so as to permit the court to infer some resulting loss of business/damage (even if not yet quantified). Such evidence will also certainly assist with the other prongs of the section 7(a) test.
  • Interestingly, the court has also suggested that even where a patent was valid and infringed, an unsuccessful impeacher may still have a section 7(a) claim8 (though notably this appears to be contrary to the S&S line of cases which indicate that part of the "false and misleading" activity is that the patentee alleged its patent was infringed when in fact it was not).

From an IP owner perspective:

  • In order to avoid abusive marketing claims, C&D letters and communications to an infringer's customers must be carefully worded. There is a fine balance between informative/restrained statements (which are acceptable) vs. threatening statements that discredit the infringer and cause the customer to stop buying the infringer's product (which are not acceptable). Harsh words to customers, backed up by litigation against your competitor infringer, are acceptable:

"As these doors were a complete copy of our patented Re-Coil-Away Rolling Rubber Door system, we commenced legal action for patent infringement at that time."9

  • In order to avoid section section 7(a) consequences, be careful not to use veiled threats – these are still abusive. The court in E Mishan & Sons found no direct threat was required by a shrewd patentee. Instead their emails and comments were enough to leave the customer with the "clear impression" they would be sued if they continued to deal with the impeacher's product.
  • Abusive behaviour may in fact be worth the risk to protect your patent on a quia timet basis. A threatening (implicitly or explicitly) C&D letter to an infringer's customers may effectively curtail/limit the infringer's business, without having to actually sue said customers, and without having to obtain an interlocutory injunction against the infringer. Threatened customers who stop buying an alleged infringer's product effectively grants a patentee an interlocutory injunction (or at least a partial injunction depending on the supply chain/market). Even if an IP owner obtains an interlocutory injunction (which continues to be a very difficult remedy to obtain in the Federal Court particularly in patent cases10), there is risk involved as the IP owner is required to give an undertaking regarding damages in any event (to protect the impeacher who was improperly held off the market by an injunction that should never have issued). One may balance the immediate advantages of a threatening C&D letter with the potential liability for a section 7(a) claim years later.
  • In cases where one's IP is found to be invalid, a successful impeacher has several procedural hurdles to overcome in a section 7(a) claim. Even where a threatening C&D letter is used, the damages, and in particular causation, may be very difficult for an impeacher to prove, obviously not having been a party to discussions between IP owner and customers years earlier. There are practical problems with relying on subpoenaed witnesses, where an impeacher may discover for the first time at trial that a customer stopped buying its product simply for business/supply reasons (and not because it was threatened with litigation by an abusive patentee). Such a problem arose for a hose manufacturer impeacher, where the Canadian Tire customer's evidence was:

"You know, even though we talked internally in terms of the stress of the threats, that wasn't the reason why we made the decision"11

This article was also published on SLAW online magazine.

Footnotes

1 2016 FC 1279 (Justice Manson) [under appeal A-460-16]

2 [1966] SCR 419 at 424 ("S&S")

3 Actual quantum for the 7(a) violation was deferred to a separate reference, which appears to have settled.

4 E Mishan & Sons, Inc v Supertek Canada Inc, 2016 FC 986 (Hughes)

5 E Mishan & Sons, Inc v Supertek Canada Inc, 2016 FC 986 (Hughes)

6 See for example, Professor Siebrasse's concern that one should not have to wait for actual damage to bring a section 7(a) case [http://www.sufficientdescription.com/2016/12/are-damages-element-of-claim-under.html].

7 Although such an injunction was ordered (enjoining a patentee from making further statements it had made 3 years ago to customers alleging its patent was infringed), after the court found the patent was invalid and not infringed. (Riello Canada Inc v Lambert (1986) 9 CPR(3d) 324 (FCTD))

8 Uview Ultraviolet Systems Inc v Brasscorp Ltd, 2009 FC 58 (O'Keefe) [regarding a press release advising of the pending infringement action; the 7(a) claim was denied because existence of damages was not proven]; see also M.K. Plastics Corp. v. Plasticair Inc.2007 FC 574

9 M&I Door Systems Ltd v Indoro Industrial Door Co Ltd (1989), 25 CPR (3d) 477 (FCTD), (Cullen)

10 For example, Tearlab Corporation v I-Med Pharma Inc. 2017 FCA 8 has reinforced the difficulty in obtaining injunctions in patent infringement cases because "patent rights are economic in nature" and therefore damages are quantifiable – there is no irreparable harm.

11 E Mishan & Sons, Inc v Supertek Canada Inc, 2016 FC 986 (Hughes)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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