14 August 2016

Another Australian Patentee Bitten By ‘Unjustified Threats’ Provisions

AccuseUnder section 128 of the Australian Patents Act 1990, a person or company that feels they have been unjustifiably threatened with patent infringement proceedings can take legal action seeking an injunction to prevent the threats from continuing, and the recovery of any damages sustained as a result of the threats.  The law particularly contemplates circumstances in which a patent holder seeks to inhibit competition by making vague or dubious claims, such as ‘by means of circulars, advertisements or otherwise’ as well as by more conventional means, such as cease-and-desist letters.
I am not a fan of the current unjustified threats provisions, at least not as they have been repeatedly interpreted by the Australian courts.  They can be successfully invoked in any case in which it ultimately turns out that a patent is invalid or not infringed, regardless of how objectively reasonable the patentee’s original belief may have been.  The law therefore does not particularly target bad actors such as ‘patent trolls’.  There is a very limited ‘safe harbour’ in section 131, according to which ‘the mere notification of the existence of a patent, or an application for a patent, does not constitute a threat of proceedings for the purposes of section 128.’
As a result, the unjustified threats provisions provide an accused infringer with an effective trigger for invoking full-blown, time-consuming and expensive proceedings in the Federal Court of Australia on infringement and validity of a patent at the merest hint of an allegation of infringement by the patentee.
A recent judgment in CQMS Pty Ltd v Bradken Resources Pty Limited [2016] FCA 847 reconfirms the position that any allegation of infringement which eventually turns out to have been incorrect (no matter how reasonably and sincerely believed) will be treated as an unjustified threat under the Australian law.  The case particularly highlights the difficulties inherent in drafting initial letters to potential infringers without risking exposure to subsequent proceedings for making unjustified threats. 
Patent attorneys and IP lawyers, who are commonly called upon to prepare such letters, should therefore take particular note, as should patentees who might otherwise feel inclined to make initial allegations without obtaining appropriate legal advice.

Initiating a Dispute by Issuing a Threat

CQMS sued Bradken for infringement of two patents (one standard, one innovation).  As is usual, Bradken cross-claimed for invalidity.  About 80% of the judgment deals with these substantive aspects of the case, in which the CQMS patents were found to be valid, but not infringed by Bradken. 
The judge (Dowsett J) then turned to the issue of unjustified threats, which had been raised by Bradken.  Under the Australian law, as discussed above, the judge found (at [159]) that his ‘conclusion that there has been no infringement means that the threats were unjustified.’
The patent attorneys engaged by CQMS had initially drafted and sent a very typical letter of demand, setting out relevant facts concerning the patents, the legislation and Bradken’s conduct which was said by CQMS to infringe its patents.  The letter asserted the position of CQMS that such conduct entitled them to relief from a court, and set out various demands.  The interesting thing about it, however, is that after the list of demands, the letter concluded by saying (see [163]):
Litigants are required to comply with the requirements of the Civil Dispute Resolution Act 2011 (Cth) to take genuine step[s] to resolve a dispute prior to commencing proceedings in the Federal Court of Australia.
This letter constitutes our Client’s genuine steps to resolve this dispute.
Our Client otherwise reserves all of its rights.

On this basis, CQMS argued that the letter did not constitute a ‘threat’.   The judge disagreed, and found that in all other respects the letter comprised a threat which was, by definition in view of the finding of non-infringement, groundless and unjustified.  However, two subsequent letters from the applicant’s solicitors were found to comprise ‘genuine steps’ to resolve the dispute.

The Cost of Unjustified Threats

The relief for a proven case of unjustified threats is the damages arising from the threats.  In many cases, the threats themselves may cause the accused infringers little or no demonstrable harm, and thus the available damages will often be negligible.  In this particular case, however, CQMS also took steps that effectively notified Bradken’s customers of the alleged infringement.  As a result, it is possible that quantifiable damage may have been sustained to Bradken’s business interests.  The quantification of damages has not yet been considered by the court, and has been stood over for further directions.

Unjustified Threats v Civil Dispute Resolution – A Catch-22?

The easiest way for a patent owner to avoid the risk of making unjustified threats is not to make any threats at all!  At one extreme this can be achieved by leaving a competitor alone, even if they appear to be infringing the patent.  At the other extreme, it could mean commencing infringement proceedings immediately, without issuing any kind of advance threat or warning whatsoever.  As I have noted previously, there is earlier judicial authority for the proposition that this is exactly the course of action that the (common) law prefers.
However, the existence of the Civil Dispute Resolution Act suggests that the Parliament has determined that parties involved in civil disputes should endeavour to work out their differences between themselves before imposing upon the courts.
The difficulty is that a party cannot take genuine steps to resolve a dispute until there is a dispute to resolve.  In other words, until somebody picks a fight there is nothing to discuss.  But by picking the fight, the patentee risks being found to have made unjustified threats.  The present case demonstrates the point well – the initial ‘fight-picking’ letter was found to comprise an unjustified threat, while the subsequent exchanges between the parties, prior to the commencement of litigation, were found to constitute genuine steps to resolve the dispute.

Conclusion – Follow the UK Path of Reform?

It is notable that the UK has been examining a similar issue, and there is currently legislation pending to reform that country’s equivalent ‘groundless threats’ provisions.  While the UK law has, since 2004, protected patentees from groundless threats proceedings initiated by primary infringers (i.e. manufacturers and importers) this has not resolved all stakeholders’ concerns.  As a 2015 UK Law Commission report accompanying the proposed reform legislation explained:
The current law also drives cases to court. Although the Civil Procedure Rules are designed to encourage disputing parties to resolve their differences between themselves, groundless threats law encourages the parties to sue. This happens in two ways. First, the rights holder may decide to issue a “defensive writ” to avoid a potential groundless threats action. Alternatively the recipient may issue an action for groundless threats rather than attempting to resolve the dispute.
The proposed legislation, which is currently before the UK Parliament, will (if passed) expand the ‘safe harbour’ to encompass a defined category of ‘permitted communications’ which are made for one or more ‘permitted purposes’.  While it will remain risky to make express threats against secondary infringers (e.g. distributors, users or retailers of allegedly infringing products), the reforms are designed to extend significantly the protections against groundless threats proceedings to encompass a range of communications that may facilitate dispute resolution without litigation, but which might nonetheless cause a recipient to feel threatened.
In my opinion, the Australian unjustified threats provisions are overdue for review and reform.  The approach that is being followed in the UK appears to provide a useful model, both in its existing ‘primary infringers’ provisions, and in its proposed ‘permitted communications’ safe harbour.


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