Germeshausen Center Newsletters Archive - Winter 2010 Prelitigation Hardball - Thomas G. Field, Jr. and Richard F. Kurz

Prelitigation Hardball - Thomas G. Field, Jr. and Richard F. Kurz

The Kenneth J. Germeshausen Center, created in 1985 through the generosity of Kenneth J. and Pauline Germeshausen, is the umbrella organization for Pierce Law's intellectual property specializations. Today the Germeshausen Center is a driving force in the study of international and national intellectual property law and the transfer of technology. It acts as a resource to business as well as scientific, legal and governmental interests in patent, trademark, trade secret, licensing, copyright, computer law and related fields.

The Center bears the name of its benefactor Kenneth J. Germeshausen, one of New England's pioneering inventors and professor of electrical engineering at Massachusetts Institute of Technology. Germeshausen was also co-founder of the international high technology firm of EG&G.

Prelitigation Hardball - Thomas G. Field, Jr. and Richard F. Kurz

            In situations where some parties infringe intellectual property (IP) rights only if others do, the former can be thought of as secondary and the latter as primary infringers.  Threatening to sue secondary infringers can be strategically advantageous but courts should carefully evaluate any such threats.

            Consider, for example, the series of suits between Cardtoons, L.C. and the Major League Baseball Players Ass n (MLBPA), where the latter obtained nearly the equivalent of a temporary restraining order by sending a cease and desist letter to a printing company, Champs Marketing, Inc. (Champs).  Champs had previously agreed to print a set of parodic cards for Cardtoons that resembled traditional trading cards, but after receiving the MLBPA letter Champs advised Cardtoons that it would not print [its] parody cards until a court of competent jurisdiction had determined that the cards did not violate MLBPA s rights. [i]  

            Although the court ultimately affirmed Cardtoons right to publish despite possible objections based on state rights of publicity and Lanham Act § 43(a)(1) the MLBPA succeeded in delaying publication by three years.[ii]  When Cardtoons also sued for tort damages, the MLBPA was unsuccessful in asserting absolute immunity under the First Amendment right-to-petition clause.[iii]  The MLBPA, however, ultimately avoided tort liability when Cardtoons failed to prove that the MLBPA acted maliciously or wrongfully when threatening the printer.[iv]  

            Not surprisingly, an equivalent common law tort privilege predates recognition of First Amendment rights.  This is well illustrated by drawn-out patent litigation summarized in Kemart Corp. v. Printing Arts Research Lab., Inc.,[v]  where the court faced nearly the same question as in Cardtoons.  Could Kemart, having established noninfringement, recover in tort for damages caused by multi-state publication of allegations ultimately found to be false?

            California law was applied;[vi]  it follows the general rule in the United States that a qualified privilege is recognized in cases where the publisher and the recipient of the publication have a common interest which might be reasonably believed to be protected or furthered by the publication and the publication is made reasonably and in good faith. [vii]   Moreover, it was necessary for Kemart . . . to show actual malice as distinguished from malice inferred from the false communication in and of itself. [viii]  Because the trial court had found no malice, Kemart was unable to recover.

            The possibility of stopping such communications at the outset seems to have been considered in neither Cardtoons nor Kemart, but the Federal Circuit has addressed that in several cases beginning with Hunter Douglas, Inc. v. Harmonic Design, Inc.,[ix] where it held: [F]ederal patent law bars the imposition of liability for publicizing a patent in the marketplace unless the plaintiff can show that the patent holder acted in bad faith. [x]  

             Based on that standard, Mikohn Gaming Corp. v. Acres Gaming, Inc.,[xi] vacated a preliminary injunction based on state law because [c]ommunication of accurate information about patent rights, whether by direct notice . . . or by publicity release, does not support a finding of bad faith. [xii]  Suit had been filed by Mikohn after Acres, a competing slot machine manufacturer, sent notices to several of Mikohn's customers and potential customers upon issuance of a patent.[xiii]  A typical letter stated, [i]t appears that [a] system manufactured and sold by Mikohn Corp. infringes at least some of the claims of the enclosed patent, although this cannot be determined conclusively . . . [xiv]  The letter further referenced a number of pending U.S. applications . . . that had the same disclosure, and said, [y]ou should be aware that when these patents issue, [Acres] intends to use its patents to stop the use of such systems. [xv]    Moreover, although the extent of publication is unclear, Acres also issued a press release stating . . . Mikohn is clearly suffering in the marketplace as a result of the issuance of [our patent]. Customers naturally hesitate to do business with a company whose products appear to infringe a patent. [xvi]  

