08 February 2015

‘Unjustified Threats’ Provisions: A (Tarnished) Silver Bullet for Trolls?

Angry bulletIn Australia, if somebody threatens you with patent infringement proceedings, you can sue them for making ‘unjustified threats’.  If you win, you can be awarded not only your costs of the proceedings (i.e. what the Americans call ‘fee shifting’, and we call ‘business as usual’ here in Australia) but also an injunction to prevent continuing threats, and damages in compensation for any harm you can show has been done to you as a result of having been accused of infringing a patent.

This could be great news if you receive a letter from some shady patent-owner with a dubious claim, whom you suspect is just trying to shake you down for a quick settlement in order to avoid the expense of possible full-blown, time-consuming and expensive proceedings in the Federal Court of Australia on infringement and validity of the patent.

Unfortunately, however, the ‘unjustified threats’ provisions do not specifically target bad actors such as ‘patent trolls’.  As a result, invoking the right to sue somebody for making (allegedly) unjustified threats is likely to lead to full-blown, time-consuming and expensive proceedings in the Federal Court of Australia on infringement and validity of the patent – and I have written previously about cases in which this is exactly what has happened.

In my opinion, a balanced approach to dealing with dubious threats made by opportunistic patent-owners offers a genuine means of dealing with the ‘troll issue’ – not just in Australia, but in the US and elsewhere.

However, what we have at present is not balanced.  The existing ‘unjustified threats’ provisions adversely impact patent-owners who are acting in good faith.  They are also counter to the wider public interest, in that they provide an incentive for patentees to ‘sue first and ask questions later’ (contrary to the intent of the Civil Dispute Resolution Act 2011).  So what is the value of the ‘unjustified threats’ provisions in the Patents Act 1990, and should they be reformed to improve the balance, and make them more effective?

Getting the Balance Wrong

Providing a right to sue someone for making unjustified threats of patent infringement proceedings could be a great mechanism for accused infringers to address manifestly baseless allegations of patent infringement, thereby restricting the incentive for patent holders to make speculative, anticompetitive, or just plain extortionate threats.

But the Australian provisions do not draw the line at such cases (see below for a summary of the actual legislation).

You have the right to sue the person who has made the threats even if they have a pretty sound case, i.e. good reason to believe that their patent is valid and that you may well be infringing it.  If you do sue them for ‘unjustified threats’ their best course of action is likely to be a cross-claim that you are, in fact, infringing their patent.  In response to which, your best course of action might well be to counterclaim that their patent is invalid.

The end result, then?  Full-blown, time-consuming and expensive proceedings in the Federal Court of Australia on infringement and validity of the patent.

Now suppose you ignore, or deny, the allegations made in the threat, and the patent-owner then commences proceedings for infringement?  Well, then you can still bring a cross-claim alleging that the original threats were unjustified, in addition to your right to cross-claim that the patent is invalid.  And if you win the case on the basis that the patent was not infringed and/or is invalid – no matter how closely fought, or reasonable the arguments are on both sides – you will automatically succeed on the unjustified threats claim because… well… it turned out that the threats were unjustified.

But only following full-blown, time-consuming and expensive proceedings in the Federal Court of Australia on infringement and validity of the patent.

The good news for the patentee is that it is actually very easy to avoid liability for making unjustified threats.  Just do not make any threats.  Go to court.  Go directly to court.  Do not give any warning.  And do not offer to negotiate a peaceful resolution.

Of course, once the patentee initiates the process, there is a good chance it will develop into full-blown, time-consuming and expensive proceedings in the Federal Court of Australia on infringement and validity of the patent.

Tension with Public Policy Considerations?

Where infringement proceedings are commenced without warning, the patentee might be in violation of its obligations, under the Civil Dispute Resolution Act 2011, to take ‘genuine steps’ to resolve the dispute before heading to court.  On the other hand, it would only be doing what the courts, in earlier times, have expressly advocated, e.g. Mechanical Services (Trailer Engineers) Ltd v Avon Rubber Co Ltd [1977] RPC 66 at 75:

A patentee's first and proper remedy when he considers the defendant is infringing is to bring an action for infringement, without making any threats at all. This is however in the life of the market place no doubt a counsel of perfection and, patentees and travellers being human as they are, no doubt threats against potential defendants will continue to be made. That does not mean to say that the law approves of such action, which, as already stated, can obviously cause serious damage which it is often difficult or impossible to recover.

The existence of the Civil Dispute Resolution Act suggests that, whether or not the (common) law continues to disapprove of such action, parliament has deemed it desirable for parties in civil disputes to try to work out their differences between themselves before imposing upon the courts. 

It is difficult to imagine how a patentee would bring an alleged infringer to the negotiating table without asserting the existence of relevant and valid patent rights.  As the law currently stands, I believe that a statement to the effect that ‘we do not want to sue you, but if we cannot work this out between ourselves we might have to sue you’ constitutes a threat sufficient to support an application for ‘unjustified threats’, setting in train the rapid escalation of claims and counter-claims set out above.

