Willing to wound, yet afraid to strike?

This article revisits the essential elements of the UK law of groundless threats of intellectual property rights infringement, before going on to discuss steps which can be taken to manage that risk.

What is a “groundless threat”?

It should go without saying that, where a party’s intellectual property rights (IPR) are being infringed, those rights should be capable of being protected. Often the first step in protecting IPR is to issue a claim letter (normally drafted by the party’s solicitors), requesting that the infringer ceases the infringing activity, and provides appropriate undertakings.

When drafting such a letter, care must be taken to avoid liability arising from the groundless threat provisions. Where A alleges that B has infringed A’s IPR, A and A’s solicitor may be liable to B for having issued a “groundless threat”.

Threats provisions were first introduced into patent legislation, but are now present in almost all areas of IP law, both in respect of registered and unregistered IPR.

In summary, the relevant sections which relate to the groundless threats provisions in respect of the different types of IP are:

• s 70 of the Patents Act 1977 (as amended by the Patents Act 2004);
• s 21 of the Trade Marks Act 1994;
• s 26 of the Registered Designs Act 1949; and
• s 253 of the Copyright, Designs and Patents Act 1988.

It is important to note that the law governing copyright, and passing off law, does not contain “groundless threats” provisions.

Rationale behind the provisions

Although often considered harsh by the party alleging the infringement, there are sound public policy reasons for the existence of these provisions. They address the concern of a trader who has been accused of infringing one’s IPR, ceasing trading through fear of being involved in litigation, with the result that that trader’s business is irrevocably damaged. To allow a party to make unsubstantiated threats across the market would likely have an unfairly adverse effect on a smaller company’s ability to trade, particularly if faced with the constant threat of legal “threatening” letters from larger, wealthier companies. In short, these rules ensure that those threatening IPR infringement either “put up or shut up”.

Who is liable?

The legislation provides that any person making a threat can be sued. “Person” is not defined or qualified, therefore its reach is potentially very wide and is likely to include not only an IP holder, but also a licensee and professional advisers, such as solicitors and patent and trade mark attorneys if they are the issuer of the threatening letter.

Who may bring an action and for what can they claim?

A threats action may be brought by “any person aggrieved” by the threat, not just the person threatened. A “person aggrieved” will typically be the manufacturer of the allegedly infringing product, but it may equally be an importer, distributor, buyer or user of such a product. Importantly, for a person to be aggrieved, they must establish that their commercial interests are, or are likely to be, adversely affected in a real way.

Whilst you may be able to send a general warning to the trade or industry as a whole, by way of an advertisement or circular, if it is (expressly or impliedly) directed to any particular person then it could be actionable.

Exceptions to the groundless threats provisions

Certain activities by a suspected infringer are exempt from the threats actions, meaning the person alleging the infringement will not fall foul of the threat provisions, provided that the actions of infringement which are threatened fall within the exemptions below.

In short, the exceptions apply if the alleged infringement concerns:

• patents – s 70(4) of the Patents Act 1977 – making or importing a product for disposal or using a process;
• trade marks – s 21(1) of the Trade Marks Act 1994 – applying the mark to goods or their packaging, importing goods bearing the mark, or supplying services under that mark;
• designs – s 26(2)(a) of the Registered Designs Act 1949 and s 253(3) of the Copyright, Designs and Patents Act 1988 – making or importing anything.

The rationale behind these exceptions is that an IPR holder should be able to place the main offenders on notice that he intends to sue, but retailers and other traders who are further removed from the distribution chain should be protected from such threats, as they are not the primary infringers.

Remedies available

If found liable for making an unsubstantiated threat, there are several remedies open to the party bringing a threats action. First, they may seek a declarator from the court that the threats alleged lacked justification. They may also be able to obtain an interdict/injunction order against the party making the threats to prevent them from doing so in the future. Lastly, the party being threatened may be able to sue the party alleging the infringement in damages for all lost profit during the time they were unable to sell their goods due to the ongoing litigation.

Risk management strategies

Having been involved in issuing cease and desist letters for over 15 years, there are a number of steps which I adopt to manage risk in relation to groundless threats. I do appreciate that these will be known or at least common sense to some, but I very much suspect not all.

Here follow 10 means by which this risk can be managed:

1. Do nothing... yet

Whilst many great military strategists advocate the brilliance of inaction, I am not seriously advocating this as a long-term strategy. Rather my suggestion is do nothing, for now.

