Dealing with a cease and desist letter: part 1

When a company receives a cease and desist letter, the first questions that typically come to mind are as follows:

  • Do you have to respond to the letter, particularly if you do not know anything about the sender?
  • What are your options for providing a response?
  • What steps should you take in formulating a response to such a letter?

Receiving a cease and desist letter that alleges patent infringement is becoming more common in today’s competitive business markets and may come as a shock to the recipient, particularly if the sender is unknown to it and the recipient is unaware of the patents referenced in the cease and desist letter. That shock may quickly evolve into an emotional reaction based on an assumption or suspicion that the sender may be a 'patent troll', which may result in the letter being thrown away.

However, sound business decisions are rarely made based on emotional responses. Cease and desist letters are a first step that a patent owner is legally entitled to take toward enforcing its patent rights. Ignoring a cease and desist letter or, alternatively, responding inappropirately may result in expensive and protracted litigation.

A better approach is to take steps to understand:

  • who the sender of the letter is;
  • the patents on which it based the cease and desist demand; and
  • whether your company’s activities potentially infringe the referenced patents.

Depending on the results of these initial steps, a formal and timely (eg, within two to four weeks after receipt of the cease and desist letter) response to the sender may be warranted.

The first step is to determine whether the sender is a company that is actively carrying on business by way of producing and/or distributing a product, running a process that captures or transforms inputs into refined outputs or providing a service that is protected by the patents referred to in the letter. Alternatively, the sender may be a non-practising entity (NPE) that does not conduct business operations in the form of manufacturing or processing, or providing services, but does own the patents referred to in the letter. The next steps taken can then be tailored to prepare appropriate responses to a practising entity or, alternatively, a NPE.

This article discusses:

  • NPEs;
  • patent assertion entities (PAEs); and
  • the options you have for responding to an NPE cease and desist letter. 

NPE is a broad term that captures several different categories of business. The categories discussed below are general summaries intended to demonstrate the fluidity of NPEs. Some business entities may embody one category of NPE at one time and another category at another time. In addition, one entity may fall into one category regarding dealings with one third party, and at the same time fall into a different category regarding dealings with another third party. 

Practising the invention protected by a patent occurs when the patent owner designs, manufactures or processes a product or offers a service that falls within the scope of the issued patent claims. One common feature of every NPE is that it owns one or more issued patents but does not practise the invention protected by the patent. 

In one category, an NPE may be a patent-holding company within a corporate family of companies, wherein the NPE licenses its patent rights to a related company within the corporate family that then practises the licensed invention by selling products or offering services. A corporate family may use such NPE holding companies for tax reasons and to shelter valuable patent assets from any liability that the related practising company may incur. For example, the practising company may face a damages award from a product liability suit that will be satisfied up to the limits of the practising company’s assets, instead of being based on the total value of the patents owned by the NPE holding company.

In another category, an NPE may aggregate patent rights through strategic acquisitions of patent portfolios from one or more third parties. These acquired patents are often in a similar field of technology which allows the aggregating NPEs to monetise the acquired patents by licensing a bundle of patents to practising entities. These aggregating NPEs may also bring further value to their licensees by providing them with opportunities for cross-licences and promises not to sue each other.

In yet another category, an NPE may be a post-secondary institution or a government research organisation that aggregates patent rights through contractual relationships with its employees and contractors. Most institutional NPEs from this category have internal technology transfer offices that seek to commercialise their patent portfolios by actively pursuing licensing revenue. In addition, some institutional NPE technology transfer offices seek to spin out their patented and patent-pending technologies into new start-up businesses. In such cases, the institutional NPEs typically maintain the IP rights in the underlying technologies and may additionally take an ownership position in the new start-up businesses. Typically, the technology transfer office mandate is focused on realising new revenue streams for the institutional NPE by identifying those innovations with the greatest potential to result in a successful new business.  

The final category of NPE in this discussion is a PAE, which may be pejoratively referred to as a 'patent troll'. Many PAEs are different from the aforementioned categories of NPE because they PAEs typically rely on a threat of litigation as an incentive for entities to enter into licence agreements with the PAE. Some PAEs acquire patent rights by recognising opportunities that arise when a distressed innovation-focused company needs to raise capital. As such, some PAEs may never have contributed to the innovation that resulted in the patents they intend to assert. PAEs are also sometimes characterised as owning rights in patents that may be overly broad, and therefore the allegation of patent infringement may be untenable before a court. This is a particularly common characterisation in cases where a PAE’s patents are alleged to cover technology that may not have even existed or been contemplated at the time the patents were filed.