‘Unjustified Threats’ Provisions for Tackling Trolls

It is actually quite timely to look at the value of statutory provisions dealing with unjustified threats, because it is possible that there has never been a time in history when they have had more potential to be useful.

Last week, US Republican Congressman Goodlatte reintroduced the Innovation Act in the House of Representatives.  The proposed reforms – which previously sailed through the House, but stalled in the Senate – include the introduction of ‘fee shifting’ to losing parties in patent litigation, a heightened requirement for detail in claims for infringement, requirements for courts to settle validity issues early in proceedings, and delaying discovery to keep early costs down in cases that may not proceed to a full infringement trial.

I have previously written in favour of many of these reforms, which would generally bring the US system more closely in line with other jurisdictions, such as Australia, in which extortionate behaviour and abuse of the litigation system is far less prevalent.

However, many people with a greater stake in the US patent system do not agree with me (although IP Watchdog’s Gene Quinn, who is generally opposed to the Goodlatte reforms, shares my views on complaint sufficiency).  I am also now inclined to agree with those, such as IAM Magazine’s Richard Lloyd, that recent Supreme Court decisions and other changes in the US patent landscape over the past 12 months have called into question the urgency for further reform.  While pro-reform advocates are arguing that the system is broken, the reality is that the system is in flux and there is no way to tell right now whether it is in need of any further ‘fixing’.

However, if there is to be debate about reform, and if (as many, including Congressman Goodlatte himself, seem to agree) the focus should be on ‘behaviours rather than actors’, then maybe ‘unjustified threats’ provisions are worth a fresh look.

There are three problems with the current Australian provisions, as I see them:
  1. they are contrary to public policy, in that they discourage a ‘talk first, sue later’ approach to dispute resolution;
  2. once an ‘unjustified threat’ has been alleged, and basic thresholds satisfied, the substantive onus shifts to the patentee to show – essentially by establishing that the patent is valid and infringed – that the threat was not unjustified; and
  3. they are completely agnostic as to behaviour, in that they are equally applicable to any case in which a threat is made but infringement is ultimately not found to have occurred.
A patent provides its owner with a powerful right – the ability to prevent another party from operating freely in the marketplace.  In principle, then, provisions that target ‘bad faith’ (e.g. extortionate, anticompetitive) acts by patent-owners are a good thing. 

However, where there is a genuine dispute between the parties as to whether a patent is infringed and/or is valid, and they have not been able to settle this between themselves, then that is precisely what the courts are there to resolve.  Somebody will ‘win’, and somebody will ‘lose’, however neither party should be subject to any additional liability simply because they ‘started it’!

Conclusion – Scope for Reform?

In my view, a person holding a genuine and reasonable belief that their rights are valid and being infringed should not be subject to a potential damages claim for making ‘unjustified’ threats. 

I would suggest that relief for unjustified threats should only be available if the threatened party is able to establish that the patentee knew, or ought to have known, at the time of making the threats that they were baseless and/or the patent was invalid.  In many such cases, the lack of justification for the threatened action will become apparent at an early stage in the proceedings, without the need for extensive discovery or evidence preparation.  If not, then perhaps there are genuine questions of law and/or fact requiring resolution by the court?

Putting the onus on the patentee to show that a ‘threat’ is not ‘unjustified’ (the double-negative is itself an indication of the problem) encourages full-blown infringement and validity proceedings, regardless of which side pulls the trigger first, when the whole point of sending a ‘demand’ letter in the first place was possibly to try to avoid precisely this outcome.

It surely would not be difficult to amend the legislation to address the real problems presented by patent-owners acting in bad faith, while allowing scope for parties in genuine cases to raise and seek to resolve a dispute before running to the courts?  I have already provided a first draft: ‘…that the person making the threats knew, or ought to have known, at the time of making the threats that they were baseless and/or the patent was invalid.’

And if the US Congress is seeking some form of compromise over the scope of any further patent reform, I think they could do a lot worse than to look at some similar provision, which targets the offending behaviour right at the source.

Appendix: Summary of The Legislation As It Stands

Sections 128 to 132 of the Australian Patents Act 1990 provide for a person threatened with infringement proceedings, or other similar proceedings, to make an application to the court on the basis that the threats are unjustified.

In particular, section 128 provides that ‘a person aggrieved’ may apply for a declaration that the threats are unjustifiable, an injunction against the continuance of the threats, and the recovery of any damages sustained by the recipient as a result of the threats.

Section 129 and section 129A effectively provide the person making the threats with a defence.  Specifically, the threats will not have been unjustified if it turns out that the recipient in fact infringed a valid claim of the patent.

Additionally, section 130 expressly provides for the patentee to counter-sue for infringement of the patent, and for the threatened party then to apply for revocation of the patent on any or all of the usual grounds of invalidity.

Section 131 provides a ‘safe harbour’, under 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.’

Finally, section 132 absolves a legal practitioner or registered patent attorney from liability for unjustified threats made on behalf of a client, i.e. when a client instructs one of us to send a threatening letter, it is the client not the attorney that is liable for the consequences.  (Practitioners should note, however, that this section will not save you from potential liability for any failure to advise the client on the possible consequences prior to sending the letter.)


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