Changes to the law on threats: balancing interests March 2016 This feature article considers the current law and proposed changes to the law on groundless threats for infringement of intellectual property rights. Introduction In some circumstances, a threat to enforce intellectual property rights (IPRs) through infringement proceedings may itself be actionable. Current legislation is complex and inconsistent across different IPRs and there is uncertainty about what constitutes a threat. However, new legislation has been proposed to address a number of concerns in this area. This article reviews the current law on unjustified threats and the reasons that change is needed, key features of the proposed reforms and the impact that these may have on rights holders. The changes, which are expected to be introduced later in 2016, will introduce a regime that is more consistent across different IPRs and provides a better balance between rights holders and competitors. Nevertheless, there still remains a degree of uncertainty about what constitutes an unjustified threat. Current law In summary, the current law on unjustified threats means that any aggrieved person, such as a manufacturer, importer, distributor, or customer or user, can bring an unjustified threats action against the person making the threat. A threat may be oral, implied or indirect and the test is whether an ordinary person in the position of the claimant would understand the words to contain a threat to sue. The available remedies are a declaration that the threats are unjustifiable, an injunction against further threats and damages for any loss caused by the threats. Threats that refer to primary acts of infringement, such as making or importing, will not generally be actionable as an unjustified threat. For patents, threats in respect of a secondary act made to a primary infringer will not be actionable. By way of example, if a company imports into the UK a product from abroad that is alleged to infringe a patent, the importing is a primary act and the company is a primary infringer as it is doing the primary act. Even if that company then distributes the product to local retailers, which would be a secondary act, a threat could be made in respect of the distribution as it was done by the primary infringer. However, threats made against the local retailer for selling the product to customers would be actionable as they would be in respect of the secondary act of selling a product and made against a retailer that is not the primary infringer.
Legislation Patents Trade marks Registered designs Community designs Design rights Threats provision Patents Act 1977 Trade Marks Act 1994 Registered Designs Act 1949 Community Design Regulations 2005 (SI 2005/2339) Copyright, Designs and Patents Act 1988 What is a threat? Section 70 Section 21 Section 26 Regulation 2 Section 253 Is the threat actionable? Permitted communications Remedies and defences Professional advisors Supplementary provisions on pending registration and delivery up Section 70A Section 21A Section 26A Regulation 2A Section 253A Section 70B Section 21B Section 26B Regulation 2B Section 253B Section 70C Section 21C Section 26C Regulation 2C Section 253C Section 70D Section 21D Section 26D Regulation 2D Section 253D Sections 70E and 70F Sections 21E and 21F Sections 26E and 26F Regulations 2E and 2F Section 253E Justification The law on unjustified threats was introduced, as explained by the High Court in L Oréal (UK) Ltd v Johnson & Johnson, in order to stop intellectual property rights holders "who were (in Pope's words about Addison) 'willing to wound but afraid to strike' from holding the sword of Damocles above another's head" ([2000] EWHC Ch 129). Retailers or customers who may be less well placed or inclined to attack the validity of an IPR than the manufacturer can often simply switch to buying or selling a different product. This can result in fewer challenges to IPRs of questionable validity. It can, however, be difficult to track down the manufacturer in question and it is therefore sometimes easiest to persuade a retailer to stop selling instead. Manufacturers, on the other hand, will often have made far more investment in the product or service in question and may be more likely to fight the action if it is without merit. Therefore, since 1883, the UK has had provisions in one form or another that aim to encourage rights holders to focus allegations of infringement on the manufacturer or service provider that produced the competing product or service. However, the area is a difficult one and uncertainties can lead parties to be reluctant to enter communications