A period of intelligence gathering (perhaps using external investigators to carry out test purchases) may well save time, money and risk in the long run.

2. Pass the risk to your client

The real risk arising from a groundless threats action should never be exposure to a substantial damages claim. Rather, it is from your firm and your client being sued as joint defenders (and thus requiring you to pass the matter to your firm’s professional indemnity insurers). In that event the alleged infringer has stolen the initiative and effectively split the rights holder from their (formerly?) trusted adviser.

When I explained this risk to clients, they are often content to issue a cease and desist letter in their own name. This means that they are the only party exposed to the risk of a groundless threats action and we are able to become involved, either by way of service of proceedings or in without prejudice negotiations, at a subsequent stage.

3. Raise proceedings

When appropriate to do so, the commencement of proceedings without issue of a cease and desist letter is the safest means of leapfrogging the dangers of a groundless threats claim. IP judges fully appreciate the need to manage groundless threats claims in this way, so the likelihood of receiving criticism for not having first fired a “warning shot” may be low.

If you have a good claim then the only risk is that the infringer immediately “raises the white flag” and has a position to resist an order for expenses.

4. Restriction of threat to s 21(1)(a) to (c) conduct

Drafting a cease and desist letter which stays within the exceptions outlined in s 21(1)(a) to (c) can be an effective risk management strategy. A common mistake is to believe that these subparagraphs make it safe to write to the manufacturer or importer with impunity. They do not. The exceptions relate to conduct rather than the status of recipients. If you write to an infringing manufacturer referring to their marketing and sale of goods then the letter may well be actionable.

It is important to remember that it is not only the primary allegations in your cease and desist letter which need to observe the s 21 exceptions, but also any undertakings which may be sought. Requesting an undertaking that a party will not market a certain brand of goods would most likely be an implied threat of trade mark infringement proceedings for their failure to do so. Your cease and desist letter is not judged by what you intended it to mean, but by what the objective recipient would construe it to mean.

5. Effective use of “without prejudice” privilege

This will only ever be of limited effect. I cannot envisage how an initial cease and desist letter could ever be covered by without prejudice privilege. Of course, the application of the words “without prejudice” has no particular magic and the court will also look to see whether a communication is genuinely intended to achieve a resolution of a dispute or, as in the case of a cease and desist letter, is the commencement of a dispute.

Another aspect on the limits of without prejudice is to have an awareness of differing laws of evidence throughout the UK, EU and elsewhere.

6. Threaten only passing off (making no mention of trade marks)

As with others, this approach can be effective, but only in a limited sense. The suggestion is that a letter threatening common law passing off is issued and not even a passing reference made to trade marks.

One potential way of ensuring a letter alleging passing off is not dismissed is if the letter is copied to trade mark attorneys known to act for the alleged infringer. Of course, additional care should always be taken when communicating such allegations to any third party.

7. Introduce “four-eyes” or “gatekeeper” policies

It makes a great deal of sense to have a policy for monitoring the issue of all threats letters. For example, ensuring signoff by a second set of eyes familiar with this area of law is a very useful sense check prior to issue of a letter. Certainly, it is our universal practice.

8. Engage with insurers on this issue

Insurers do not like being surprised. It is much better to inform or educate your brokers regarding the potential ramifications of groundless threats claims prior to a claim arising.

9. Mere notification of existence of trade mark

This, of course, is an express statutory provision in terms of s 21(4) of the 1994 Act. It is important to bear in mind that this protection has been construed very narrowly by the courts. Any steps going beyond mere notification of a trade mark being in existence run the risk of liability.

10. Awareness of different jurisdictions

Research carried out on behalf of my firm has uncovered a very considerable disparity in approaches between different jurisdictions in managing these risks. From a UK perspective, it is encouraging that we appear to be about as bad as it gets. We are one of the few countries which has statutory threats provisions and in which an agent communicating a threat made in good faith can be liable. However, our practice is always to secure local advice in the jurisdiction in which the threat is being made.

Outlook unchanged

Our threats provisions stand out as being the most draconian in Europe, if not the world. There is real concern among practitioners that the UK is seen as an unattractive jurisdiction to resolve IP disputes.

With the Gowers review having so recently passed without taking the opportunity to address problem – I consider it is one we will have to live with and risk which we will have to continue to manage.