How to protect your IP without making a groundless or unjustified threat

Marina Olsen and Jeren Gul
BANKI HADDOCK FIORA

One of the most common and effective means of a party acting to protect its intellectual property (IP) is by sending (or having a lawyer send) a letter of demand, with such letters forming a key part of the day-to-day practice of many IP lawyers. However, these letters, and other communications that put potential infringers on notice of an IP right, run the risk of contravening the unjustified threats (or groundless threats) provisions found in each of the pieces of IP legislation. These provisions are an oft-cited but little understood area of law that is unique to IP. This article will consider the three elements required to make out an unjustified threat action and attempt to paint a clearer picture of those elements by providing some practical examples.

Takeaway points

• The existence or otherwise of the “threat” element is the most determinative of a successful claim and is generally construed broadly by the courts. Examples capable of satisfying this element include threats made indirectly, threats made to third parties and those contained in advertisements.
• The “unjustified” element does not require that the threat be made in bad faith.
• If an infringement claim is unsuccessful, the usual consequence is that the threat was unjustified. However, this is not always the case as justification turns on whether there were good legal grounds to make the threat at the time it was made.
• Where a threat of infringement proceedings is followed by commencement of such proceedings, any assessment of damage caused must be linked to the threat itself, not to the court action. These damages will typically relate to sales or customers lost as a result of steps taken in response to the threat but can also include legal costs of seeking relief by reason of the threat.
• A letter of demand can constitute a “genuine step” for the purposes of the genuine steps provisions of the Civil Dispute Resolution Act 2011 (Cth). However, such a step may also be an unjustified threat if it satisfies the requisite elements.

Unjustified or groundless threats

An unjustified threat (or groundless threat in the case of copyright law¹) is a sui generis cause of action that can be found within the following sections²:

• Copyright Act 1968 (Cth), ss 202 and 202A
• Trade Marks Act 1995 (Cth), s 129
• Designs Act 2003 (Cth), s 77(1)
• Patents Act 1990 (Cth), s 128(1)

There are three elements of an unjustified threat action: (1) a threat (2) that is unjustified and (3) that causes damage. Although unjustified threats relate to IP, there is no cause of action for a threat made in respect of trade secrets (breach of confidential information), passing off or contravention of the Australian Consumer Law — all segments of the law that are closely linked to IP claims.

Threat

As a first step in an unjustified threats action, the aggrieved party must establish that a threat has been made.³ The word “threat” is undefined by the IP Acts. Some of the IP Acts tell us what is not a threat. For example, the mere notification of the existence of an IP right is not sufficient to constitute a threat. ⁴ Any communication beyond mere notification of a right has the capacity to establish a threat, so long as it is not too general. The threat must refer (expressly or impliedly⁵) to the possibility of a future step being taken, whether that be a threat of infringement proceedings⁵ or other “similar proceedings”.⁶

On the other hand, it has been found that a relevant threat has not been made by the communication of the existence of a right coupled with a statement that it is not maintainable to suggest that the recipient is entitled to replicate the relevant invention (in the context of a patents case), or a communication seeking confirmation that no improper or wrongful use or infringement of the patent has come to the recipient’s attention.⁷

It is an objective test: does the language or conduct directly or impliedly convey to the reasonable person standing in the position of the actual recipient reading the communication that the author intends to bring proceedings for infringement against them?⁸ It is essentially a question of fact.⁹

Letters of demand

Letters of demand, or cease and desist letters, regularly include language that might be interpreted as a threat to commence proceedings if the demands set out in the letter are not met. It is important to understand what language is capable of constituting a threat for the purposes of these provisions. The following examples (found to be threats) shed some light:

• a statement that proceedings “will be commenced forthwith” if goods are not withdrawn from the market¹⁰
• a statement reserving a party’s right to sue if certain conditions are not met, which “is a threat to sue … on a future occasion” ¹¹
• a communication that does not include a threat but refers to a previous threat with a statement that the relevant allegations are not withdrawn¹²
• a statement indicating that any offering for sale will be regarded as infringement and may be made the subject of litigation¹³
• a communication notifying the recipient that the threatener has already commenced proceedings against a third party, combined with the words “we may commence proceedings against you” ¹⁴

Another important question that has been considered is whether, by sending a letter of demand, a party is taking a genuine step towards resolving a dispute under its Civil Dispute Resolution Act obligations, or whether such a letter is a threat. In fact, such a letter might be both. ¹⁵

Other types of threats

A threat need not be made expressly or even in writing and might arise impliedly from some other communication or by conduct. In fact, some of the IP Acts have stipulated that a threat may be made “by means of circulars, advertisements or otherwise”. ¹⁶

A general notice to customers via email¹⁷ and a notice in an industry magazine¹⁸ have been held to constitute relevant threats. Although not yet litigated in Australia, it is not unreasonable to think that an unjustified threat might be made via an online medium, such as a blog or social media post, if the reasonable recipient would understand that they are threatened with infringement proceedings.

