​self-inflicted harm: sending a Cease and Desist letter can create liability for the sender

Gramercy Holdings LLC v. Borozan, No. 8:21-cv-0932 (M.D. Fla. Nov. 10, 2021)
USD891,783 (Wood/Bamboo Container Lid)
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Cease and desist letters typically are sent to accused patent infringers to inform them of alleged infringement. Such letters also frequently are sent with a "take down" demand to on-line marketplaces such as Amazon when an advertised product is believed to infringe. Can sending these letters lead to liability against the sender? The answer depends on whether the letter was sent in good faith or in bad faith.  It also may depend on whether an initial allegation, made in good faith, is promptly retracted if new information comes to light that the patent is invalid, unenforceable, or not infringed.

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FIG. 1 USD891,783 Wood/Bamboo Container Lid

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Long ago the Supreme Court recognized that “[p]atents would be of little value if infringers of them could not be notified of the consequences of infringement, or proceeded against in courts.” Virtue v. Creamery Package Mfg. Co., 227 U.S. 8, 37 38, (1913). Consequently, federal patent laws generally preempt state tort laws that impose liability for good faith communications alleging patent infringement. See Globetrotter Software, Inc. v. Elan Computer Group., Inc., 362 F.3d 1367, 1377 (Fed. Cir. 2004). But the key to such preemption is that the communication must have been made in good faith. If bad faith is alleged and proven, then liability under state tort laws may exist. See Zenith Elecs. Corp. v. Exzec, Inc., 182 F.3d 1340, 1355 (Fed. Cir. 1999).

Bad faith in this context has both an objective and subjective component. See 800 Adept, Inc. v. Murex Sec. Ltd., 539 F.3d 1354, 1370 (Fed. Cir. 2008) (en banc). First, bad faith requires that the design patent infringement allegation be objectively baseless. An objectively baseless allegation exists if "no reasonable litigant could realistically expect success on the merits." Pro. Real Est. Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49, 60 (1993). Second, the sender of the letter must have acted in subjective bad faith. The case law provides no single, clear definition of subjective bad faith, and it is determined on a case by case basis. See Zenith Elecs., 182 F.3d at 1354.

Objectively Baseless

What type of allegations and proof may satisfy the objectively baseless component?

1.  That a patent is invalid as anticipated by prior art. See Gramercy Holdings at *8-10.

2.  That a patent is unenforceable due to inequitable conduct or fraud on the patent office. See Unicorn Glob., Inc. v. GoLabs, Inc., 447 F. Supp. 3d 535, 544 (N.D. Tex. 2020)

3.  That a patent is not infringed. See, e.g., Microsource v. Eco World Grp., No. 19-CV-4016 (N.D. Iowa Oct. 30, 2019)

4.  Knowingly asserting an expired, and therefore unenforceable, patent. See Golan v. Pingel Enter., 310 F.3d 1360, 1372 (Fed. Cir. 2002).

5.  Making allegations of patent infringement before the patent issues or is published to the public. See Hickory Springs Mfg. Co. v. R&D Plastics of Hickory, Ltd., No. 5:14CV00093 (W.D.N.C. July 20, 2015).

6.  That a patent is unenforceable based on patent exhaustion, implied license, and legal estoppel. See Triple7vaping.com, LLC v. Shipping & Transit LLC, No. 16-cv-80855 (S.D. Fla. Feb. 6, 2017).

Subjective Bad Faith ​

What type of allegations and proof may satisfy the subjective bad faith component?

1.  "[I]f the patentee knows that the patent is invalid, unenforceable, or not infringed, yet represents to the marketplace that a competitor is infringing the patent, a clear case of bad faith representations is made out." Zenith Elecs., 182 F.3d at 1354.

