So, your company just received a cease and desist letter... (Part 2)

13 minute read
01 December 2015

Part 1 of this article summarized the steps that should be taken if your company receives a cease and desist letter that alleges patent infringement. The first step should be to assess the type of business entity that sent the letter to determine if they are a practicing entity (PE), a non-practicing entity (NPE) or specifically 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 type of entity that sent the cease and desist letter. The next 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 NPEs, including PAEs, and in the case that 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 a 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 in a timely manner to the PAE. 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. Yet other PAEs may choose to pursue legal action. In the case where the PAE is considering pursuing or actually pursues legal action in Canada, a number of dynamics come into play, as discussed in more detail below.

PAE Activity in Canada

While numerous PAEs have initiated patent infringement litigation in Canada, there are aspects of the Canadian legal system that may act as a buffer against a deluge of future PAE-initiated litigation. At the same time, there are aspects of the Canadian legal system that PAEs will find attractive 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 U.S. where parties often bear their own legal costs, although this may be evolving in the U.S. 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 20-30% of actual legal fees and 70-80% of actual disbursements. Combined with the reality that patent litigation as a whole is substantially cheaper in Canada than in the U.S., 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 the PAE.

As such, before a PAE asserts a Canadian patent it will have to consider the degree of risk associated with having to pay a portion of a defendant's legal fees, if the defendant is ultimately successful 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. Under Canada's legal system, if a plaintiff does not have sufficient 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, e.g., pay cash into Court pending final judgment in the litigation. Where there is a settlement or the plaintiff PAE is successful at trial, the security is paid back to the PAE with interest. Where the PAE is not successful, 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 given that the total amount of security is typically less than the total amount recoverable by a defendant at the end of trial (which amount is already discounted from actual fees, as discussed above).

Permanent Injunctions

In the U.S., permanent injunctions for successful PAEs are virtually unheard of ever since the U.S. Supreme Court's decision in eBay Inc. et al. v. MercExchange, L.L.C., 547 U.S. 388 (2006) (eBay). In Canada, however, there is no equivalent to the eBay case. 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 there are no recent Canadian decisions addressing whether a PAE, as a matter of policy, should be entitled to or denied a permanent injunction, there is some guidance in the case law that 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 only interested in obtaining licensing revenues, and would enjoy a greater financial benefit with ongoing and/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. That said, the desire for this remedy needs to be balanced against the reality that a compulsory license – and not an injunction – could result in the greatest financial benefit to the PAE.

Monetary Remedies

In the U.S., 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, i.e., the accused infringer's profits attributable to the infringement may be disgorged.

In addition, the U.S. allows for the recovery of treble damages for cases involving wilful infringement. Canada does not permit recovery of treble damages, though 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 U.S.

Jury Trials and Forum Shopping

Outside of the niche of pharmaceutical litigation, Canadian patent lawsuits do not typically result in the large monetary awards seen in other jurisdictions, most notably the U.S. This can be explained by the fact that the U.S. is roughly ten times the size of Canada, and so often has ten 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 U.S. often come from U.S. patent trials that are decided by a jury. In Canada, first instance patent trials are only 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. Furthermore, certain jurisdictions in the U.S. are well known for being patent-holder friendly, such as 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 judges of the Federal Court have 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 they may be accustomed to in the U.S.

Validity Challenges

In the U.S., there are several procedures for challenging a patent's validity post-grant. The most popular procedure currently is the Inter Partes Review (IPR). Not only have accused infringers enjoyed good success with having patent claims invalidated in IPRs, but also many PAEs have seen their district court cases stayed pending the resolution of IPR 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. In this regard, 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. Furthermore, 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 would be the re-examination proceeding that would 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 they would in the U.S.

Take-Away Points Regarding Responses to PAEs

In our view, there are a number of differences between the Canadian legal system and the U.S. legal system that may act as a buffer against increased PAE activity here in Canada. Indeed, despite there being a number of differences between the two legal systems that actually favour a PAE litigating in Canada, we have not seen, to date, an explosion in the number of PAE cases filed in Canada, or even so much as a continuous upward 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 the PAEs. Furthermore, while the U.S. 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 U.S., such as 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 we do not expect there to be a sharp near term increase in PAE-initiated patent litigation in Canada, the potential for more litigation is there in view of the numerous factors making Canada at least somewhat of an attractive venue for PAEs, and the ever-expanding enforcement efforts of PAEs to jurisdictions outside the U.S. 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, at least in our experience, help keep the emotions at bay.

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