Should you cease and desist? How to respond to international IP litigation

Growing your business into foreign markets can be a cause for celebration. It can also attract the unwanted attention of an overseas competitor. While it sounds like a first-world problem for a startup or mid-sized company here in Australia, that attention can come in the form of a cease and desist letter or a legal complaint alleging that you are infringing intellectual property (IP) overseas.

IP Australia warns of differences in “culture, politics and business etiquette” and that “the civil litigation process for enforcement [in the US] is considered to be more aggressive and expensive compared to Australia”. 

Why you’re most likely to receive IP claims from the US

1. Infringements and thus anticipated recoveries are larger in the US.

2. US courts generally permit discovery of information that is reasonably calculated to lead to the discovery of admissible evidence, unlike Australian courts that generally limit discovery to information necessary for the just and efficient resolution of the dispute.

3. Evidence is usually presented live and to a jury in the US, instead of by affidavit to a judge.

4. The cost for asserting and losing cases in the US are generally unencumbered by cost shifting, unlike Australia where often the loser pays a portion of the other party’s costs.

Statistically, companies in Australia have less experience than larger or longer-established overseas competitors in defending against infringement allegations from foreign markets, just as US companies and executives have less experience in asserting IP rights overseas. As such, the tendency when responding to allegations from afar may be to do so too quickly and too casually. 

Doing so without local expert advice risks missing subtle clues that may be communicated with the cease and desist letter or in legal complaint. It also risks creating new legal liabilities. Not everything is meant to proceed at the speed or informality of the internet. 

What you say can and will be used against you

IP lawyers generally advise clients not to directly contact the lawyer who sent the letter or filed the complaint. Not knowing all the legal issues, you may give away information that makes it easier for the IP owner (a.k.a. the plaintiff) to proceed against you. 

Statements you make about your limited sales into the US for example — intending to suggest you aren’t worth the effort — can be used to establish infringement or tie you to the actions of your foreign employees, independent contractors or distributors. 

The information you may provide to the plaintiff’s counsel unwittingly can also be used to help establish the rights of a foreign court to exercise its jurisdiction over your company, to fix an unfavorable court as the proper venue, or even to assert jurisdiction over you personally. 

For example, a US trial court was held to have personal jurisdiction in a trademarks matter over an Australian wine producer and its Australian subsidiary, alongside their New York importer and a liquor store in Washington, DC, because they “arranged for introduction of their wine into the United States stream of commerce with the expectation (or at least the intention and hope) that their products will be shelved and sold at numerous local outlets in diverse parts of the country”.

Try not to do anything that will be used against you

Even if you don’t contact the other party, you should be careful when taking other actions. Attempts to minimise exposure, such as removing products from your online store may send signals that increase your liability through new causes of action or expose weaknesses in your litigation or business positions. 

Likewise, investigating the allegations may end up handing the plaintiff disastrous information through discovery. Emails to staff sent after receiving a cease and desist letter may be discoverable in a litigation, where they often make nice fodder for the jury during closing arguments. 

If you choose not to respond, it may be used against you

It may turn out that not responding to the letter or the complaint is the right course of action. But inaction may still lead to undesirable consequences, including default judgment, bad press, stunted growth plans, diminished investor interest, reduced employee morale, and difficulty in hiring. 

Delaying your response for too long can also lead to a significant increase in the damages awarded to the other party. 

Some IP rights give plaintiffs the ability to seek three times their damages by claiming the infringement is “willful”. While a cease and desist letter may start this period of enhanced damages, the period may be capped by obtaining an appropriate legal opinion that the asserted IP rights are likely invalid or not infringed. 

Even if you choose not to rely on this legal opinion during the trial (and there may be reasons not to), during pre-trial negotiations it is common to use financial figures and dates that assume that you obtained an opinion around the date your legal counsel responded to the plaintiff’s counsel — especially where there are contemporary communications with counsel being withheld on the basis of attorney-client privilege. Thus, even delaying discussions with an appropriate lawyer or delaying your response may change the financial terms on which you can resolve the matter.

Don’t make your company a better target than it should be

Sophisticated companies competing in global markets use IP litigation — or the threat of it — not only to stop infringement, but also to send signals to suppliers, customers and investors, to investigate competitors and discourage them from entering a market, and to validate IP for future uses. 

In fact, your company may not have been the plaintiff’s real target until you talked, as some plaintiffs pick on relatively softer or willing defendants to demonstrate the validity or strength of their IP rights to investors or to future deeper-pocket litigation targets.

Be careful when contacting other defendants

While contacting other possible defendants may prove a useful tactic, remember their interests may be significantly different from yours. Even with the best of intentions, other defendants may have good reasons for interpreting a plaintiff’s actions differently. For example, other defendants may not have all the legal defenses you do as a foreign company.

Your communications with the other companies may also not be protected under an appropriate joint defense theory, risking exposure of these communications directly to the plaintiff. 

What should I ask my lawyer?

Depending on your circumstances, it is likely you should ask your lawyer for advice about the quality of the plaintiff’s IP, the reputation and litigiousness of the plaintiff and its lawyers, and what else is being communicated in the letter or complaint. 

For example, what information can you get from the plaintiff’s choice of court, the allegations in the complaint, what isn’t being alleged in the complaint, and even whether the plaintiff has served the complaint. Likewise, a lot can be read into how an IP owner describes its IP rights in a letter and how strongly it requests you to alter your conduct. 

Before deciding how to respond, also ask for some advice on the available next steps. Ask your lawyer for time frames and cost projections, and explore the costs and risks for delaying or doing nothing. 

Also consider how your next steps may be interpreted by your competitors, suppliers, investors, the public and even your employees. Before you (or more likely your lawyer) respond to the plaintiff, test whether you are sending only the right signals, as answers don’t always need to be complete, and early mixed signals may cost you down the road.

As you begin growing into your global markets, it can be difficult to know when you need expert foreign advice, where to get it, how much it should cost, and how best to use it.

The good news is that general guidance to these preliminary questions is often free.