before instituting proceedings, therefore reducing the opportunities for settlement. Other European developments Other jurisdictions generally do not have specific provisions relating to threats but tend to rely on general torts of unfair competition; for example, case law based on the German Civil Code provides that damages are payable for illegal and culpable interference with the right to operate an established business. This is a broader, although not necessarily clearer, regime which prohibits commercial actions that impair the interests of competitors, consumers and other market participants. These commercial actions can include unjustified threats. The introduction of European unified rights, which currently include Community trade marks and designs but soon will also include unitary patents, caused both the UK courts and legislators to consider how the unjustified threats provisions apply to unified rights. Reasons for change The unjustified threats regime has been controversial, given the difficulty of getting the correct balance between the interests of rights holders and alleged infringers. However, two key problems have underpinned the case for immediate reform: Uncertainty as to what a threat is. Inconsistency between different IPRs. The various pre-action protocols in the Civil Procedure Rules generally encourage parties to litigation to resolve their differences before proceedings are started, or at the very least to narrow down the issues under dispute. However, as the unjustified threats regime can give rise to liability where claims are discussed in advance of proceedings, this can discourage communication and dispute resolution. This has led to raised legal costs and complexity in pre-action conduct for IPR infringement actions, potentially stifling the ability of small and medium sized businesses to properly assert their IPRs against infringers. Uncertainty as to what a threat is While various exceptions to an actionable threat exist, there is limited guidance on what those exceptions mean in practice. Under the current patents regime, a rights holder is only allowed to provide factual information about the patent, or make an assertion about the patent for the purpose of any enquiries made to discover whether or by whom the patent has been infringed by primary acts; anything beyond this could amount to a threat of action. However, given the risk of implied threats, it is difficult to be certain of the point at which a communication contains more than mere factual information and becomes an implied threat. Inconsistency between IPRs Although there are many elements of the threats regime that are common across the different IPRs, they have developed separately and, as a result, there are some key differences. It is therefore important to consider the risk of a threats action when alleging infringement of separate rights, such as trade marks and patents, in the same communication. For example, since the Patents Act 2004 came into force, patent owners have been able to make
threats against persons doing primary acts of infringement, such as manufacturing or importing a product, in respect of both those primary acts and any other acts, such as selling (see "Actionable threats" below). However, despite indications from the government that this exception to an actionable threat would also be swiftly extended to trade marks and designs, this never took place. So a threat in relation to a potential product that encompasses those other IPRs may be actionable, particularly if the threat relates to secondary acts such as selling or distribution. Reform The Law Commission carried out a wide-ranging review of the law and published its report in April 2014 (2014 report). The government accepted the majority of the recommendations set out in the 2014 report and the Law Commission published draft legislation in October 2015, along with a further report (2015 report), in the form of the Intellectual Property (Unjustified Threats) Bill (the Bill). The government confirmed in January 2016 that it would be taking the Bill forward. It is expected to be introduced in Parliament in the next Parliamentary session. Jurisdictional issues National intellectual property rights (IPR): current regime Community IPRs: current regime All IPRs (including unitary patents and Community IPRs): new regime UK courts will hear threats actions where the threat relates to a UK IPR and UK proceedings, but is made outside the UK. Threats provisions apply to Community rights. Courts have considered how a domestic right to bring an action for groundless threats applies to Community trade marks and Community designs. The current test is that the threat must be understood to relate to proceedings brought in a UK court (Best BuyCo Inc. and another v Worldwide Sales Corporation España SL [2011] EWCA Civ 618). The proposed test under the Intellectual Property (Unjustified Threats) Bill is that the threat must be understood to relate to acts done in the UK or an act, which if done, would be done in the UK. It specifically brings the unitary patent within the threats provisions despite the Unified Patent Court not being a UK court. It is irrelevant where the threat to sue was made. Threats to sue made abroad are still actionable provided that the relevant tests are satisfied.
