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Trojan Law Offices
Olga Kay
Trojan Law Offices
Imagine this scenario: You run a medical supplies company. Business is good until one day, this letter comes in the mail: “We represent the Mammoth Medical Company in its intellectual property rights. It has come to our attention that your product infringes our client’s Patent No. 7,654,321.” The letter demands that you “immediately stop making and selling the accused product.” You glance outside the window. A filled delivery truck eases out of your loading dock. Two more trucks await their turn. Do they seriously expect you to cancel orders? If hospitals do not receive the product, you will lose these customers for good.
What is the best response to a cease-and-desist letter? Of course, each case is different. However, many patent attorneys would agree that the worst response is to ignore it. The sender of the letter most likely is prepared to file a lawsuit, and some damage already is unavoidable. However, additional damage can and should be prevented.
What’s the Damage?
Fortunately, patent law, unlike personal injury, does not allow for exorbitant damages. In personal injury, punitive damages, added “to hurt” the party at fault, can be astronomical in relation to actual compensation for the injury. In contrast, patent damages have a ceiling. Compensation is computed as royalty or lost profits (from sales lost to the infringer). These “hard damages” may be increased, but only up to three-fold and only if the plaintiff proves “willful infringement.” This means that the defendant knew about the patent yet intentionally kept violating it.
Sometimes one has to pay for patent infringement that one has not heard of before. However, willful or deliberate infringement requires that the infringer be personally put on notice of the patent. The legal significance of the cease-and-desist letter is exactly such notice. Any sales after receipt of the letter may be labeled as willful infringement, subject to enhanced damages.
In reality, accused infringers do not rush to surrender. They rarely shut down their businesses or even cancel orders in response to cease-and-desist letters. In our scenario, the company executive may decide to accept the risk of having to pay some royalty damages. The risk is justifiable—at the moment, it is more important to keep the revenue stream and maintain good customer relations.
Generally, patent royalties range between 25% and 33%. (In “crowded” fields, with many acceptable alternatives, the royalties may be as low as 1% to 2%. When the patented technology is unique and no alternatives exist, the royalty may be as high as 40% to 50%.) In our example, up to 33% of the sales revenue may go to court-ordered royalty—but only for a short period. (Most likely, the company engineers already are hard at work trying to redesign the product and get around the patent.) Such risk is small and justifiable.
Not so with the risk of damages for willful infringement. In the same example, if the jury finds willful infringement, instead of paying 33% of revenue as royalty damages, the company would have to pay three times more or 100%. This clearly is unjustifiable risk. Fortunately, the willful infringement damages are preventable through a series of simple steps.
Tell It to the Judge
To find willful infringement, the court asks whether a hypothetical “reasonable person” in the infringer’s shoes would have continued to sell the infringing product. A reasonable person may do that, for example, if he or she honestly believes that (1) the patent is no good (the Patent Office did a poor job and approved it by mistake) or (2) the sender of the cease-and-desist letter is wrong (the accused product is, in fact, not covered by the patent). How can a “reasonable person” without legal training come to such conclusions?
Attorney Opinion: Say It Isn’t So
One of the effective defenses against a charge of willful infringement is an opinion letter from an attorney. Such letters, preferably addressed to the accused infringer, would explain why the patent is invalid or not infringed. Armed with the letter, the accused infringer may, in good faith, continue making and selling his or her product. Such action would be considered reasonable. Of course, the attorney eventually may be proven wrong. The judge or the jury may find that the patent is valid and infringed and award damages. However, the letter clears the defendant of the charge of deliberate infringement. The damages would not be enhanced and would not exceed actual compensation.
For the opinion letter to be effective, it must pass the court’s muster. First, it must come from a competent patent attorney. The attorney need not be a neutral or an independent party. The attorney may be infringer’s in-house counsel or best friend. However, this is not a job for the courtroom star who won your rear-end collision case. Patent attorneys have specialized skills and knowledge that other attorneys usually do not have.
Next, the letter must be based on correct information. For example, feeding the attorney incorrect technical data in order to get the desired conclusion will not help. The court will discover the error and throw out the letter together with the defense.
Third, the letter must be sent within a reasonable timeframe—it cannot justify any past infringement. An example of what not to do is ignoring the cease-and-desist letter, continuing to sell the product and getting an attorney opinion at the last moment, right before trial. Any infringement before the receipt of a letter is likely to be considered willful.
Finally, the letter must be well reasoned and state the basis for each conclusion. The letter must explain how the earlier references hurt the patent or how the accused product is different from the patent claims.
Can the Letter Hurt Your Case?
Usually patent attorneys experienced in litigation know to draft proper opinion letters. However, a letter can make things worse. Examples of such blunders would state: “You are infringing, but no worries; the patent is invalid because of an earlier article” or “The patent is valid, but no worries; you are not infringing,” These letters needlessly concede important issues and limit available defenses.
What if a well-reasoned opinion letter states that you infringe a perfectly valid patent? Should you burn the letter and swear the attorney to silence? Perhaps it is better to start negotiating a settlement with the patent owner instead.
As a final note, it is important to remember that an attorney’s opinion is not exoneration from willful infringement. The court will consider other evidence to reconstruct the “totality of circumstances” and see whether the infringer was acting in good faith. Not having the opinion does not automatically mean willful infringement, but it paints a bad picture of the defendant. At the same time, the plaintiff would be less willing to settle, knowing that the $1 million in royalty damages is about to balloon to $3 million because of willful infringement.
In our example, after receiving the cease-and-desist letter, the company executive should call a friendly patent attorney right away and request an opinion letter. This small investment would justify itself very soon.