2.  "[S]ubjective bad faith only requires proof that the lack of objective foundation for the claim was either known or so obvious that it should have been known by the party asserting the claim." Crye Precision LLC v. Duro Textiles, LLC, No. 15cv1681 (S.D.N.Y. Oct. 28, 2015) (citing and quoting Kilopass Tech., Inc. v. Sidense Corp., 738 F.3d 1302, 1310 (Fed. Cir. 2013).  Note that Kilopass Tech discussed this principle in the 35 U.S.C. § 285 context and Crye Precision applied it to the preemption context. The knowledge requirement also is satisfied if the patentee makes infringement allegations with disregard for their incorrectness or falsity, or with no reasonable basis to believe that the patent was being infringed when the infringement letter was sent. See B&G Plastics, Inc. v. E. Creative Indus., 269 F. Supp. 2d 450, 469 (S.D.N.Y. 2003). 

3.  Knowingly asserting an expired, and therefore unenforceable, patent results in a clear case of bad faith.  See Golan v. Pingel Enter., 310 F.3d 1360, 1372 (Fed. Cir. 2002)

4.  Threats of infringement made without intending to file suit. See Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 710 (Fed. Cir. 1992) (citing Betmar Hats, Inc. v. Young America Hats, Inc., 116 F.2d 956 (2d Cir. 1941); "Persistent threats to the trade, unsupported by any attempt to have the patentee's claims established by suit, will not be permitted. Failure to assert their rights in the customary way indicated a lack of good faith on the part of the defendants." Betmar Hats, 116 F.2d 956 at 957. However, note that this factor is not dispositive and there may be legitimate business reasons not to file suit after making threats of infringement. See Golan v. Pingel Enter., 310 F.3d 1360, 1372 (Fed. Cir. 2002). 

5.  Notices indiscriminately sent to all members of a trade. See Mallinckrodt, 976 F.2d at 710 (citing International Industries & Developments, Inc. v. Farbach Chemical Co., 241 F.2d 246 (6th Cir. 1957).

6.  When the patentee has no good faith belief in the validity of its patent. See Mallinckrodt, 976 F.2d at 710 (citing Magnetic Engineering & Mfg. Co. v. Dings Mfg. Co., 178 F.2d 866 (2d Cir. 1950).

7.  Note that a competitive commercial purpose in sending a cease and desist letter is not by itself improper, and bad faith is not supported when the information conveyed is objectively accurate. See Mikohn Gaming Corp. v. Acres Gaming, Inc., 165 F.3d 891, 897 (Fed. Cir. 1998). In general, "a threshold showing of incorrectness or falsity, or disregard for either, is required in order to find bad faith in the communication of information about the existence or pendency of patent rights." Id.  "Indeed, a patentee, acting in good faith on its belief as to the nature and scope of its rights, is fully permitted to press those rights 'even though he may misconceive what those rights are.'".  Id. (citing and quoting Kaplan v. Helenhart Novelty Co., 182 F.2d 311, 314 (2d Cir. 1950).

8.  Note that subjective considerations of bad faith are not relevant if the allegations are not objectively baseless. See Dominant Semiconductors Sdn. Bhd. v. OSRAM GmbH, 524 F.3d 1254, 1264 (Fed. Cir. 2008).

9.  "Examples of subjective considerations of bad faith are allegations relating to the patentee's representations to the patent office in its application for patent, in the patentee's motivation in making allegations of infringement, and in whether the patentee's representations regarding the patent or the allegations of infringement were made recklessly or without regard to their truth or falsehood." Energy Heating, Ltd. Liab. Co. v. Heat On-The-Fly, Ltd. Liab. Co., No. 4:13-cv-10 (D.N.D. July 7, 2015).

10.  "'A statement of fact' cognizable under the Lanham Act is one that is 'capable of being proved false.'" Unicorn Glob., Inc. v. GoLabs, Inc., 447 F. Supp. 3d 535, 545 (N.D. Tex. 2020) (citing and quoting Eastman Chem. Co. v. Plastipure, Inc., 775 F.3d 230, 235-36 (5th Cir. 2014) (internal quotations omitted)).