Non-actionable threats Trade marks Designs Patents Application of mark to goods and packaging Importing goods and packaging Supply of services Causing another to apply the sign (for example, commissioning) Intention to carry out above acts Secondary acts by same person Making or importing Intention to carry out above act Secondary acts by same person Making or importing a product for disposal Using a process Intention to carry out above acts Secondary acts by same person * Text in italics denotes proposed changes under the Intellectual Property (Unjustified Threats) Bill One of the key aspects of the Bill is that the provisions are to be harmonised across the different IPRs, resolving one of the major problems with the current regime. The Bill inserts parallel provisions into each of the relevant pieces of legislation currently dealing with the rights in question, for example, the Patents Act 1977 for patents (see box "Legislation"). An IPR exists. A person intends to bring proceedings (whether in a court in the UK or elsewhere) against another person for infringement of the IPR by an act that is done in the UK or which if done would be done in the UK (see box "Threats under the proposed legislation"). The Bill also identifies new categories of permitted communications that will not constitute threats and introduces a degree of clarity. Where a primary infringer is identified, the threats provisions will be relaxed but the defence of justification will be restricted in scope where a threat relates to a patent that is found to be invalid. What is a threat? Under the Bill, a threat is made when a reasonable person in the position of a recipient would understand from a communication that: This is a change in wording from the current law where a threat depends on the understanding of the ordinary person in the position of the recipient. In practice though, this has been interpreted by the courts as requiring analysis from the perspective of the reasonable man. In Best Buy Co Inc and another v Worldwide Sales Corporation España SL, the Court of Appeal held that whether or not a letter was a threat was to be answered by reference to what a reasonable person, in the position of the recipient of the letter, with its knowledge of all the relevant circumstances as at the date the letter was
written, would have understood the writer of the passage to have intended, when read in the context of the letter as a whole ([2011] EWCA Civ 618). This analysis was recently confirmed by the High Court in Tech 21 UK Limited v Logitech Europe SA, which involved Community design rights ([2015] EWHC 2614 (Ch)). Under the current law and the Bill, threats can be implied as well as express and communications need to be understood in the context within which they are sent. In GrimmeLadmaschinenfabrik GmbH & Co KG v Scott (t/a Scotts Potato Machinery), even though the letter in question stated that the claimant did not intend to take proceedings, when it was read in context with a reservation of the claimant's rights and a reference to contacting the customer again if it was successful in its action against the defendant, the letter still amounted to a threat ([2009] EWHC 2691). The Bill also deals with the territorial scope of the provisions and, in particular, seeks to address the issues raised by the unitary patent. The current test set out in Best Buy requires the threat to be understood to give rise to proceedings being brought in a UK court and would therefore not apply to proceedings in the unitary patent court (UPC). Under the new test set out in the Bill, the threat must relate to an act that is done in the UK, or which if done would be done in the UK. This would then allow unitary patents to come under the threats provisions if the alleged infringing act to which the unitary patent threat related took place in the UK. As is currently the case, lawyers from other jurisdictions could still fall foul of the threats provisions if they make a threat in relation to an alleged infringing act done in the UK or a generalised threat in relation to Europe that might be taken to apply to the UK (see box "Jurisdictional issues"). Actionable threats For a threat to be actionable under the Bill: The action needs to be brought by a person aggrieved, who does not need to be the recipient of the threat. The threat must not fall within any of three primary exceptions to an actionable threat: o o o threats made in respect of primary acts; threats made in respect of primary actors; or being a permitted communication. A person aggrieved is anyone whose commercial interests have been, or might be, affected by the threat in a real, as opposed to a fanciful, way. So, for example, a manufacturer could bring an action for threats made against retailers that then cancelled orders from the manufacturer Samuel Smith Old Brewery (Tadcaster) v Philip Lee (trading as "Cropton Brewery") shows how this provision works in practice ([2011] EWHC 1879 (Ch)). The claimant made an unjustifiable threat to Marks and Spencer, a customer of Cropton Brewery, for use of a stylised white rose on bottles of beer supplied by Cropton Brewery which was alleged to infringe Samuel Smith's similar trade mark. However, Cropton Brewery was not a person aggrieved as the threats had not damaged the commercial relationship between Marks and Spencer and Cropton Brewery (the beer continued to be supplied) and consequently its business had not been damaged.