            Although the district court had broadly enjoined further statements to Mikohn s customers under Nevada law,[xvii] the court did not dwell on the breadth of the injunction.  Rather, it held, somewhat surprisingly, [t]he record provided shows no more than a negligible likelihood of success in showing bad faith in Acres giving of notice by letters and publicity release.  In addition, there was no strong showing of irreparable injury or that the balance of harms strongly favored Mikohn. . . .  Although Mikohn states that Acres purpose was not the giving of notice as a matter of objective information, but as a carefully crafted competitive tactic, this allegation, even if true, does not substitute for the obligation to satisfy the factors predicate to the grant of a preliminary injunction. [xviii]  

            Underscoring the irrelevance of subjective intent as found in Mikohn, supra, Globetrotter Software, Inc. v. Elan Computer Group, Inc.,[xix]  holds that the bad faith standard cannot be satisfied in the absence of a showing that the claims asserted were objectively baseless.  This means that no reasonable litigant could realistically expect success on the merits. [xx]

            Prof l Real Estate Investors, evaluating challenges to suits in light of the First Amendment right to petition seems only to echo what the Court had found in FTC v. Standard Oil Co. California (SOCAL).[xxi]  There, it said, the expense and annoyance of litigation is part of the social burden of living under government. [xxii]    This proposition also justifies application of an objectively baseless standard to the evaluation of threats to sue but only if they are accurately conveyed.  Indeed, in a similarly challenging setting, the Supreme Court has disapproved one s making conscious overstatements he has reason to believe will mislead. [xxiii]  

            It is unclear that the proposition reflected in Gissel,[xxiv] is adequately credited in Mikohn or Globetrotter or in GP Industries, Inc. v. Eran Industries, Inc.,[xxv] where the objectively baseless standard of Globetrotter is brought to bear.  In the last, the trial court had found Eran s letters to be scurrilous and [to have] irreparably harmed GPI s business opportunities, relationships with customers, good will, and reputation. [xxvi]   But it said only that Eran s activities approach the bad-faith threshold. [xxvii]  

            Ultimately regarding activities so characterized as insufficient to support an injunction, the Federal Circuit begins by observing, an injunction against communication is strong medicine that must be used with care and only in exceptional circumstances. [xxviii]  Despite recognizing that a district court s discretion to enter a preliminary injunction is entitled to a high standard of deference, id., it reverses because the district court had not found Eran s communications to be objectively baseless.[xxix]  

            Still, application of that standard raises concerns at least equivalent to those addressed in eBay Inc. v. MercExchange, L.L.C.[xxx]  There, the unanimous Court held that a permanent injunction need not necessarily issue notwithstanding a jury s finding of patent infringement.[xxxi]   Reluctance seems to have been spurred by a problem stressed in a second opinion: [A]n injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent. [xxxii]  Despite lack of emphasis by all, that point justifies the Court s holding that the traditional four-factor test must be applied before issuing injunctions.[xxxiii]

            Threats directed at secondary infringers seem no less apt to have an important role in bargaining.  Thus, more attention should be given analyzing pressures likely to achieve ends nearly identical to those eschewed in eBay.

            All parties, of course, wish to know of potential liability.  Although primary infringers can be expected to evaluate threats carefully, that is less true of secondary infringers.  Indeed, incentives for the latter to conduct independent inquiries, credit their suppliers assurances of noninfringement or accept offers to indemnify would often be small.  Consequently, the response of those with small stakes should be expected to resemble, as discussed above, that of Champs in the Cardtoons case or, if Acres press release is to be believed, those of Mikohn s customers.  Further, the potential for unfairness is exacerbated if alleged primary infringers understand that ultimate victory, as in Kemart and Cardtoons, is apt to be pyrrhic.

