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Archived updates for Saturday, September 29, 2007

Infringement Warning Letters to Customers Not Enjoinable Unless Objectively Baseless

In GP Inductries, Inc., et al. v. Eran Industries, Inc., et al. (September 2o, 2007), the Federal Circuit reversed an injunction against a patentee to refrain from communicating information in [earlier] correspondence to its customers, distributors, contractors and others during the pendency of this litigation."

Eran, through counsel, sent two sets of letters to its distributors and contractors informing them that GPI planned to manufacture and sell a gutter cover that infringed it's patent. The first set of letter stated in pertinent part:

It has come to our attention that GP Industries is planning to manufacture and
sell a gutter cover that is similar to our client’s proprietary gutter cover designs. . . . We obtained a sample of GP Industries’ gutter cover and believe that it infringes at least our client’s ’891 patent and possibly other Eran patents. . . . Eran has spent a considerable amount of time and money developing and protecting its proprietary gutter cover designs and will take all necessary steps to stop the infringement by GP Industries and anyone who purchases infringing gutter cover products from GP Industries. Eran plans to focus its enforcement efforts against GP Industries and currently has no plans to sue any distributors or customers who cooperate with its efforts to stop GP Industries’ infringement.

The second set of letters stated in pertinent part:
It has been brought to our attention that your company is selling and offering
for sale the Leaf-X and/or Leafree products of GP Industries. Those products
infringe Eran Industries’ patent rights and are based on a trade secret drawing
of a product design that was unlawfully stolen from Eran Industries. . . . The
theft of Eran Industries’ trade secrets and the distribution and sale of the
Leaf-X and Leafree products that incorporate those trade secrets constitute mail
fraud, interstate transportation of stolen property, and other criminal
activity. In addition, those unlawful activities constitute a pattern of
racketeering activity that is a violation of the Racketeer Influenced and
Corrupt Organizations (RICO) Act. . . . [T]his letter is intended to place you
on notice that Eran Industries will consider naming your company as an
additional defendant unless you either demonstrate that your company is not
selling or offering for sale the Leaf-X and Leafree products or agrees to
promptly forever cease selling or offering for sale those products.

After the letters were sent, the district court entered the following injunction: "Eran Industries and James Buchanan are ordered to refrain from communicating information such as that contained in its January 31, 2006 and May 10, 2006, correspondence to its customers, distributors, contractors and others during the pendency of this litigation."

According to the opinion by Circuit Judge Lourie,

First, we wish to note the rarity of an injunction being granted against communicating with others concerning one’s patent rights. This is not a grant or denial of an injunction against infringement, but an injunction against communication, a much more serious matter. One has a right to inform others of his or her patent rights. See 35 U.S.C. § 287. Thus, an injunction against communication is strong medicine that must be used with care and only in exceptional circumstances.

In this case we agree with Eran that the district court abused its discretion in granting the preliminary injunction against Eran’s communicating with customers and potential customers about its patent rights. While we recognize that a district court’s discretion to enter a preliminary injunction is entitled to a high standard of deference, the patent laws permit a patentee to inform a potential infringer of the existence of its patent. See, e.g., 35 U.S.C. § 287 (authorizing a patentee to "give notice to the public" of a patent) . . . .

GPI’s claim for tortious interference with business relationships is based on the letters sent to Eran’s distributors and customers, wherein Eran gave notice of its patent rights and its intent to enforce them. Federal patent law governs the propriety of giving such notice, and a patentee has a right to inform potential infringers of a patent and potentially infringing activity unless the communication is made in bad faith. . . .

In Mikohn Gaming, we stated that "bad faith" may include subjective and objective considerations. Id. at 897. We have recently determined that a bad faith standard cannot be satisfied in the absence of a showing that the claims asserted were objectively baseless. Globetrotter Software, 362 F.3d at 1375. . . .

Thus, as part of the district court’s analysis in deciding whether to grant a preliminary injunction that would prevent Eran from communicating its patent
rights to a potential infringer, the court should have considered whether Eran’s assertions were objectively baseless. The court did not cite the Professional Real Estate "objectively baseless" standard in its discussion of the relevant law or analysis. In fact, the court made certain statements in its opinion that nonetheless demonstrate that Eran’s assertions were not objectively baseless. The court stated that "[a]t this stage of the proceedings, it cannot be said that either one side or the other will prevail on the ultimate issues." Preliminary Injunction Order, slip op. at 10. The court further stated that "the validity of Eran’s patent presents a close question." Id. at 9. By recognizing that the patent is not necessarily invalid and that the court could not conclude that there was no infringement, the court established that Eran’s assertions were not objectively baseless. In fact, the court only stated that the letters "approach the bad-faith threshold," clearly implying that they did not meet the bad faith standard. Thus, GPI could not show a reasonable likelihood of success that Eran’s assertions were objectively baseless. As we held in Globetrotters, because GPI cannot show that Eran’s assertions were objectively baseless, the bad faith standard cannot be satisfied, and the court therefore erred in enjoining Eran from giving notice of its patent rights to potential infringers.

The district court, as indicated, did state that Eran’s communications "approach the bad-faith threshold" and stated that "Eran’s accusations were made in disregard of the truth or falsity of the purported infringement." Preliminary Injunction Order, slip op. at 8-9. However, the court’s analysis of bad faith encompassed subjective considerations and unconvincing objective factors. Subjective considerations of bad faith are irrelevant if the assertions are not objectively baseless. See Professional Real Estate, 508 U.S. at 60 ("Only if the challenged litigation is objectively meritless may a court examine the litigant’s subjective motivation.") For example, the court found that Eran did not show that its president examined any product sold or distributed by GPI and failed to verify that the prototype it did examine was the actual product sold.

The court also stated that Eran did not "show that any expert advice or opinions
were sought before Eran made the accusations of infringement" and found significant "that Eran never asserted a patent infringement claim against the manufacturers of other similar gutter covers." These are not convincing objective factors, as the president of a company does not necessarily need to examine an accused product or seek expert advice on a product as uncomplicated as a gutter cover. Furthermore, the court stated that the letters sent by Eran were "particularly scurrilous, accusatory and threatening" and "the timing of the action vis-à-vis the termination of the former employees invites an inference of retaliatory motive." We do not consider the letters to be scurrilous. Moreover, one is entitled to threaten suit if not in bad faith and not objectively baseless.

In sum, even though the court did not consider the objectively baseless standard in its discussion of bad faith, the additional statements made in the opinion indicate that Eran’s assertions were not objectively baseless; the grant of the preliminary injunction was therefore improper.

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