Tactical use of threatening cease and desist letters discouraged by the Court

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Overview

This week the Federal Court published a January decision, Fluid Energy Group Ltd v Exaltexx Inc, 2020 FC 81, in which it granted an interlocutory injunction enjoining the plaintiff from sending “very threatening” cease and desist letters to third parties who traded with the defendant. The letters alleged these third parties had themselves infringed the plaintiff’s patent, demanded that they cease their conduct, threatened serious legal action, demanded that the third parties preserve documents (including by retaining forensic consultants), and enclosing a copy of the statement of claim in the ongoing patent litigation with the defendant in which the plaintiff sought $100 million in damages.[1]

The case centres on a patent dispute between competitors in the oil and gas industry’s downhole fluids business. Fluid Energy Group had sued Exaltexx for patent infringement and proceeded to send cease and desist letters to several of Exaltexx’s suppliers, as well as a trucking company that delivered Exaltexx’s finished product to customers. Exaltexx alleged that the plaintiff, Fluid, had made false or misleading statements that the Exaltexx infringed Fluid’s patent, which discredited Exaltexx’s business, goods and services, contrary to subsection 7(a) of the Trademarks Act. At the time of the interlocutory injunction motion, the case was in its early stages.

In granting the injunction, Justice McHaffie adopted the Court’s earlier reasoning in Excalibre Oil Tools,[2] a 2016 decision, where it observed that cease and desist letters can have both salutary and detrimental effects: “Informative letters set out a patentee’s rights and provide information that will enable the recipient to understand what may constitute infringement. Threatening letters contain explicit or veiled threats that the recipient will be sued if they do not change a particular course of conduct.”[3]

The Court emphasized that, although cease and desist letters can be valid tools, the letters sent by Fluid “appear[ed] on their face to be designed for maximum threatening effect, with the goal of having suppliers cease doing business with Exaltexx regardless of the merits of a claim against those suppliers and well before determination of their claim against Exaltexx.”[4]

This decision is a useful reminder to parties involved in intellectual property disputes that statements made to third parties need to be carefully considered to avoid fall out under Canada’s trade libel laws.

Exaltexx established that the three part RJR-MacDonald test for an interlocutory injunction was met: (a) there was a serious question to be tried with respect to its claim against Fluid, (b) Exaltexx showed it would suffer irreparable harm if the injunction were not granted, and (c) the balance of convenience favoured granting the injunction.[5]

Interlocutory Injunctions: Serious question to be tried

The serious question to be tried is not a high threshold, but in this case it turned out to be the most contentious issue.

The basis for Exaltexx’s complaint was that Fluid’s letters alleging patent infringement made violated section 7(a) of the Trademarks Act, which reads: “No person shall make a false or misleading statement tending to discredit the business, goods or services of a competitor”. To make out the cause of action, Exaltexx was required to establish, with evidence, (a) a false or misleading statement, (b) tending to discredit the business, wares or services of a competitor, and (c) resulting damage.[6]

The Court found that Exaltexx did not establish there was a serious issue to be tried that its products did not infringe Fluid’s patent, but that there was a serious issue about whether Exaltexx’s suppliers or shipping partners were infringing. The Court also found that privilege did not apply to the statements in Fluid’s letters. Statements in a pleading are subject to privilege, but those statements cannot be “repeated out of court with impunity.”[7] Qualified privilege did not apply because Fluid went beyond reporting on the infringement action that was underway.[8]

(1) False or misleading statement

As to non-infringement by Exaltexx, Exaltexx pointed to deficiencies in Fluid’s infringement pleading, third party statements as to why Exaltexx’s products do not infringe, and Fluid’s request for a sample of Exaltexx’s product for testing.[9] These arguments were all insufficient to establish the falsity of the statement that Exaltexx’s products infringe.[10]

Under section 7(a), the issue is whether the statements were true or false; not whether the statements were speculative or reckless.[11] Exaltexx bore the burden to establish falsity, with evidence. With no direct evidence as to the composition of Exaltexx’s product, the Court could not draw conclusions on whether there was a serious issue of non-infringement.[12]

There was a different result respecting the allegations of infringement by Exaltexx’s suppliers and shippers. The Court found a serious question that those statements were false or misleading. The letter sent to one of Exaltexx’s chemical suppliers alleged that the supplier was infringing Fluid’s patent, but the evidence showed that the supplier only provided the raw chemical hydrochloric acid to Exaltexx. Since none of the patent claims were for hydrochloric acid nor its use, the supplier could not have been directly infringing the patent. Further, the mere supply of a component of a patent claim is not inducement.[13]

In another letter, Fluid had alleged that a trucking company had infringed its patent, but the evidence showed that the trucking company only stored and shipped Exaltexx’s finished product. Storing and shipping are not “expressly identified as infringing conduct” under the Patent Act.[14] The Court was not satisfied that shipping or storing product could constitute “use” for the purposes of the Patent Act. At best, the question is an open one, which means there is a serious issue as to whether there could be infringement by the trucking company.[15]

(2) Tending to discredit the business, wares or services of a competitor

Since the letters were threatening ones sent to third parties, there was necessarily a serious question that the letters tended to discredit Exaltexx, Fluid’s competitor.[16]

(3) Exaltexx’s resulting damage

There was also a serious question as to whether Exaltexx had suffered damage because, as a direct result of the letters, the preferred shipping agent of one of Exaltexx’s clients had ceased to do business with Exaltexx. The Court had “no difficulty in concluding that a preferred shipping agent of a customer ceasing to do business raises a serious issue of both direct financial harm associated with re-routing shipments (assuming another shipper satisfactory to the customer can be found and orders placed despite the shipping disruption) and reputational harm with both the shipper and the customer.”[17]

