How To Respond To A Cease & Desist Letter
Intellectual Property Watch
US companies are generally known to be much more litigious than non-US companies. Thus, if you are a non-US company looking to enter the US market, it is prudent to understand the nuances of responding to a cease and desist letter.
While cease and desist letters can be upsetting and sometimes confusing, there are a series of steps that companies can take to be better prepared in the event that they do receive one. By taking a closer look at the risk involved in a cease and desist letter, companies can better assess the strategies to deal with them.
Evaluating the Risk
A cease and desist letter is written by a patent owner, identifies one or more patents, and alleges that one or more parties is infringing the patent. The letter may identify a product or service that the patent owner believes is infringing their patent, and it often demands that you stop selling the product or service. Typically, the letter also requests information regarding your prior sales and demands a payment.
As an initial matter, before stressing about the cease and desist letter you just received, first look more closely at the US patents identified in the letter. If you are well versed in US patent law, review the patent’s claims (the numbered sentences at the end of the patent that define its scope), or ask your legal counsel to do so. In particular, take a look at the independent claims (those that do not depend upon a previous claim). If your product clearly does not include at least one limitation recited in each of the independent claims, the product does not infringe the patent. Remember that the scope of a US patent may differ from a corresponding patent that issued in another country. Thus, even if you are familiar with the claim scope of, for example, a European patent, that does not mean that you are familiar with the claim scope of the corresponding US patent.
This exercise may become more complex if you have an extensive line of products/services and/or there are many patents identified in the cease and desist letter. If you are not well versed in patent law, it is important to involve your legal counsel to help interpret the scope of the claims. However, sometimes the patent owner has not done their homework before sending such a letter, and the issue may be quickly resolved by responding to the letter with a simple explanation why your product clearly falls outside the scope of its patent.
Often, a more lengthy review of the patent and its file history is required to assess the scope of the claims. Before you jump in, it may be wise to make a rough estimate of your potential exposure to the patent. First, evaluate your product line and assess how many products might be relevant to the patent identified. Make sure to look at both current and upcoming product lines.
Second, roughly estimate what the possible damages could be if any potentially relevant product of yours infringes the patent. A patent owner may specify a reasonable royalty rate in its letter, which often varies by industry.
Also, determine whether the patent owner sells the product covered by the patent, and, if so, find out whether it has been marking its product with the patent number. Under US law, if the product is unmarked, the US patent owner is only entitled to collect damages from you that occur after it has put you on notice of the patent (e.g., the day you receive the cease and desist letter), decreasing your exposure. If the US patent owner has been marking its product with the patent number, it would be entitled to collect damages from you based on your past sales.
If your exposure to the patent is relatively low, a preliminary investigation into the patent may be all that is needed. In other words, if you are already phasing the product out of your US product line, or if you have a relatively low volume of sales in the US, it may not make economic sense to go launch a potentially expensive full investigation of the patent.
Once you have a preliminary assessment of the scope of the US patent and your potential exposure to it, consider your options. If there is no clear case of non-infringement that would make the patent owner concede, there are several defensive strategies to contemplate.
First, to more clearly fall outside of the scope of the patent, consider whether you can design around the patent. If you can alter your product to avoid the patent, then the patent owner would not be entitled to obtain royalties from you on any future sales of your new product. Depending upon the specific design, your legal counsel should review the patent file history to be sure the new design avoids the patent.
Second, you may want to consider whether it would be in your interest to license the patent if it is not easy to design around. This may be one approach to reaching a quick resolution, and it may be desirable to a patent owner who is simply looking to monetize the patent. If you are able to reach a favorable license agreement with the patent owner, the outcome may be far cheaper than patent litigation.
Third, check to see if you are indemnified by another party. For example, if your potentially infringing product is made of several components which you source from other companies, your agreement with those other companies may include an indemnification clause which would hold the other company liable in a patent dispute if the dispute concerned its component. In this case, the other company may be obligated to assume responsibility for any payment to the patent owner. If your current agreements with sourcing partners do not include an indemnification clause, you may want to consider adding one.
Fourth, another approach may be to do nothing and wait to see how the patent owner responds. This is a more common approach at a large company that receives many cease and desist letters, and it can sometimes weed out the serious patent owners from the rest. Even though the patent owner sent the cease and desist letter, it may not have the desire – or budget – to fight it out in court. If the patent owner is hoping for a quick monetary settlement, a wait and see approach may cause it either to look deeper into its pockets, or to retreat. The risk of this approach, of course, is that the US patent owner may file a lawsuit before you are given the opportunity to resolve the issue outside of court.
The above-mentioned defensive strategies may help to shield you from future issues concerning the patent. Also consider offensive strategies which you may be able to use to be proactive against the patent owner.
First, if you have a legitimate reason for why you do not infringe the patent, consider filing a Declaratory Judgment of non-infringement. This brings the matter into court, but allows you to pick a more desirable venue. In the alternative, if you wait for the US patent owner to sue you for infringement, you may wind up in a less convenient location. This option may be less desirable if you want to avoid litigation at all costs, but it may be a good option to resolve the matter if the issue is negatively affecting your business.
Second, conduct a prior art search to attempt to invalidate the patent. When a US patent application is examined at the US Patent and Trademark Office (USPTO), the Examiner conducts a search of the prior art, and a patent will only issue if the claims are patentable in view of the prior art uncovered. However, if you are able to locate prior art that invalidates one or more of the claims in the patent, you now have the upper hand. You could choose to file a Declaratory Judgment to attempt to invalidate the patent in court in view of this newly discovered prior art. Alternatively, you could request a reexamination of the patent at the USPTO. Furthermore, you could decide to reveal the “smoking gun” prior art to the patent owner in the hopes it will cause the patent owner to retreat for fear you will take action and file either a Declaratory Judgment or a request for reexamination.
Third, review your own patent portfolio for ways to strike back. It would be quite helpful if you had patents you could assert against the patent owner and/or you had pending patent applications which could be revised to cover the patent owner’s products.
Fourth, consider whether you have any counterclaims you could assert against the US patent owner. For example, knowingly or recklessly making false accusations of patent infringement is actionable in the United States.
In sum, receiving a cease and desist letter will never be considered a pleasant experience. However, after evaluating the risk and considering both defensive and offensive strategies, you will have armed yourself with a plan of attack, making the next cease and desist letter easier to navigate.