Recipient

An action for unjustified threats can be brought by any person aggrieved, not merely the person threatened. This includes “the supplier to the recipient of a threatening letter of the goods the subject of the threat, who loses sales or potential sales as a result of the letter”. ¹⁹

Unjustified

Once a threat is established, the onus shifts to the person who made the threat to prove that it was justified. This is because a threat is prima facie unjustified.²⁰ The terms “groundless” and “unjustified” have the same meaning, being without basis or reason, “a reference to the objective strength of the legal position underpinning the threat”. The question is not whether the conduct is bona fide, and the threatener’s belief is an irrelevant consideration.²² There is no defence available that threats were made in good faith.²³

In the case of an uncertified design or innovation patent relied upon in making a threat, the threat is automatically unjustified by virtue of its lack of certification.²⁴

One popular school of thought is that the test of justification simply turns on whether a successful infringement claim is made out:

1. If party X is found to have infringed party Y’s IP, party Y’s threat to party X was justified.²⁵
2. If party X is found not to have infringed party Y’s IP, party Y’s threat to party X was unjustified.²⁶

This approach is widely supported by the authorities. Scenario (b) will hold true in most cases, however there are exceptions. The bringing of an unsuccessful infringement claim does not automatically render a threat unjustified without more. The words “unjustified” and “groundless” do have a role to play in the relevant sections of the IP Acts. Threats made with good legal grounds where the infringement claim ultimately fails are not unjustified (as acknowledged by Murphy J in Telstra Corp Ltd v Phone Directories Co Pty Ltd²⁷ and again in Damorgold²⁸).

In summary:

• where there is a threat, it is prima facie unjustified
• if an infringement claim is successful, the threat is justified
• if an infringement claim is unsuccessful (for example by reason of a court finding to that effect or the revocation of the IP right upon which the threat is based), the threat is usually (but not always) unjustified. The onus is on the threatener to prove that the threat was made on good legal grounds

Causation

The final requirement in an unjustified threats claim is that the threat itself has caused damage to the person threatened (not any legal proceedings subsequently commenced).²⁹ This is a particularly important distinction to make in circumstances where a threat is followed by the commencement of infringement proceedings. The question is whether there is a causal relationship between the threat/s and the damage,³⁰ assessed on the balance of probabilities.³¹ The Full Court of the Federal Court has held: “This is not to say that there cannot be different types of damage. Nor is it to say that the one type of damage cannot have more than one cause.”³²

In Bell v Steele (No 3), Collier J provided examples of compensable damages arising from a threat:³³

• impacts upon the readiness of third parties to do business with the applicant³⁴
• losses arising from threats to the applicant’s customers³⁵
• lost sales or lost potential sales³⁶
• the cost to the applicant of instituting relief — such as a declaration of an unjustified threat — following receipt of the threat³⁷

Nominal damages will suffice for the aggrieved person to obtain relief, such as a declaration that the relevant threat was groundless. It is also noteworthy that the test for damages in s 129(2)–(2A)of the Trade Marks Act is worded “because of the defendant’s conduct” as opposed to “as a result of the threats” in the other IP Acts.

Conclusion

Unjustified threats claims are generally commenced by way of cross-claim to an infringement proceeding, although they can be brought as standalone proceedings. As practitioners, we must bear in mind that any communication, such as letters of demand, leaves a party open to having a claim of unjustified threats brought against them.

Remedies available to an IP rights owner who is successful in an unjustified threats action include:

• a declaration that the threat was unjustifiable
• an injunction against the continuance of the threat
• damages sustained as a result of the threat

In February 2019, additional damages were introduced to the relevant IP Acts for flagrant unjustified threats, being glaring or blatant conduct. This means that although good faith is not a defence to an unjustified threat, bad faith will likely increase the damages awarded. Ultimately, the grant of relief is discretionary.³⁸

There are many steps a party may wish to consider before protecting its IP. What kind of language should be used? How secure is the IP? Notably, the test of justification is not merely a test of infringement. It is open to a court to find that a threat was unjustified where infringement proceedings are successful. It is for this reason, perhaps surprisingly, that more unjustified threats actions are not brought in such proceedings. On the other hand, one can fail to prove infringement but be found to have made a threat on solid legal grounds.

Read full article via the Australian Intellectual Property Law Bulletin. For more information, contact us below.