Pre-Litigation Strategies to Ensure a “Home Court” Advantage
September 2011By: Michael N. Rader
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What This Means to You
- Carefully evaluate all pre-litigation communications with potential infringers to ensure you are doing your best not to trigger a declaratory judgment (DJ) action.
- Consider whether filing a preemptive lawsuit in your chosen forum before sending a cease-and-desist letter would meet your strategic and business goals.
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Intellectual property litigation is expensive, time consuming, and disruptive. Nevertheless, IP litigation continues to explode across the United States, as the enforcement of intellectual property remains a critical business tool.
When it becomes necessary to enforce your IP portfolio against competitors, you should be concerned about two things. First and foremost, of course, is winning the case. A close second is minimizing the extent to which the cost (both direct and indirect) of the litigation eats into its benefits for your business.
In a multi-million dollar IP case, there are many steps your law firm can and should take to increase the likelihood of success while easing the burden on you and your company. A few examples include: completing appropriate due diligence before bringing the case; mastering the technology quickly at the outset of the case (where patents or trade secrets are involved); identifying and focusing on the key issues throughout the case; and keeping you well-informed, while at the same time shielding you from litigation-related hassle as much as possible.
Pre-Litigation Communication
This article focuses on an issue that arises at an even earlier stage (often long before litigation commences), yet can have a dramatic impact on the cost and hassle of the case, as well as your likelihood of success. The issue is your company’s pre-litigation communications with your competitor. Under some circumstances, these communications can give the competitor the right to file a lawsuit challenging your IP rights in a court of the competitor’s choosing.
The possibility of an IP owner and an accused infringer “trading places,” so that the accused infringer is the plaintiff and the IP owner is the defendant, seems counterintuitive, but it happens all the time. A provision of federal law called the Declaratory Judgment Act permits an accused infringer to file an action asking the court to find the patent invalid and/or not infringed, if it can demonstrate the existence of a “substantial controversy” regarding the patent.
The classic example of such a situation occurs when the IP owner or its counsel dashes off a strongly worded “cease-and-desist” letter, threatening to take legal action if the competitor does not stop its infringing activity. Such a letter, often thought to be an effective business tool for “sending a message,” can have the unintended consequence of vesting the recipient with the right to file its own lawsuit – in a court of its choosing.
The consequences of triggering a declaratory judgment action can be significant. First, as noted above, you (the IP owner) are now the defendant. You cannot simply drop the matter if you make a strategic decision to hold off on suing your competitor. The competitor can press its declaratory judgment claims, and you will be forced to defend your IP, undoubtedly at significant cost. Indeed, just being the “plaintiff” may embolden the competitor, encouraging aggressive litigation.
Second, litigating in a remote forum almost increases the cost of the case. Your primary attorneys will have to retain local counsel (either because the court requires it, or as a practical matter, to assist with filing papers and navigating the court’s unique rules and requirements). Your attorneys will also have to travel to and from the court for hearings. In some jurisdictions, judges hold hearings as frequently as once per month.
Third, if the case goes to trial, company employees will be faced with the inconvenience of traveling to participate and testify. If the trial is lengthy (complex IP trials typically last several weeks, and can go even longer), this can be a significant and costly hassle.
Fourth, your likelihood of success may be affected by litigating in your competitor’s home court rather than your own. The jury will be selected from the local area, where your competitor may be well known and may be a significant employer. Although legally irrelevant in theory, the reality is that these factors can tip the balance in a close case.
Safeguarding the Home Court
So how can you safeguard your home court advantage? A simple and effective strategy is to file a preemptive lawsuit in your chosen forum before sending a strongly worded cease-and-desist letter. You need not serve the complaint on the defendant; the lawsuit will simply sit in the court (for 120 days), serving as a placeholder in case negotiations sour and your competitor files a declaratory judgment action in another court. In such cases, the first-filed action (yours) usually takes precedence.
Of course, it may not be practical to file a lawsuit every time you wish to communicate with a competitor about its infringement of your IP rights. Moreover, many companies (or their attorneys) now employ watch services alerting them if they are sued anywhere in the country. Thus, you may not have the element of surprise after all.
An alternative strategy is to craft your dealings with the competitor in a way that accomplishes your business objectives without triggering a declaratory judgment action in the first place. While the courts have made it easier to establish declaratory judgment jurisdiction over the past several years, it is still possible to minimize the risk of others filing unwanted lawsuits.
One approach is to work your patents into a broader business discussion so that the topic does not seem threatening. If your competitor does not perceive your discussion of patent issues as coercive, it is less likely to file a declaratory judgment lawsuit.
Meeting in person, or talking by telephone, is preferable to sending written correspondence that could be interpreted, even implicitly, as suggesting the possibility of legal action.
Never issue a direct threat to sue, unless you are prepared to run the risk of being sued first for a declaratory judgment, and do not attempt to circumvent declaratory judgment jurisdiction by threatening your competitor’s customers. Such “indirect” threats will create declaration judgment jurisdiction and are likely to spur your competitor to action.
A few years ago, most courts held that declaratory judgment jurisdiction was generally negated by bona fide licensing offers and negotiations. Making clear that a license would be available, and that litigation would be a last resort, would often be enough to avoid declaratory judgment jurisdiction. The law has shifted in recent years so that these steps are less helpful, as a legal matter, in negating jurisdiction should a suit be filed. However, in practice they will often reduce the likelihood of a competitor feeling threatened enough to go to court.
