CEASE AND DESIST LETTERS

Clients know that a cease and desist letter is the typical first salvo taken against an infringer.  What is not typically understood is that such letters must be carefully prepared to prevent the infringing party from using the letter as the grounds for suing (in a declaratory judgment action) the patent or trademark owner. The infringing party will usually attempt to bring his first strike declaratory judgment action in some location inconvenient to the owner.  Prior to the beginning of this year, the well drafted cease and desist letter avoided language or terms that would establish, in the mind of the infringer, an objectively reasonable apprehension of being sued for patent infringement.  Hence the need to carefully draft the letter to prevent the infringer from making the first strike via the declaratory judgment action filed in federal court.

In MedImmune v. Genetech, the Supreme Court has recently (January 2007) issued an opinion that significantly shifts the basis that can be used by the alleged infringer in initiating a declaratory judgment action.  When the patent owner asserts its rights under the patent to a third party and the third party asserts is may rightfully engage in activity without a license from the patent owner (i.e., the third party is not infringing the patent), the third party may bring a declaratory judgment action. 

Note, no cease and desist letter has been sent.  The patent owner has not threatened litigation.  The patent owner may only have offered to commence license negotiations.

A declaratory judgment may be filed whenever the facts alleged, under all the circumstances, show that there is a substantial controversy, between the parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.  This standard, stated in MedImmune, appears to encourage the patent owner to "soft pedal" any dispute.  But note the Supreme Court shoved aside the patent owners written statement that it was not contemplating suit.

In MedImmune, the Supreme Court decided that a patent licensee was not 

required to break or terminate its license agreement before seeking a declaratory 

judgment in federal court that the underlying patent is invalid, unenforceable, or 

not infringed.  

The Supreme Court looked at its much older precedent for support.  “The 

only Supreme Court decision in point is, fortuitously, close on its facts to the case 

before us. Altvater v. Freeman, 319 U. S. 359 (1943), held that a licensee's 

failure to cease its payment of royalties did not render non-justiciable a dispute 

over the validity of the patent.  In that litigation, several patentees had sued their 

licensees to enforce territorial restrictions in the license.  The licensees filed a 

counterclaim for declaratory judgment that the underlying patents were invalid, in 

the meantime paying "under protest" royalties required by an injunction the 

patentees had obtained in an earlier case. The patentees argued that "so long as 

[licensees] continue to pay royalties, there is only an academic, not a real 

controversy, between the parties." Id., at 364.  We rejected that argument and 

held that the declaratory-judgment claim presented a justiciable case or 

controversy:  "The fact that royalties were being paid did not make this a 

`difference or dispute of a hypothetical or abstract character.'" Ibid. (quoting 

Aetna, 300 U. S., at 240).  The royalties "were being paid under protest and 

under the compulsion of an injunction decree," and "[u]nless the injunction 

decree were modified, the only other course [of action] was to defy it, and to risk 

not only actual but treble damages in infringement suits." 319 U. S., at 365.  We 

concluded that "the requirements of [a] case or controversy are met where 

payment of a claim is demanded as of right and where payment is made, but 

where the involuntary or coercive nature of the exaction preserves the right to 

recover the sums paid or to challenge the legality of the claim." Ibid.

See also the recent posting entitled Declaratory Judgment and Patent Licensing.

September 23, 2008