Intellectual property litigation: When is a threat to sue unjustified?

Although steps have been made to reduce the cost of intellectual property ("IP") litigation, it can be a daunting prospect, particularly for a retailer or small business. IP rights holders may feel the need to sue for infringement and to use their financial resources to fight any litigation should it go to court, whereas the prospect of litigation to a smaller business could mean a crippling financial burden, and use of precious management time. Given the cost of litigation and potential damage to their business, it is understandable why businesses sometimes choose to settle the claim out of court. However, when being threatened with infringement proceedings, the recipient should consider whether this threat is an 'unjustified threat'. During the ongoing development of IP legislation, attempts have been made to address the problems outlined above and to give retailers possible redress when faced with an unjustified threat (meaning the recipient of the threat can sue the IP rights holder who made the threat, and may be awarded a declaration of non-infringement, an injunction or damages). The legislation varies for different types of IP rights and I will focus on patents and registered designs. Put simply, a threat is made if what is communicated is understood by the recipient as being a threat to sue for infringement; the threat will be unjustified where no infringement has taken place. It is noteworthy that the threat does not need to be specific, and an implied 'veiled threat' will still constitute a threat. Generally, however, a mere notification that an IP right exists will not amount to a threat. In the case of threats to sue for patent infringement, providing factual information about the patent, making enquiries to find out if there is infringement and "assertions" about the patent for the purpose of making the enquiries, will not amount to a threat. Threats legislation is an attempt to strike a balance between allowing an IP rights holder to enforce their rights, and third parties to carry on their business without having to deal with unjustified threats. It is considered that those who will be most aggrieved by a threat are likely to be retailers who are selling the product, rather than a manufacturer or importer, who are more likely to have greater knowledge of the product in general. With regard to patents, threats relating to making or importing a product, or using a process1; and in relation to designs, making or importing – these threats are allowed. Practically speaking, if you or your business receives a letter containing a threat to sue for infringement, the threats will be allowed if it is proved that the IP right has been infringed. The IP right must be valid, except in the case of patents, where a defence will be if infringement of the patent is proved, even where the patent is found to be invalid, provided it can be shown that the rights holder did not suspect the relevant part was invalid at the time of making the threat. Some reforms have already taken place regarding threats in patent actions, but the Law Commission is currently undertaking a wholesale review of the provisions and has been consulting on potential changes to the law. While it is appreciated that a balance is still necessary, the reforms will probably see changes to the law to make it easier for businesses to enforce their IP rights without the same fear of court proceedings for threats actions. The Law Commission has acknowledged the concerns of small businesses but feels that the current provisions allowing for unjustified threat actions hamper genuine pre-litigation negotiations over legitimate disputes. The provisions are also in contradiction of the rules that govern litigation procedure in England and Wales as their aim is to encourage negotiations in the first instance, followed by litigation only if necessary. If you receive a threat for infringing an IP right look carefully at what it is you have been accused of and importantly gather your own evidence as to what you (and your staff) have actually been doing. Preliminary legal advice need not be expensive and so if you feel the threat is genuine, seek prompt legal advice. In relation to patents alone, by virtue of amendments to the Patents Act 2004, a threat may now be made against a retailer or retailer without being classed as "unjustified" if the patent proprietor has used their "best endeavors" to discover the identity of the alleged "primary" infringer (i.e. manufacturer or importer) but has failed to do so. For more information, please contact Claudia Rabbitts Partner, on: Tel:020 7269 8550 Email: cxr@dyoung.com.