There is no change under the Bill from the current exceptions that threats in respect of primary acts are not actionable. However, the exception is also expressly extended to include intended primary acts, such as an intent to import an alleged infringing product. There is also a specific change for trade marks. Under the Bill, a threat made against a third party for causing another person to apply marks to goods or in connection with a service is also an exception to an actionable threat. This anti-avoidance provision prevents claimants avoiding the threats exceptions by paying a third party to add marks to the goods or packaging in question. There are three primary exceptions to an actionable threat. Primary acts. Broadly speaking, threats are not actionable if they are made in respect of primary acts of infringement (see box "Non-actionable threats"). A threat is not actionable if it is made in respect of a primary act or intended primary acts. Actions to which the threat refers. Under the Bill, a threat is also not actionable if it is made against someone that is a primary infringer regardless of whether or not the alleged act or intended act is a primary or secondary act. The primary infringer is the person making the infringing product or, in the case of trade marks, applying the mark, or importing the product. Whereas a secondary infringer is someone dealing with the product in a way that amounts to infringement, such as through selling or distributing an alleged infringing product. This extends the current position for patents to the remaining IPRs and removes one of the significant inconsistencies between them. As a result, it will be possible for a letter to be sent to a manufacturer that makes threats in respect of distribution as well as the manufacture of an
infringing design (see box "Non-actionable threats"). Permitted communications. The permitted communication exception will introduce a safe harbour for rights holders looking to send initial letters to potential secondary infringers (see box "Legislation"). This should assist rights owners trying to establish who the primary infringer is without risking being sued for making a threat. A permitted communication is a communication that: Does not contain an express threat to sue. So far as it relates to the threat, is made solely to: o give notice that an IPR exists; o discover the identity of a primary infringer; or o give notice that a person has an IPR where another person's awareness of that right is relevant to any proceedings that may be brought in respect of that IPR (these are known as permitted purposes). All of the information relating to that threat is information that is necessary for the permitted purpose and is reasonably believed by the sender to be true. The courts have the ability to add to the list of permitted purposes, the idea being that the list will develop over time. The provisions also give specific examples of where a statement is deemed necessary for a permitted purpose and when a statement amounts to a permitted purpose, which will give greater clarity to letter writers. The following are all considered necessary for a permitted purpose: Statements that an IPR exists and is in force or that an application for an IPR has been made. Providing details of the IPR in question that are accurate in all material respects and not misleading in any material respect. Providing information that enables the identification of the products, services or processes in respect of which it is alleged that acts infringing the relevant IPR have been carried out. Conversely, the following are expressly not for permitted purposes: Defences A request to cease doing the infringing act in relation to a product, for example, using a sign in relation to goods or services, or doing something in relation to a product or process. A request for delivery up or destruction of products. A request for undertakings to be given in respect of products, processes or services. The reformed threats provisions in the Bill set out two statutory defences available to the rights holder. Justification defence. It will be a defence if the defendant can show that the act in respect of which proceedings were threatened was in fact infringing (or would have been infringing if the act had been done).
