The Meteoric Rise and Spectacular Fall of Damages for Unjustified Threats of Patent Infringement

On 19 August 2016, a single judge of the Federal Court of Australia issued a ruling awarding damages of A$1,506,859 against the Australian Mud Company Pty Ltd for making unjustified threats of patent infringement proceedings against Coretell Pty Ltd: Australian Mud Company Pty Ltd v Coretell Pty Ltd (No 7) [2016] FCA 991.  Less than a year later, however, a different judge has ‘reluctantly’ dismissed a claim for damages allegedly arising from threats of infringement proceedings made to the public at large via a trade publication: Mizzi Family Holdings Pty Ltd v Morellini (No 3) [2017] FCA 870.  This follows a decision in March of this year, by a Full Bench of the Federal Court on appeal, overturning the Australian Mud damages award.

I first wrote about the Mizzi Family Holdings litigation back in January 2014, following the initial findings in December 2013 of a single judge of the Federal Court that the respondent, Daryl Morellini, had not infringed an innovation patent for a ‘cane billet planter’ owned by Mizzi, and that all prior threats of infringement proceedings were therefore unjustified.

The first relevant threat in the Mizzi case had not been made directly to Morellini, but rather had been directed to the cane growing industry more generally through the combination of an advertisement and an article that appeared in the Canegrowers Magazine of 5 April 2010.  The advertisement had been placed by Mizzi, and included a notice of its patent application.  The article was authored by one Mr Terry Hurlock of Invention Pathways Pty Ltd, who had worked in conjunction with Mizzi’s patent attorneys, and was entitled ‘Infringement Danger’.  This juxtaposition of the advertisement identifying the patent application with the article warning about the potential consequences of infringement was found by the court to constitute ‘unjustifiable threats’, in the circumstance that the patent was not actually infringed.  A second threat was said to have been made in June 2011, after another cane grower, one Mr Girgenti, used Morellini’s planter, and Mizzi made a verbal allegation of infringement and demanded the payment of a royalty.

The initial decision in the Mizzi case was followed by a second judgment of the primary judge, on questions of costs and declaratory relief in relation to the unjustified threats (Mizzi Family Holdings Pty Ltd v Morellini (No 2) [2014] FCA 807), an appeal to a Full Bench of the Federal Court, decided in February 2016 (Morellini v Mizzi Family Holdings Pty Ltd [2016] FCAFC 13), and now the most recent decision on damages related to the threats.  Through all of this, the fundamental original finding of the primary judge – that the patent was not infringed – has remained undisturbed.

The major difficulty for Morellini in demonstrating damage was the requirement, emphasised by the Full Court in Australian Mud, to establish causation between the threats themselves and the damages claimed.  The court found (at [20]) that:

There is no direct evidence that anybody declined to deal with Mr Morellini as a result of the threats. It seems that even before the newspaper article on 5 April 2010, there was a degree of reluctance concerning any such dealings. That reluctance cannot have been attributable to the threats. Mr Morellini has not demonstrated that any adverse effect resulted from either of the threats. The newspaper article may well have been widely read within the sugar industry, but there is no reason to believe that the incident involving Mr Girgenti was a matter of common knowledge. Some people in the industry may have heard of it. In either case such knowledge may have reinforced previous perceptions, but that is largely speculative.

As we shall see, unjustified threats provisions were originally enacted to curb anticompetitive, abusive, coercive, or extortionate use of the patent system.  Yet here in Australia we have two recent cases of patentees acting apparently from a good-faith belief that their patents were valid and infringed, and with an arguable case to this effect at first instance and on appeal before a Full Court, in which the prosecution of unjustified threats claims clearly resulted in proceedings becoming significantly more protracted, complex, and costly, than they might otherwise have been.  For a brief period, we hit a high water mark for unjustified threats with a judge awarding over one and a half million dollars in damages, before this was sensibly and firmly reversed on appeal.  Ultimately, neither accused infringer received any award of damages.

How and why did this happen?  What is wrong with the Australian law in relation to unjustified threats that a Federal Court judge could make an astronomical seven-figure award of damages, when the correct sum was zero?  Or that the parties in long-running infringement proceedings would devote such resources to an argument that ultimately brought no benefit to any of them, under provisions that were not originally intended to apply in such circumstances?  And what can be done to fix this situation?

