Cease and Desist Letters: Use with Care

Cease and desist letters are an important part of a lawyer’s tool kit: they notify the recipient of a claim, and ideally lead to the client resolving an issue without litigation. However, receiving such a letter can be unpleasant. They may even seem excessive, as if they were intended to achieve the maximum possible threatening effect. In Fluid Energy Group Ltd. v. Exaltexx Inc. (“Fluid v. Exaltexx”), Justice McHaffie of the Federal Court found that that indeed appeared to be the intention of Fluid’s letters, taking the unusual step of issuing an injunction ordering Fluid not to communicate with Exaltexx’s suppliers with respect to such suppliers’ alleged infringement of Fluid’s patents.

Where is the line between an appropriate cease and desist letter and one worthy of an injunction? In the case of letters alleging patent infringement, strangely enough, the answer may lie in section 7(a) the Trademarks Act, which was the basis for Exaltexx’s motion for the interlocutory injunction. That section reads: “No person shall … make a false or misleading statement tending to discredit the business, goods or services of a competitor…” This provision, however, must be read down so as to include only statements relating to the competitor’s intellectual property.

In Fluid v. Exaltexx, Exaltexx alleged that Fluid had made such statements in its cease and desist letters. Fluid and Exaltexx were competitors in the market for “safe acids”, which are strong acids with additives intended to make them safer, both for the environment and those handling them. The letters at issue were sent to a number of businesses with whom Exaltexx worked, such as its suppliers and transportation companies. A letter to a company that supplied Exaltexx with raw chemicals, for example, claimed, that by “storing for sale, transporting, importing, shipping, distributing, supplying, selling and/or using the Infringing Products”, it had “infringed, [was] continuing to infringe, and/or had induced and procured others to infringe.” The letter went on to demand that the supplier cease such activities and threatened legal action if it did not.

Justice McHaffie confirmed that an interlocutory injunction ordering a party not to send such letters may be appropriate if the criteria established by the Supreme Court of Canada in RJR-MacDonald v. Canada (Attorney General) are satisfied, namely:

1. The party seeking the injunction has raised a serious issue to be tried in respect of its claim;
2. It will suffer irreparable harm if the injunction is not granted; and
3. The balance of convenience favours granting the injunction.

With regards to the first element, the judge notes that the bar is low, that is, a party need only demonstrate that its claim is not frivolous or vexatious, on a preliminary assessment of the merits. In the case at hand, there was evidence on file, for example, that one of the recipients merely transported the allegedly infringing products, which would not even constitute infringement. Similarly, another recipient merely supplied hydrochloric acid, yet none of the patents in question claimed hydrochloric acid. As such, there was a serious issue to be tried as to whether Fluid had made false or misleading statements. Justice McHaffie further ruled that there was a serious issue to be tried as to the intention to discredit a competitor and the damages suffered by Exaltexx.

Fluid attempted to argue that its pleadings were subject to privilege, meaning that it was immune to section 7(a) claims arising from its letters. However, the letters went well beyond informing their recipients that a statement of claim had been filed, and that privilege did not extend so far as to immunize Fluid with respect to its claims that the suppliers had infringed its patents.

While the threshold for establishing irreparable harm is higher, the judge ruled that Exaltexx had met it, and that the balance of convenience favoured an injunction. It should be noted, however, that the evidence on file did not suffice to demonstrate that Exaltexx itself was not infringing on Fluid’s patents. As such, the injunction was limited to ordering Fluid

1. Not to make statements alleging that Exaltexx’s suppliers were infringing by virtue of working with Exaltexx
2. Not to demand that such suppliers cease dealing with Exaltexx; and
3. Not to threaten legal proceedings for infringement by virtue of dealing with Exaltexx.

The take-home message from this case may be that cease and desist letters are not innocuous. Those who might be tempted to send such letters, believing that there will be no repercussions should take good note.

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