This essentially replicates the defence found under the current law for all of the IPRs. However, as currently proposed in the Bill, the defence is not available if the right that is being asserted turns out to be invalid. The 2014 report argues that an invalid right is incapable of being infringed and therefore there is no need for the express carve out. While this is true, in removing the invalidity wording, the draftsmen have also removed another important part of the defence for patentees introduced in the 2004 amendments. For patents, the defendant patentee has a defence, even if the claimant shows that the patent is invalid in a relevant respect, if the defendant proves that at the time of making the threats it did not know, and had no reason to suspect, that the patent was invalid in that respect. This is an important provision as a patentee may have a genuine belief in the validity of a patent that is ultimately overturned as a result of a thorough attack in the course of proceedings which may, for example, identify previously unknown prior art. Of course, there is a public policy concern that threats will not be made in relation to weak patents and thereby protect unjustified monopolies. As a result, the defence has been construed relatively narrowly by the courts. In Sudarshan Chemical Industries Limited v Clariant Produkte (Deutschland) GmbH, the Court of Appeal held that even though the patent attorney who wrote the letter in question did not personally have reason to believe that the patent was invalid, the inventor was aware before the priority date of facts invalidating the patent and therefore the justification defence could not be invoked ([2013] EWCA Civ 919). Identifying the primary actor. It is a defence if the defendant shows that it: Took all reasonable steps to discover the identity of the primary actor. Notified the person being threatened before or at the time of the relevant threat of the steps taken. In practice, it is not always possible to identify the primary actor. Retailers may not wish to damage commercial relationships with suppliers by reporting them to potential claimants nor are they incentivised under the proposed reforms to do so. The Bill however, allows rights holders to take some steps to identify the primary infringer without facing a threats claim. The defence applies only to patents under the current regime, but is extended to the remaining IPRs under the Bill, again removing an inconsistency. However, a lower standard has now been proposed. A patentee currently has to use best endeavours to identify the primary infringer, in contrast under the new regime reasonable steps must be taken in relation to both patents and other relevant IPRs. In all of these cases, there remains significant scope for argument about whether or not a particular step was reasonable and it is debateable whether much clarity has been added by this particular change. Threats and privilege. The judicial policy of encouraging settlement favours pre-action correspondence in order to resolve or narrow the issues before starting proceedings and justifies the ability of the parties to claim without prejudice privilege over genuine attempts to settle a dispute. Parties generally need to be able to have some frank exchange of views on the merits to reach settlement and the protection of
privilege is an important safeguard even where an unjustified threat might be made. The Court of Appeal in Unilever v Procter & Gamble made it clear that it was an abuse of process for Unilever to rely on the statement made by Procter & Gamble in a without prejudice meeting that it would assert its rights in relation to the patent in issue if negotiations were unsuccessful ([1999] EWCA Civ 3027). However, the courts have been careful to circumscribe whether a communication containing a threat is covered by without prejudice privilege. So, for example, in one case despite correspondence being marked "without prejudice", the rule did not apply as no relevant negotiations were actually taking place between the parties at the time. Best Buy also looked at the without prejudice rule and noted that although the last three paragraphs of a letter that was held to contain threats were an invitation to enter settlement negotiations, the letter as a whole could not be said to be a genuine attempt to settle the case. The case underlines the difficulty of avoiding threats in an initial communication. Therefore, while marking threats letters "without prejudice" is an advisable step, the communication needs to be a genuine attempt to settle, otherwise the courts will dismiss the label as disguising what is otherwise a clear threat to sue. Remedies A person successfully suing for unjustified threats is able to obtain: A declaration that the threat is unjustified. An injunction against the continuation of the threat. Damages in respect of any loss sustained by the aggrieved person by reason of the threat. These remedies are the same under the Bill as under the current regime. Immunity of legal advisers Under the existing threats provisions, legal advisers have previously been personally liable for threats made on behalf of their clients. This has raised difficulties for both legal advisers and clients, and gives litigants an opportunity to play them off against each other. As a result, the Bill is proposing protection from liability for legal advisers provided that certain criteria are met. The legal adviser must be acting on the instructions of his client and the client must be identified in the communication, in order to prevent clients hiding behind the immunity of their legal advisers. A legal adviser is defined as someone who is acting in a professional capacity in providing legal services, or the services of a trade mark attorney or a patent attorney, and is regulated in the provision of those services. This allows the relevant regulator to take action against any legal advisers who take advantage of their immunity. The impact of the changes It is difficult to strike the right balance between rights holders and recipients of unjustified threats. However, while the new regime resolves some of the issues with the threats provisions, there remain uncertainties in the practical application of the provisions, particularly as a result of technological developments.
