Dealing with a cease and desist letter: part 2

Part 1 of this article summarised the steps that should be taken if your company receives a cease and desist letter that alleges patent infringement (for further details please see "Dealing with a cease and desist letter: part 1"). The first step should be to assess the type of business entity that sent the letter to determine whether it is a practising entity, a non-practising entity (NPE) or a patent assertion entity (PAE). The next step should be to engage patent counsel as soon as practicably possible to assess the strength of the claim of patent infringement, and to advise on how best to respond – if at all – in view of the type of entity that sent the cease and desist letter. The final step should then be a timely response letter from your patent counsel to the entity.

Part 1 also provided an overview of the different types of NPE and, where the cease and desist letter appears to have come from an NPE, the steps that should be taken in assessing potentially infringing activities and options for a follow-up response to the NPE.

Part 2 of this article now considers responses to PAEs specifically and implications regarding PAE-initiated litigation in Canada. 

Responses to PAE cease and desist letter
If you have determined that the cease and desist letter came from a PAE, it is even more important to engage patent counsel and have them respond to the PAE in a timely manner. A curt response from patent counsel stating that your activities do not infringe the issued claims in their patent(s) and/or that their patents are invalid will put the ball back in the PAE’s court to make the next move. Some PAEs may provide proof or detailed information in an effort to demonstrate that your activities are infringing. Other PAEs may simply disappear and never follow up. Still other PAEs may choose to pursue legal action. Where the PAE is considering pursuing or actually pursues legal action in Canada, a number of dynamics come into play.

PAE activity in Canada
While numerous PAEs have initiated patent infringement litigation in Canada, aspects of the Canadian legal system may act as a buffer against a deluge of future PAE-initiated litigation. At the same time, some aspects of the Canadian legal system may be attractive to PAEs in their increasingly international enforcement efforts.

Cost implications       
The Canadian legal system employs a 'loser pays' approach to assessing costs at the end of a trial. Canadian courts employ a sliding scale of how much of a successful party’s legal fees must be covered by the unsuccessful party. This is contrary to the typical approach in the United States, where parties often bear their own legal costs – although this may be evolving following cases such as Octane Fitness, LLC v ICON Health & Fitness, Inc (134 S Ct 1749 (2014)). 

Although the Canadian system is a 'loser pays' system, the amount recovered by a successful party is typically only about 20% to 30% of actual legal fees, and 70% to 80% of actual disbursements. Combined with the reality that patent litigation as a whole is substantially cheaper in Canada than in the United States, the total risk associated with an adverse costs award can be relatively limited. Notwithstanding the above, if the PAE’s case is found by the court to have been frivolous or if the PAE is found to have engaged in reprehensible conduct during the litigation, a more substantial costs award could be levelled against it.

As such, before a PAE asserts a Canadian patent, it must consider the degree of risk associated with having to pay a portion of a defendant’s legal fees if the defendant ultimately succeeds at trial. Because the 'loser pays' regime cuts both ways in the sense that defendants are equally exposed to adverse costs judgments, it is arguable that the 'loser pays' aspect of Canadian patent litigation is not a strong deterrent to PAE litigation.    

Security for costs
Related to the comments above regarding costs for a successful party is the concept of security for costs. If a plaintiff has insufficient assets within Canada to satisfy a potential costs judgment against it, the court will require it to post security for the costs of the defendant (eg, pay cash into the court pending final judgment in the litigation). Where there is a settlement or the plaintiff PAE succeeds at trial, the security is paid back to the PAE with interest. Where the PAE is unsuccessful, the security is paid to the defendant as compensation for its legal costs.

Requiring a plaintiff to post security for costs is a factor that may discourage PAEs from commencing a suit in Canada. However, the requirement to post security is somewhat tempered by the fact that the security may be posted in instalments (with the initial instalments typically being less than the later instalments), and the total amount of security is typically less than the total amount recoverable by a defendant at the end of trial (which is already discounted from actual fees, as discussed above).

Permanent injunctions
In the United States, permanent injunctions for successful PAEs have been virtually unheard of ever since the Supreme Court’s decision in eBay Inc v MercExchange, LLC (547 US 388 (2006)). However, Canada has no equivalent to eBay. Rather, a permanent injunction will normally follow once the court has found that a patent is valid and has been infringed. An injunction will be refused “only in very rare circumstances”, according to Canadian case law. 

While no recent Canadian decisions address whether a PAE, as a matter of policy, should be entitled to or denied a permanent injunction, some guidance in the case law suggests the court will examine each dispute on a case-by-case basis. Considerations for the court in this regard may include whether the infringing product may be substituted with a reasonable alternative and whether, based on the particular interests of the parties and the public at large, damages alone may be sufficient compensation. For example, there may be an argument that damages alone are adequate where a PAE:

  • uses the threat of an injunction for undue leverage;
  • does not have a competing product or other particular interest in the market;
  • is interested only in obtaining licensing revenues; and
  • would enjoy a greater financial benefit with ongoing or future royalties. 

