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Groundless Threats, Groundless Reform

About The Author

Chris Bridges (Executive Editor)

Chris is an IT and Data Protection solicitor at a top 20 full service firm and the founder of Keep Calm Talk Law. He also contributes to Computers and Law and other sector specific publications.

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Intellectual property law has the difficult job of balancing innovation with competition, as has been discussed in a previous article. However, this is not the only balancing act it must undertake. Another is protecting people and businesses from groundless threats, whilst allowing legitimate threats and discussions in order to prevent the matter from going to court, as preferred by the Civil Procedure Rules. The exact way in which these considerations are balanced has experienced turbulence for a long time, and the Law Commission has this week concluded on how best to proceed with reform.

Threats can come in various forms. Threats in their own right should not be prohibited, as otherwise recourse outside court would be rendered virtually impossible. However, groundless threats are all too often used to damage a competitor. This is often done by targeting the competitor’s clients, asserting a patent, which in many cases will deter a client from working with the competitor.

The Law Commission use the case of Zeno Corporation v BSM-Bionic Solutions Management GmbH as an example of the damaging effects of groundless threats. Boots stocked a cream for acne called Zeno. The defendant wrote a letter to many corporations, Boots included, asking why they had not considered their patent when deciding to stock the product. As a result, Boots stopped stocking Zeno, causing considerable damage to the claimant, on what later turned out to be a false allegation: Zeno did not infringe the defendant’s patent.

The damage of groundless threats is only entrenched by the well-known expense of intellectual property litigation, which for distributors will often trump any commercial gain from stocking a product, resulting in the product being instantly dropped to the detriment of the producer, as shown in the above case. The Law Commission highlights a 2010 report that shows the cost of UK litigation is the tip of the iceberg, with oversees enforcement being even more costly. Therefore, the solution to this problem (although it would undoubtedly help) cannot be to simply reign in expense.

The present state of the law

The Action

An action for groundless threats has existed since the introduction of Section 32 of the Patents, Designs and Trade Marks Act 1883. Over the years, this action became available for all forms of intellectual property, and in the present day cover trademarks, design rights, patents and their Community variations (unified patents not available until 2015). The action allows an aggrieved party (even if not the receiver of the threat), to sue the accuser (who need not be the rights holder) for a perceived groundless threat. The only defence to such an action would be for the accuser to show rights had in fact been infringed, and even this defence can be rebutted by demonstrating that the rights in question are invalid. A successful claimant may be entitled to an injunction against the accuser, damages and costs.

A threat need only be implicit such that the reasonable person would perceive it as a threat. Therefore, any communication that a right is held unless worded exceptionally carefully can be considered a threat. However, any threat must be of one of proceedings within the UK. Therefore threatening to sue in another jurisdiction would not open the accuser to an action for groundless threat, something that many perceive to be a flaw.

Another flaw that has caused numerous issues is that a threat made by a legal adviser, even if on behalf of a client, could open the adviser to liability under the action. In some cases, this has resulted in advisers refusing to represent a client on such a matter.

In the aforementioned Zeno case, Zeno was able to bring a successful action for a groundless threat. As a result, an inquiry was launched into the financial damage caused.

The Exemptions

For a long time, the law on groundless threats was without doubt acting in a rights infringers’ interest. However, in 1970, this was realised and the law was subsequently reformed to achieve a greater balance. A distinction between primary acts (e.g. producing or importing products) and secondary acts (e.g. selling products) was introduced across all types of intellectual property. The accused could only bring an action for groundless threat where they were a secondary actor.

However, unsurprisingly, as with many classifications created by law, boundaries are often blurred. In this case, where a single party carried out both primary and secondary acts (e.g. imported a product, and then put it to market itself). Further reform was made by Section 12 Patents Act 2004 to remedy this, but only in respect of patents, leaving the protection for alleged trademark holders and design rights holders lacking.

The 2004 Act also introduced new defences for use where an action for groundless threat had been made in relation to patents. The first provided a defence where the accuser had threatened a secondary actor having made reasonable attempts to identify the manufacturer and/or the importer. The second that where a patent was invalid, at the time of accusing the accuser was not aware and had no reason to believe that this was so.