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Tags: Australia, Damages, Law reform, Unjustified threats

Appeals Court Annuls $1.5 Million ‘Unjustified Threats’ Damages Award

Under section 128 of the Australian Patents Act 1990, a person or company that has been unjustifiably threatened with patent infringement proceedings may seek an injunction to prevent the threats from continuing, and the recovery of any damages sustained as a result of the threats.  These provisions may be invoked pre-emptively by an accused infringer, for example against a patent holder that may be trying to inhibit competition by making vague or dubious claims.  However, they may also be invoked defensively, in response to the actual commencement of infringement proceedings by a patent holder that has initially made threats by way of a cease-and-desist letter.  As the law has developed in Australia, an application for relief from unjustified threats will be successful 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.

I have written on a number of previous occasions of my concerns about the operation of the unjustified threats provisions in the Patents Act.  Most recently, in August 2016, I discussed the difficulties faced by a patentee in raising and seeking to resolve a dispute prior to commencing proceedings – as required under the Civil Dispute Resolution Act 2011 – without incidentally opening itself up to a subsequent unjustified threats claim.  At around the same time, a single judge of the Federal Court of Australia (Barker J) issued an 870 paragraph judgment (Australian Mud Company Pty Ltd v Coretell Pty Ltd (No 7) [2016] FCA 991) awarding damages of A$1,506,859 against the Australian Mud Company Pty Ltd (‘AMC’) for making unjustified threats against Coretell Pty Ltd, following a number of years of patent infringement proceedings in which AMC was ultimately unsuccessful.  (For earlier articles on this dispute see Innovation Patent Claims Once Again Construed Narrowly, Australian Appeals Court Further Clarifies ‘Purposive Construction’ and Australian Federal Court Considers Patent Attorney Privilege.)

If you think (as I do) that $1.5 million seems like an excessive amount of damage to have resulted from the sending of a fairly typical letter of demand, then I am pleased to report that you would be correct.  A Full Bench of the Federal Court of Australia has now wholly overturned the ruling of the original judge and ordered that, instead, Coretell’s claim for damages should be dismissed with costs: Australian Mud Company Pty Ltd v Coretell Pty Ltd [2017] FCAFC 44.  In doing so, the Full Court has highlighted the importance of establishing causation, i.e. that damage is sustained as a result of the threats.  In particular, the judgment cautions against failing to distinguish properly between damage sustained as a result of the threat of infringement proceedings and damage sustained as a result of infringement proceedings themselves.

This is, to my mind at least, a welcome development in the law.  While it does nothing to prevent the unjustified threats provisions being invoked by an accused infringer in response to proceedings commenced on the basis of a reasonably-held belief that a patent is being infringed, it significantly limits the practical impact of the provisions in such circumstances.  I imagine that it would be rare for substantial damage to be sustained merely as a result of an initial threat of proceedings in any case where infringement proceedings are actually commenced within a reasonable period of time, allowing for some efforts to resolve the dispute prior to litigation.

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Tags: Australia, Damages, Unjustified threats

Another Australian Patentee Bitten By ‘Unjustified Threats’ Provisions

Under 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.

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Tags: Australia, Law reform, UK, Unjustified threats

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

In 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?

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Tags: Australia, Law reform, Trolls, Unjustified threats, US

Fighting Unjustified Threats of Infringement Proceedings

N & E Bowder Pty Ltd v Australian Keg Company Pty Ltd [2013] FCA 1436 (24 December 2013)
Mizzi Family Holdings Pty Ltd v Morellini [2013] FCA 1435 (24 December 2013)

Under Australian law, a person or company which 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 relevant provision is section 128 of the Patents Act 1990.  It particularly contemplates circumstances in which a patent holder seeks to inhibit competition by making vague or dubious claims (take note, prospective Australian patent trolls), such as ‘by means of circulars, advertisements or otherwise’ as well as by more conventional means, such as cease-and-desist letters. 

Section 128 enables a party which feels threatened to take pre-emptive action against a patent owner, although it has also been used as a counter-claim in response to the commencement of court proceedings for patent infringement. 

In my opinion, the primary purpose of s 128 is to provide a mechanism for accused infringers to address manifestly baseless allegations of patent infringement, thereby restricting the incentive for patent holders to make speculative or anticompetitive threats.  In practice, the Australian Federal Court has interpreted the provision broadly, treating any allegation of infringement which ultimately fails as constituting an unjustifiable threat.

It is therefore interesting that two recent decisions of the Federal Court – both issued on 24 December 2013 – have addressed the issue of unjustified threats.  In one case, the accused party initiated proceedings via the ‘unjustified threats’ provisions, and lost (i.e. the patent owner was able to prove infringement).  In the other case, the patent holder initiated infringement proceedings and, having been unsuccessful in establishing infringement, was found to have made unjustified threats.  Interestingly, the threats in this case were ‘generic’ in nature, having been made through the juxtaposition of an advertisement and an article in a trade publication.

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Tags: Australia, Infringement, Unjustified threats