Interlocutory Injunctions: Irreparable harm

In interlocutory injunction cases, irreparable harm is typically the most difficult hurdle to overcome. Clear, non-speculative evidence of the harm that either cannot be quantified in monetary terms or cannot be cured is required, but clear proof is not required.[18]

Here, the Court held there was a strong case that the statements in the demand letters were false or misleading. In other words, the “serious issue to be tried stage” was easily satisfied. As a result, the Court applied a lower threshold at the irreparable harm stage irreparable harm.[19] Exaltexx’s irreparable harm evidence was unchallenged and was accepted by the Court.[20]

In part, the Court found the harm to be irreparable because the Exaltexx might never have learned which third parties refused to do business with them as a result of the letters, even though all of the third party recipients of the cease and desist letters would have been discoverable.[21]

Interestingly, the Court inferred from Fluid’s opposition to the injunction that Fluid wanted to preserve the ability to send similar letters to Exaltexx’s other trading partners.[22] The Court disapproved of this course of conduct.

Interlocutory Injunctions: Balance of convenience

The balance of convenience favoured Exaltexx, because the injunction would not prevent Fluid from promoting its products or enforcing its patent rights.[23] As to the risk that the injunction may go too far, in the Court’s words:

[B]y sending highly threatening letters to companies against whom it has suspect infringement claims, Fluid has gone beyond the appropriate and valuable use of cease and desist letters. If the result is that they become less able to use them as a tool in enforcing their patent rights until the determination of those rights, it is a result of their own actions to date and the resulting impact on Exaltexx.[24]

Undertakings as to damages are a prerequisite to obtain an interlocutory injunction

The Court reiterated that an “undertaking as to damages is an important and necessary precondition to the granting of an injunction” because an injunction is “extraordinary interlocutory relief”.[25] The undertaking was required in this case, even though the injunction did not seek to prevent Fluid from selling any product or competing with Exaltexx.[26]

The Court rejected Exaltexx’s argument that it should not be required to provide an undertaking because there was no evidence from Fluid that it would suffer harm. The onus is on the party seeking the relief to meet all preconditions for it. The Federal Courts Rules require the provision of an undertaking as to damages; there was no onus on Fluid to prove that it would suffer damages if the injunction was wrongly issued.[27]

Although the custom is to provide the required undertaking in writing in the moving party’s motion materials, in this case, the Court accepted an oral undertaking from counsel for Exaltexx given at the hearing. Giving an undertaking in writing in advance of the motion is often preferred as it allows the responding party to test the strength and enforceability of the undertaking. However, in this case, because there was no evidence that Fluid would suffer harm if the injunction was issued, the Court found that the oral undertaking was satisfactory.[28]

A note about procedure

The injunction motion was brought before Exaltexx had defended the patent infringement claim or commenced a counterclaim alleging breach of the Trademarks Act. Since the motion did not concern preserving rights at issue in the main action, and counterclaims are separate proceedings, under the Federal Courts Rules the Court could only adjudicate the motion if (a) it found the motion to be urgent, and (b) Exaltexx undertook to commence the counterclaim.[29]

In this case, both requirements were met. The motion was brought urgently (within a week of Exaltexx becoming aware of the cease and desist letters) and Exaltexx undertook to counterclaim at the hearing.[30] Relying on jurisprudence from the Ontario Superior Court,[31] Fluid criticized Exaltexx for not filing a draft counterclaim in advance of the motion. The Court rejected the argument, however, because the basis for the counterclaim was clear.[32]

For more information, please contact the McCarthy Tétrault Intellectual Property Litigation group in Toronto.

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[1] Fluid Energy Group Ltd v Exaltexx Inc, 2020 FC 81 at paras 99-101, 117 [Fluid].

[2] Excalibre Oil Tools Ltd v Advantage Products Inc, 2016 FC 1279 [Excalibre Oil Tools], aff’d 2019 FCA 121.

[3] Fluid at para 51 citing Excalibre Oil Tools at para 282.

[4] Fluid at para 128, citations omitted.

[5] Fluid at paras 41, 43.

[6] Fluid at paras 46-49.

[7] Fluid at para 61.

[8] Fluid at para 63.

[9] Fluid at para 83.

[10] Fluid at paras 84-87.

[11] Fluid at para 85.

[12] Fluid at paras 86-94.

[13] Fluid at para 74.

[14] Fluid at para 76.

[15] Fluid at para 77.

[16] Fluid at paras 96-102.

[17] Fluid at para 105.

[18] Fluid at para 111, citing Namgis First Nation v Canada (Fisheries, Oceans and Coast Guard), 2018 FC 334 at paras 89-90.

[19] Fluid at paras 42, 112.

[20] Fluid at para 115.

[21] Fluid at para 121.

[22] Fluid at para 119

[23] Fluid at para 124.

[24] Fluid at para 125.

[25] Fluid at para 36.

[26] Fluid at paras 37-38.

[27] Fluid at para 39.

[28] Fluid at para 40.

[29] Fluid at paras 26-30, Federal Courts Rules, Rule 372.

[30] Fluid at paras 30-31.

[31] AMTIM Capital Inc v Appliance Recycling Centers of America, 2018 CarswellOnt 8793 at para 19 (Sup. Ct. J.).

[32] Fluid at para 32.

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