Much to be desired…

As you have likely concluded yourself, the current law on groundless threats leaves much to be desired. Whilst patent holders now have greater protection against claims for groundless threats, holders of trademarks and/or design rights have been left out in the cold, with no good reason for this to be so. Many rights holders are still left in a precarious position. Under Woolf Reforms and the Civil Procedure Rules, they should be doing everything in their power to avoid litigation, yet by simply highlighting to a party that there has been an infringement, they could be susceptible to a claim for groundless threat.

This, where the cost of enforcement is already a severe deterrent to capitalising on your rights, is not a satisfactory state of affairs. Small companies holding intellectually property rights are forced into a situation where they cannot afford litigation, yet in many cases may have no alternative solution, rendering their rights useless.

As I have continuously emphasised in my articles, enforceable intellectual property rights are paramount. Without enforcement, innovation is damaged.

The Law Commission’s Solution

The Law Commission’s report was resolute that threats provisions are still needed, and in my opinion, this is entirely correct. Moreover, the Law Commission believe that reform is necessary to bring protection for trademark and design rights holders into line with that received by patent holders. Abolition of groundless threats protection was, quite rightly, lightly considered.

However, the belief that trademarks and design rights holders deserved equal protection to patent holders was not universal. For instance, the BBC argued in their consultation response that due to the greater expense and complication of patents, they should be protected further. The Commission defeated this response by reference to the 35-year Budweiser trademark dispute, which went through over 20 judgements at great expense. To me, there is little in the BBC’s argument anyway; the state of the law is not in an acceptable state and causes uncertainty and damage to business, and therefore needs reforming. If patents deserve greater protection, we should first bring protection for other forms of intellectual property into line, and use this as a starting point for any further protection for patents.

The Commission’s solution involves:

  • Removing the ability to sue the accuser for groundless threats where the accused is both a primary and secondary actor;
  • the creation of a ‘safe-harbour’ of communication;
  • the prevention of actions against professional advisers

All of these changes would be worked into the current groundless threat provisions, avoiding complete reform.

The first and third changes are straightforward and need no detailed discussion. The first change simply brings protection for trademark and design right holders into line with the protection of patent holders under the Patent Act 2004, and the third would protect legal and professional advisers from an action for groundless threat when they are acting in a professional capacity or on instruction. For further information, see Chapter 5 and 7 of the Commission report respectively.

However, the second proposed change is of much more interest. The intention of this change is to make it clear when you can threaten a secondary actor without the possibility of being held liable for groundless threats. The Commission have recognised that there are often legitimate reasons to make threats; recognition that will allow the issue to be resolved outside of court. As the law currently stands, the only exemption is where the communication is a ‘mere notification’, which has proved somewhat difficult to interpret.

The Commission suggest a new exclusion that they believe will create a ‘safe harbour’ of communication. This would be where communications are made “for a legitimate commercial purpose such as making enquiries to discover the trade source or conveying factual information to remove an innocent infringement defence.” This, they say, should be backed by statutory guidance, and “may also include copies of any registration, specifications or drawings that will identify the right in issue together with any restrictions or limitations.” The exclusion would not apply “where the defendant cannot show that they had reasonable grounds for believing both that the right was in force and that the assertions were true.”

They recommend statutory guidance should be in the form of a non-exhaustive list of examples. The examples of commercial purposes should include:

  1. Enquiries for the sole purpose of discovering whether, and by whom, the patent has been infringed; and
  2. Where a rights holder has a remedy which depends on the infringer being aware of the right, the rights holder may alert a potential infringer of the right.

The examples of information that may be communicated should include:

  1. That the right exists;
  2. That the right is in force;
  3. Details of the right including, where appropriate, copies of any registration, specifications or drawings; where details are given, they must include any limitations or other restrictions on the right; and
  4. Information to identify the goods and to make appropriate enquiries.

They also recommend introducing an exclusion where the accuser has made reasonable attempts to locate and contact the primary actor, as has been introduced for patents in the Patents Act 2004, but suggested the defence of belief in the validity of a patent should be abolished, and not introduced for trademarks and designs.

