Intellectual property infringement - when can you threaten legal action?

In brief - Correspondence should be carefully drafted and a genuine attempt to resolve dispute

A recent Federal Court decision in CQMS Pty Ltd v Bradken Resources Pty Limited [2016] FCA 847 has highlighted the perils of threatening legal proceedings in respect of intellectual property infringement. This case considered the overlap between prohibitions against making unjustified threats and the requirements found in the Civil Dispute Resolution Act 2011 that parties must attempt to resolve disputes prior to commencing litigation. 

What is an unjustified threat?

An unjustified threat means a threat to bring legal proceedings for infringement, which are ultimately found to be without basis by a court.

Intellectual property (which includes copyright, patent, trade mark and industrial design) legislation permits a party who has received a threat of infringement proceedings to apply to court for injunctive relief to prevent any further unjustified threats, and the recovery of damages occurring as a result of the threats. 

CQMS alleges patent infringement and sends letters containing alleged unjustified threats

CQMS alleged that Bradken had infringed its patents by supplying certain tools. Prior to and during the course of the litigation, CQMS sent Bradken, Bradken's solicitors and Bradken's customers a series of letters with respect to the alleged infringing conduct which contained the allegedly "unjustified threats" at issue. 

Bradken denied the patent infringement claim and cross-claimed on the basis of patent invalidity and that CQMS's correspondence constituted unjustified threats. 

The Court in its judgement ruled in favour of Bradken and rejected CQMS's claim for intellectual property infringement. The Court then considered whether the claims made by CQMS prior to resolution of the Court matter were "unjustified threats" under law.

Federal Court rejects infringement claim and therefore threats of legal action unjustified

CQMS raised two defences to the unjustified threats claim. 

1. That CQMS had commenced infringement proceedings and therefore were not liable, as the intellectual property infringement claims were made in good faith and were subject to legal proceedings. 
2. CQMS asserted that their letters were genuine attempts to resolve the dispute as required by the Civil Dispute Resolution Act, and not threats of any kind.

As to CQMS's first argument, the Court held that it is not enough to defend the making of a threat by commencing infringement proceedings. 
In respect of the second argument, as the Court rejected CQMS's claim of infringement, it found the threats of legal action for intellectual property infringement must be found to be unjustified. 

CQMS's correspondence found not to be a genuine attempt to resolve dispute under the Civil Dispute Resolution Act 

To resolve the matter, the Court considered whether the requirement to take genuine steps to resolve a dispute prior to litigation has altered the extent to which pre-litigation correspondence can amount to an unjustified threat.
 
In its judgement, the Court drew a distinction between correspondence that demands everything the applicant is entitled to and correspondence which constitutes a genuine step towards resolution of a claim. 

The Court's judgement relied on the fact that in addition to letters sent between the two parties to the dispute, CQMS also sent correspondence directly to Bradken's customers which provided notice of the alleged breach by Bradken, and included an assertion that the customers' use of the alleged infringing material amounted to a further infringement. 

The Court held that this led the customers to an "inevitable" concern as to their own liability. 

Further, the correspondence could not amount to a genuine attempt to resolve the dispute as it was written after proceedings were commenced and the point of the correspondence was "undoubtedly" designed to "discourage potential customers from buying the respondents' products." 

As a result, the Court granted injunctive relief to Bradken. The question of the amount of any loss suffered by Bradken has not yet been determined.

Intellectual property infringement correspondence lessons 

• Correspondence alleging infringement of intellectual property rights must be carefully drafted. 
• All correspondence alleging intellectual property infringement should be, and should be drafted to read as, an attempt in good faith to resolve the conflict, not a mere letter of demand. 
• Sending letters to third parties who are not directly involved actors in any infringement claim (such as customers of the alleged infringer), may constitute a threat to those customers which could expose the sender to liability if the underlying infringement claim is not upheld in a final court judgement.