In the recent decision, Fluid Energy Group Ltd v Exaltexx Inc, 2020 FC 81, the Canadian Federal Court granted an interlocutory injunction prohibiting a plaintiff patent holder in a patent infringement action from sending cease and desist letters to suppliers associated or involved with the defendant alleged infringer. This decision builds upon other recent Canadian jurisprudence in providing guidance to patent holders with respect to the use and content of cease and desist letters and risks related thereto. In particular, the decision highlights how caution should be exercised before sending demand letters to suppliers, customers and other business affiliates of an alleged infringer.
Fluid Energy Group Ltd. (Fluid) brought a patent infringement action against Exaltexx Inc. (Exaltexx). The companies are competitors in the sale of “safe acids” to the oil and gas industry. Fluid alleged that Exaltexx infringed six of its patents which pertain to certain synthetic and modified acid compositions for use in the oil industry.
Following the commencement of the action, Fluid sent cease and desist letters to various chemical suppliers and one trucking company that do business with Exaltexx (Third Party Companies) informing them of the proceeding against Exaltexx and attaching the Statement of Claim. Fluid also asserted in the letters that, by doing business with Exaltexx, the Third Party Companies were infringing Fluid’s patents. Fluid threatened the Third Party Companies with legal action if they did not cease working with Exaltexx. None of the Third Party Companies were named as parties to the action.
Exaltexx brought a motion for an interlocutory injunction to prohibit Fluid from communicating with Exaltexx’s suppliers and customers on the basis that Fluid’s actions were contrary to subsection 7(a) of the Trademarks Act which prohibits the making of “a false or misleading statement tending to discredit the business, goods or services of a competitor”. It had long been established that false allegations of patent infringement may run afoul of this provision. However, it had been postulated that cease and desist letters that merely reflect allegations contained in an issued infringement pleading would not attract liability.
The Federal Court considered two preliminary issues before addressing the merits of the motion. First, Exaltexx had not yet filed a defence and counterclaim. Consequently, it could only seek an interlocutory injunction if it demonstrated there was urgency. The Federal Court concluded that such urgency existed.
Second, Exaltexx did not make an undertaking to compensate Fluid for damages incurred should the trial judge ultimately vacate the injunction (e.g. dismiss the allegations of trade libel). Such an undertaking is typically required in order to succeed on a motion for an interlocutory injunction. Exaltexx argued that an undertaking ought not be required as Fluid would suffer no financial losses if the injunction were granted and, even if Fluid did suffer losses, any such losses would be co-extensive with the losses it is claiming for patent infringement. The Federal Court found that it is possible that a trial judge could simultaneously dismiss Fluid’s infringement claims while also finding that an interlocutory injunction should not have been granted. Ultimately, Exaltexx gave the requisite undertaking at the hearing and the Federal Court proceeded to consider the motion on the merits.
Test for Interlocutory Injunction is Satisfied
Exaltexx’s evidence included an affidavit from its Chief Financial Officer and correspondence with the various Third Party Companies. Fluid filed no responding evidence. The Federal Court found that Exaltexx satisfied the tripartite test for an interlocutory injunction with respect to communications with the Third Party Companies and other suppliers: (a) there was a serious issue to be tried, (b) Exaltexx would suffer irreparable harm if the injunction was not granted, and (c) the balance of convenience favoured granting the injunction. The Court declined Exaltexx’s request to enjoin Fluid from sending cease and desist letters to Exaltexx’s customers as there was no evidence that Fluid intended to do so.
(A) Serious Issue
Exaltexx demonstrated that there was a serious issue to be tried as to whether the cease desist letters contained statements contrary to subsection 7(a) of the Trademarks Act. The Court found that the letters were of a threatening nature and not merely informative, e.g. Fluid directly alleged that the Third Party Companies, by dealing with Exaltexx, were infringing the patent and included demands that the recipients preserve documents in anticipation of litigation. Further, it was unclear whether the activities of some of the Third Party Companies could even constitute infringement, e.g., one of the suppliers merely provided Exaltexx with a particular chemical (which itself is not claimed in the patents) and a third party trucking company merely transported Exaltexx’s products and did not purchase or sell them. Last, evidence was provided that at least one of the Third Party Companies stopped dealing with Exaltexx following receipt of the cease and desist letter.
Statements not subject to privilege
Fluid argued that, since the cease and desist letters referenced its Statement of Claim, the allegations of patent infringement were privileged and could thus not constitute trade libel. The Court acknowledged that the reference to Fluid’s infringement action, taken alone, may be subject to qualified privilege. However, the Court also found that the letters went beyond a “mere report on the pleadings” and noted that the letters contained independent infringement allegations such as threats of legal action against the Third Party Companies themselves.
(B) Irreparable Harm
The irreparable harm requirement is often difficult to satisfy. However, the Federal Court noted that “irreparable harm” is not to be considered in a silo, such that a stronger substantive case may lower the threshold on this branch of the test. The Court commented that there is a “fairly strong case” that Exaltexx will be able to establish that the allegations of direct patent infringement against particular Third Party Companies is false and misleading (e.g. such as those against the trucking company) regardless of the outcome of the infringement claim against Exaltexx. The Court also found that Fluid’s letters fall at the “very threatening” end of the spectrum of cease and desist letters and thus have “inherently detrimental reputational impact”.
Ultimately, the Court found that Exaltexx provided non-speculative evidence of irreparable harm. Exaltexx is a small company that operates in a niche industry with a limited number of suppliers and transporters with whom it can deal. At least one supplier had already ceased to deal with Exaltexx following receipt of a letter. The Court found that continued issuance of cease and desist letters could threaten Exaltexx’s very existence.
(C) Balance of Convenience
Finally, the Federal Court found that the balance of convenience favoured granting the injunction. The Court noted that the requested injunction would not hamper Fluid’s ability to promote its own products. However, allowing further communication from Fluid to Exaltexx’s suppliers would cause Exaltexx irreparable harm. This harm outweighed Fluid’s concerns that an injunction would impede its ability to assert its patent rights.
In light of this decision and others, patent holders concerned about possible infringement in Canada should speak with counsel to develop an appropriate strategy prior to sending any cease and desist letters.