Whilst these reforms would fix a number of the key issues, they fail to close a number of undesirable loopholes. Actions for groundless threats are not available where:

  • The threat is of action outside of the UK;
  • The threat is to bring an action for passing-off or similar as opposed to patent, trademark or design infringement (which inexperienced persons would not recognise to be inaccurate – passing of is a tort for enforcing unregistered trademarks);
  • Where public allegations are made with the same anti-competitive effect as groundless threats; and
  • Where proceedings have already been initiated. This allows rights holders, as the Law Commission put it, to ‘stab first’ and negotiate on the ‘withdrawal of the knife’, which is not the correct way around.

The need for more extensive reform

An alternative to the above was also discussed in Chapter 4 of the report: to introduce a new tort of unfair competition, in line with other jurisdictions that use general tort law or unfair competition law (Germany, Netherlands and France to name a few).

The overall impression from consultation responses was that an ‘evolutionary’ improvement of the current law would be preferential to a ‘revolutionary’ new tort. The reasoning was two-fold. One, this would retain a degree of certainty, and two, the current law, some argued, was not so defective to warrant replacement.

However, with several significant loopholes left behind, one must wonder whether replacement with a new tort of unfair competition would have been a better alternative.

Many civil law jurisdictions use general tort law or specific unfair competition torts because they do not have the statutory framework to deal with them in any other way as we do. Whilst you might assume that a statutory framework would provide greater protection as it was designed specifically for purpose, this is not the case, and the tortious approach in most cases offers broader protection, being based on The Paris Convention for the Protection of Industrial Property.

Article 10(3) of the convention requires signing states to provide protection from:

False allegations in the course of trade of such a nature as to discredit the establishment, the goods, or the industrial or commercial activities, of a competitor

The UK is one of few EU Member States to have not signed this convention, and hence does not have any specific law on unfair competition. The Law Commission report describes English law on unfair competition as ‘a mosaic of complementary actions’; the groundless threat provisions are just one part of this.

It is easy to think of ways in which the loopholes above could prevent UK law from complying with the convention if it were a signatory. All of them potentially allow rights holders to make false allegations with no remedy in UK courts. Whilst some consultees believed this to be the case, others such as Qualcomm reportedly highlighted that the above article is over 100 years old, and has not been problematic or controversial until now. However, is this really a legitimate reason to continue providing insufficient protection? I do not think so.

Admittedly, it is not apparent from the Law Commission report why these loopholes could not be closed by amendment of the current provisions, as has been done with the other required changes. Whilst this would be acceptable, it would only be so until the next loophole arose, at which point we would have to wait another unknown number of years for another round of reform. This, combined with a number of other advantages the Law Commission highlighted (and many consultees agreed with), makes me doubtful of the decision not to recommend further reform.

The advantages listed in the report include clarity, broader protection, compliance with the Paris Convention, consistency with other states, and compatibility with the incoming unitary patents court. All of which are very compelling, and are only likely to become more compelling as we further integrate with the EU on intellectual property issues.

The disadvantages on the other hand seem somewhat poorly considered and brief in explanation and evidential backing. These included:

  1. ‘wider reform was not needed’ and would create delays;
  2. Increased uncertainty and cost;
  3. New problems and unforeseen consequences; and
  4. ‘It would not break the current link between the infringement issue and the threats issue’.

Why do I think these are flawed?

  1. Wider reform is clearly needed to close the remaining loopholes, all of which appear sufficiently serious to warrant the additional effort. Any additional delays are worth doing the job properly; these issues will likely be revisited at great expense of time and money in the not too distant future. Indeed, the Law Commission even acknowledges further reform may be needed in the future;
  2. Consultees saw this arising in the short to medium term. However, is this not the case with most reform? Whilst reform may cause difficulty in the short term, it aims to make things easier and stronger in the long term, thereby making this a weak criticism;
  3. As above, with the additional point that the increased flexibility of a new tort would allow problems to be ironed out with relative ease;
  4. These issues will always be intrinsically linked, no matter what form reform takes. A threat is after all made on the basis of an infringement or alleged infringement.

These so-called disadvantages considered together lead me to feel the suggested reform is lackadaisical of both the Law Commission and consultees. Change will always have a certain cost, but in this case, the long term improvements seem to outweigh this cost by some measure.

We can only guess as to how long it will take for this to be realised, at which point more time and money will be wasted over reconsidering what should already have been introduced.

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Tagged: Commercial Law, Intellectual Property, Technology

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