A recent example of the uncertainty in the threats provisions was highlighted by T&A Textiles and Hosiery Ltd v Hala Textile UK Ltd and others ([2015] EWHC 2888 (IPEC)). In the decision, the Intellectual Property Enterprise Court considered whether a notification sent to ebay under its verified rights owner system that gave notice of registered rights and potentially infringing goods constituted an actionable threat. The court noted that there had been differing judicial interpretation about whether a notice of this kind was mere notice that the design right was registered and therefore the threat would not be actionable, although it concluded provisionally that the notice was a threat. It is likely that similar issues of interpretation will develop under the reformed legislation. Another important issue is the treatment of threats in the European context. As the laws surrounding IPRs become increasingly harmonised across EU member states and particularly with the introduction of the unitary patent, which joins Community trade marks as a single pan- European right, the threats provisions seem out of place. Generally, other countries take action in relation to threats under unfair competition law. The 2014 report placed emphasis on not exporting the threats regime to Europe, but those from jurisdictions other than the UK can still fall foul of the threats provisions. While further harmonisation might be helpful, the suggested introduction of a pan-european unfair competition regime would raise far broader issues. Although the law will be harmonised across the IPRs that are currently governed by threats provisions, this still only covers patents, trade marks and designs. One peculiar inconsistency is that passing off is not covered by the rules but trade mark infringement is. It is not uncommon for both passing off and trade mark infringement to be alleged together, but passing off may be the only allegation raised in initial correspondence in order to avoid possible threats actions. Also, the new regime has resulted in the loss of an important defence for patentees that currently have a defence where the patent is found to be invalid (and therefore the acts complained of are not infringing) but the patentee was not aware of the facts that rendered the patent invalid at the time of the threat. A final problem for rights holders is that the onus is still very much on them to identify the primary infringer. Although rights holders will be allowed to enquire about the identity of primary infringers (as has been the case since 2004 for patents), there is no particular obligation on the addressee of the enquiries to answer them. A retailer has little incentive to divulge its supply chain and consequently the rights holder may be forced to sue in order to discover the identity of the company or individual. This problem has not really been addressed in the Bill and while the obligation on rights holders to take steps to identify the primary infringer has been softened from best endeavours to all reasonable endeavours, the onus remains on the rights holder. Nevertheless, there are several steps that an inhouse lawyer or rights holder should take when considering making an allegation of infringement (see box "Practical tips"). These can help minimise the risks when making threats in relation to infringement of IPRs and ensure that companies and individuals are able properly to assert their rights.
Practical tips Owners of intellectual property rights (IPRs) that are considering making allegations of infringement should: Take care in all communications with other parties. Note that a threat may emerge from a group of letters or in answer to a query. Take care with announcements made in a mass communication, such as on a circular or website announcement. Note the differences in approach for different IPRs in the current legislation. Analyse the position in relation to multiple IPRs and be wary of combining them in the same communication, particularly under the current legislation. Consider whether allegations can be confined to another jurisdiction. Ensure that staff in England and other jurisdictions are aware of the risk of making threats that might be taken to refer to the UK; for example, by mentioning a Community trade mark. Consider simply giving notice of the existence of the IPRs. Identify the potentially infringing acts carefully. Assess the requirement for a permitted communication. Choose the recipient carefully and consider whether it is a primary or secondary infringer. Consider without prejudice communications but ensure that they are a genuine attempt to settle and take particular care with first communications.
Susie Middlemiss T+44 (0)20 7090 4038 E susie.middlemiss@slaughterandmay.com Richard McDonnell T +44 (0)20 7090 4240 E Richard.mcdonnell@slaughterandmay.com Laura Balfour T +44 (0)20 7090 4018 E laura.balfour@slaughterandmay.com This article was originally published in the March 2016 edition of PLC Magazine. Slaughter and May 2016 This material is for general information only and is not intended to provide legal advice. For further information, please speak to your usual Slaughter and May contact. March 2016 535620904