However, a PAE’s selection of a prospective licensee may focus on those entities that are disinclined to participate in expensive legal challenges concerning the validity of the PAE’s patent(s), and instead are inclined to settle for nominal licence fees. Other common targets of PAEs are large entities. In some cases, large entities may prefer to pay licensing royalties as a nuisance rather than participating in an intrusive and disruptive defence to allegations of patent infringement. In other cases, large entities may prefer to defend the allegations of infringement forcefully for financial, precedential or other reasons.

PAEs have also been known to set up multiple holding companies and threaten to sue many companies in a given industry at one time. In some cases, the use of multiple holding companies may be akin to a shell game which makes it difficult for the multiple defendants to recognise that they may be fighting a common adverse party. This approach may favour pre-trial settlement because it is difficult for multiple defendants to align their defensive efforts within the short settlement window set out by the PAE. 

After determing whether the cease and desist letter came from a practising entity, an NPE or a PAE, the next step should be to contact patent counsel as soon as possible. The cease and desist letter will typically include a relatively short timeline to reply. In some cases, the timeline may be as short as a week, after which if a licence has not been entered into, or at least if negotiations are not underway, the patent-owning entity may commence suit against the accused company.

Responding to an NPE cease and desist letter
By contacting patent counsel as soon as practicably possible, your counsel may be able to assess the strength of the NPE’s claim of patent infringement and advise you regarding how best to respond, if at all, in view of the particular NPE (as not all NPEs should be treated the same). Retaining counsel demonstrates to the NPE that you are taking the matter seriously which may make the NPE more willing to grant extensions to conduct any necessary reviews. 

The next step is to work closely with patent counsel to analyse the allegations of infringement. This may include providing insight into how your industry would interpret specific terminology in the patent cited in the NPE’s letter. This process is important to understand the scope of the NPE’s patent and to develop arguments regarding non-infringement. This process may also identify potential modifications to the design, manufacturing or processing of your product or service that do not infringe the NPE’s patent. 

In addition, you should work with your patent counsel to help to identify publications and prior uses in the industry that could be used to argue against the validity of the NPE’s patent. Any documents that were publicly available before the relevant date of the NPE’s patent may be used to attack the NPE’s patent. While patent counsel are typically experienced in identifying relevant patent documents, industry experience can be useful in identifying non-patent documents such as industry publications, academic publications, conference presentations and prior uses. Your experience will be particularly helpful in your field of expertise because there are often many different areas within a field that contribute to innovation in a particular industry. For example, in the context of the medical device industry, published documents from the fields of biotechnology, pharmaceuticals, mechanical engineering, electrical engineering and software may all be relevant to attack the validity of an NPE’s patent. 

With an understanding of any specific terminology, industry-specific publications and any further relevant patent documents, it is important to analyse the following issues:

  • Is the NPE’s patent valid and in good standing in the jurisdictions where you carry on business?
  • Do you have the freedom to operate with your current business activities relative to the NPE’s patent (ie, do your business activities infringe or is the NPE’s patent invalid)?
  • Are there elements in the NPE’s patent that could significantly advance your business activities?

The first two issues should be dealt with by qualified legal counsel with relevant technical expertise, while the third can be handled by your internal corporate and technical experts.

After completion of these analyses, the nature of the response to the NPE’s letter will depend on whether your business activities are potentially infringing the NPE’s patent and whether the NPE’s patent may benefit your business. 

Where the analysis indicates that it is unlikely that your business activities are infringing and there is no potential commercial value in the NPE’s patent to advance your business, the response letter may simply include a statement that your business does not infringe. The burden then shifts to the NPE to decide whether it wants to go to court to try to prove that your business activities do infringe. This decision cannot come lightly. Where the freedom-to-operate analysis indicates that it is likely that your business activities do infringe the NPE’s patent, a response letter may indicate an interest in entering licensing negotiations.

Ultimately, the decision on how to respond may be superseded by a strong business rationale to enter licensing negotiations, regardless of the infringement analysis, because there may be commercial value in the NPE’s patent that your business may realise, or value a reasonably priced licence that avoids costly litigation. In all cases, it is advisable to have legal counsel draft the response letter and forward an executed copy to the NPE.

This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight

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