Practice Points To Consider

1.  To avoid preemption, bad faith must be pleaded and proven even if bad faith is not an element of the state tort claim. See Zenith Elecs. Corp. v. Exzec, Inc., 182 F.3d 1340, 1355 (Fed. Cir. 1999).

2.  The burden is upon the party asserting bad faith to present affirmative clear and convincing evidence that the sender of the letter acted in bad faith.  The burden is not upon the sender to prove they acted in good faith. See Golan v. Pingel Enter., 310 F.3d 1360, 1372-73 (Fed. Cir. 2002). 

3.  To survive a motion to dismiss, the complaint must allege more than the legal conclusions that the allegations were objectively baseless and were made in subjective bad faith.  Sufficient factual matter must be alleged to make these conclusions plausible. See GlobalTap LLC v. Smart Tap LLC, 13 C 5322 (N.D. Ill. Feb. 24, 2015). The accused infringer only needs to plausibly allege bad faith at the pleading stage, not prove it. See Hunter Douglas, Inc. v. Harmonic Design, Inc., 153 F.3d 1318, 1336 (Fed. Cir. 1998). "Examples of conduct constituting bad faith include: the patentee having knowledge that the patent is invalid, unenforceable, or not infringed; knowledge on the part of the patentee of invalidating prior art; or baseless infringement accusations even of a valid, enforceable patent." Hickory Springs Mfg. Co. v. R&D Plastics of Hickory, Ltd., No. 5:14CV00093 (W.D.N.C. July 20, 2015) (citing Zenith Electronics Corp. v. Exzec, Inc., 182 F.3d 1340, 1355 (Fed. Cir. 1999); Blue Rhino Global Sourcing, Inc. v. Well Traveled Imports, Inc., 888 F.Supp.2d 718, 722 (M.D.N.C. 2012).

4.  "To survive summary judgment, the party challenging such statements must present affirmative evidence sufficient for a reasonable jury to conclude that the patentee acted in bad faith, in light of the burden of clear and convincing evidence that will adhere at trial."  Golan v. Pingel Enter., 310 F.3d 1360, 1371 (Fed. Cir. 2002).
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5.  Initial patent infringement allegations made in good faith may change into bad faith allegations if new information comes to light that the patent is invalid, unenforceable, or not infringed, and the infringement allegations are not withdrawn. See Gramercy Holdings at *9, *11-12.

6.  Evidence of reasonable reliance on attorney advice, even when the advice is legally incorrect, is evidence of good faith that may help defeat a claim of bad faith when the party receiving the advice had no reason to question the advice. See Golan v. Pingel Enter., 310 F.3d 1360, 1373 (Fed. Cir. 2002).

7.  In some cases, liability may be analyzed under a state litigation privilege statute, see e.g., Golden Eye Media United States, Inc. v. Trolley Bags UK, Ltd., 525 F. Supp. 3d 1145, 1232-1237 (S.D. Cal. 2021) (considering California's litigation privilege statute). 

8.  Liability also may be analyzed under the Noerr-Pennington doctrine and its sham litigation exception. However, note that some courts hold that Noerr-Pennington does not apply when the communication is made to a private patent adjudication program such as Amazon and the communication does not involve threats to file suit in court. See, e.g., Golden Eye Media, 525 F. Supp. 3d at 1241-1242.

9.  Injunctions are rarely granted that prohibit a patentee from communicating to others information about patent rights. See GP Indus., Inc. v. Eran Indus., Inc., 500 F.3d 1369, 1373 (Fed. Cir. 2007) ("[A]n injunction against communication is strong medicine that must be used with care and only in exceptional circumstances.").

10.  The lawsuit as a whole must be objectively baseless, not just a single claim. See Breville Pty Ltd. v. Storebound LLC, No. 12-cv-01783 (N.D. Cal. Apr. 24, 2013).

Open Issues

1.  Whether bad faith must be pleaded with particularity. See Gramercy Holdings at *12 n.8 ("Defendants have not identified any controlling law on this point.").