However, such an argument would need to be balanced against the general practice of granting permanent injunctions, particularly where an infringing product may be substituted with a reasonable alternative.

Accordingly, the current state of the law in Canada may be favourable to PAEs in that they may, in certain situations, be able to obtain a permanent injunction. The availability of a permanent injunction as a remedy for a PAE can be a powerful point of leverage over an accused infringer. However, the desire for this remedy needs to be balanced against the reality that a compulsory licence – and not an injunction – could result in the greatest financial benefit to the PAE.

Monetary remedies
In the United States, actual or constructive notice of patent infringement must be provided to an accused infringer for damages to accrue. Where notice is not provided, this can limit the scope of recoverable damages for a PAE. In Canada, no notice is required. An accused infringer may be found liable for at least a reasonable royalty from the date of publication of the application for a patent. With respect to post-grant infringement, an accused infringer may alternatively be found liable for an accounting of profits (ie, the accused infringer’s profits attributable to the infringement may be disgorged).

In addition, the United States allows for the recovery of treble damages for cases involving wilful infringement. Canada does not permit recovery of treble damages, although in limited cases punitive damages may be available.

Canada’s flexible monetary remedies may favour PAEs considering Canada as a potential venue for enforcement in certain cases. However, Canada’s smaller market size and the unavailability of treble damages may result in the total quantum of damages being less substantial as compared to the United States.

Jury trials and forum shopping       
Outside the niche of pharmaceutical litigation, Canadian patent lawsuits do not typically result in the large monetary awards seen in other jurisdictions, most notably the United States. This can be explained by the fact that the United States is roughly 10 times the size of Canada and so often has 10 times the market size for an accused product; but there may also be other factors at play. For example, the multiple hundreds of millions of dollars in damages awards in the United States often come from US patent trials that are decided by a jury. In Canada, first-instance patent trials are decided by a single judge, as the Federal Courts Act prohibits a trial by jury for any action before the Federal Court and the Federal Court of Appeal. Further, certain jurisdictions in the United States are well known for being patent-holder friendly (eg, the Eastern District of Texas). In contrast, Canadian patent matters are almost always argued before the Federal Court of Canada because orders from the Federal Court are enforceable across the entire country and the Federal Court has the most experience adjudicating patent matters. Accordingly, a PAE that is considering activity in Canada would not have the benefit of a jury trial and forum shopping that it may be accustomed to in the United States.

Validity challenges
In the United States, several procedures for challenging a patent’s validity post-grant are available. The most popular procedure currently is the inter partes review. Not only have accused infringers enjoyed good success with having patent claims invalidated in inter partes reviews, but also many PAEs have seen their district court cases stayed pending the resolution of inter partes review proceedings.

In contrast, Canada has a re-examination procedure for the post-grant review of a patent’s validity, but the process is patentee friendly. It is an ex parte process that allows a patentee to amend its claims without rebuttal from the accused infringer. Moreover, statistics show that a significant majority of outcomes from Canadian re-examinations favour the patentee. Further, even if a patentee is pulled into a re-examination proceeding, it likely will not result in a stay of any litigation. If anything, Canadian law provides that it is the re-examination proceeding that will be stayed in favour of the litigation based on the preference to resolve validity issues in open court.

Thus, a PAE that is considering activity in Canada would not face the same post-grant patent office validity challenge landscape as it would in the United States.

A number of differences between the Canadian legal system and the US legal system may act as a buffer against increased PAE activity in Canada. Indeed, despite there being a number of differences between the two legal systems actually favouring a PAE litigating in Canada, to date there has not been an explosion in the number of PAE cases filed in Canada, or even so much as a continuous upwards trend in the number of PAE cases. While there is no specific rationale to suspect that PAEs will increase activity directed at specific industries in Canada, it is probably safe to assume that, as a particular market grows, so too does the interest of PAEs. Further, while the US PAE experience tells us that PAEs have typically focused on enforcing high-tech and software patents, the incidence of PAEs engaging other industries in the United States (eg, the medical device industry) is on the rise.  

As your company grows, its success could attract the attention of PAEs. As a proactive step, you may now consider collecting and cataloguing publications that are particularly relevant to your technology. The older the publication, the greater the chance that it could be useful to attack the validity of a patent that is asserted against your company. 

While a sharp near-term increase in PAE-initiated patent litigation in Canada is not expected, the potential for more litigation exists in view of the numerous factors making Canada at least a somewhat attractive venue for PAEs and the ever-expanding enforcement efforts of PAEs in jurisdictions outside the United States. Therefore, it is useful to understand what steps you can take to contribute, both proactively and reactively, towards formulating a response to a cease and desist letter from a PAE. Actively contributing towards responding to the letter will engage you and your resources in the key issues at stake and help to keep the emotions at bay.  

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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