            Regarding the point made in Gissel, supra, it warrants mention that the Lanham Act § 43(a)(1)(B) has since 1989 offered injunctive relief against firms promotional misrepresentations about another s goods or services.[xxxiv]   It is especially noteworthy that actionable misrepresentations may include sophisticated deception arising from clever use of innuendo, indirect intimations, and ambiguous suggestions. [xxxv]  Although not subject to federal‑state preemption, the Federal Circuit expects challenges to communications under the Lanham Act to satisfy the bad faith and objectively baseless standards otherwise applied.[xxxvi]  

            Prelitigation allegations targeting parties other than primary infringers seem often designed to cause harm going well beyond the expense and annoyance of litigation. [xxxvii]   When that is true, it deserves better documentation than district courts have heretofore provided.  It may also deserve more sympathy than the Federal Circuit seems to have heretofore evidenced.

 


*Professor Field, who has devoted much of his time to intellectual property (IP) since the founding of Franklin Pierce Law Center in 1973, holds an A.B. (Chemistry) and a J.D. from West Virginia University as well as an LL.M. (Trade Regulations) from New York University.

**Richard Kurz (J.D. Candidate, 2010) received a B.S. in Electrical Engineering from Purdue University and plans to practice IP law upon graduation.

[i] Cardtoons, L.C. v. Major League Baseball Players Ass n (Cardtoons II), 95 F.3d 959, 963–64 (10th Cir. 1996).

[ii] Id. at 963, 976.

[iii] Cardtoons V, 208 F.3d 885, 889–90 (10th Cir. 2000) (en banc). 

[iv] Cardtoons VII, 335 F.3d 1161, 1164, 1168 (10th Cir. 2003).

[v] 269 F.2d 375, 377 (9th Cir. 1959).

[vi] Id. at 392–93.

[vii] Id. at 391. 

[viii] Id. at 393. 

[ix] 153 F.3d 1318 (Fed. Cir. 1998).

[x] Id. at 1336.

[xi] 165 F.3d 891 (Fed. Cir. 1998).

[xii] Id. at 898. 

[xiii] Id. at 893.

[xiv] Id. at 893–94.

[xv] Id. at 894.

[xvi] Id.

[xvii] Id.

[xviii] Id. at 898.

[xix] 362 F.3d 1367, 1375 (Fed. Cir. 2004).

[xx] Id. at 1377 (citing Prof l Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49, 60 (1993)).

[xxi] 449 U.S. 232 (1980). 

[xxii] Id. at 244 (internal punctuation and citation omitted).

[xxiii] NLRB v. Gissel Packing Co., 395 U.S. 575 (1969).

[xxiv] Id.,

[xxv] 500 F.3d 1369 (Fed. Cir. 2007).

[xxvi] Id. at 1373.

[xxvii] Id. at 1372.

[xxviii] Id. at 1374. 

[xxix] Id. at 1375–76.

[xxx] 547 U.S. 388 (2006). 

[xxxi] Id. at 391 n.1.

[xxxii] Id. at 396 (Justice Kennedy, joined by Justices Stevens, Souter and Breyer, concurring).

[xxxiii] Id. at 391–92.

[xxxiv] Raybestos Prods. Co. v. Younger, 54 F.3d 1234, 1246 (7th Cir. 1995).

[xxxv] Am. Home Prods. Corp. v. Johnson & Johnson, 577 F.2d 160, 165 (2d Cir. 1978). 

[xxxvi] See Zenith Elecs. Corp. v. Exec, Inc., 182 F.3d 1340, 1354 (Fed. Cir. 1999).

[xxxvii] SOCAL, 449 U.S. at 244. 

Thomas G. Field, Jr. is Professor of Law at Franklin Pierce Law Center where he has devoted much of his time to intellectual property (IP) since the founding of Pierce in 1973, holds an A.B. (Chemistry) and a J.D. from West Virginia University as well as an LL.M. (Trade Regulations) from New York University.

Richard F. Kurz (JD '10) received a B.S. in Electrical Engineering from Purdue University.

 

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