Canada: A Limit On Demand Letters: Federal Court Grants Rare Pre-Trial Injunction Barring Potentially False Or Misleading Cease And Desist Letters

In a recently published decision (Fluid Energy Group Ltd v Exaltexx Inc, 2020 FC 81), the Federal Court granted a pre-trial injunction sought by the Defendant, Exaltexx Inc. (Exaltexx), enjoining the Plaintiff, Fluid Energy Group (Fluid), from sending threatening cease and desist letters to Exaltexx's third-party suppliers.

Exaltexx was also granted a lump sum costs award, in any event of the cause, for over $25,000. A copy of the Order and Reasons as to Costs can be found here.

Smart & Biggar successfully represented Exaltexx led by Steven Garland, alongside Theodore Sum, Justin Smith, Laura Easton and Matthew Norton.

Interlocutory Injunction Application

Fluid and Exaltexx are both chemical suppliers in the oil and gas industry, and are competitors in the sale of "safe acids": strong acids which are blended with additives to be more environmentally and dermatologically safe.

In October 2019, Fluid brought an action against Exaltexx in the Federal Court alleging infringement of nine of Fluid's patents. Exaltexx in response issued a demand for particulars in respect of Fluid's Statement of Claim.

Subsequently in December 2019, while awaiting a response to its demand for particulars, Exaltexx discovered that Fluid had, in the interim, been sending cease and desist letters attaching copies of the Statement of Claim to Exaltexx's third-party suppliers and service providers, including a supplier of hydrochloric acid and a trucking company.

The cease and desist letters made assertions that Exaltexx's products infringed Fluid's patents and that by dealing with Exaltexx's products the third-party suppliers were also infringing Fluid's patents. The letters threatened litigation against the third-party suppliers if they refused to comply with the demand to cease and desist conducting business with Exaltexx.

Exaltexx sought an interlocutory injunction enjoining Fluid from, amongst other things, sending further cease and desist letters to its suppliers on the basis that such letters constituted false or misleading statements tending to discredit the business, goods or services of a competitor under section 7(a) of the Trade-marks Act. This type of counterclaim is not uncommon in patent cases, where a patentee may be making statements to the defendant's customers or suppliers about the litigation or allegedly infringing conduct (see the leading case of S&S Industries where the Supreme Court of Canada awarded damages for such statements against a plaintiff in a patent infringement matter: S&S Industries Inc v Rowell, [1966] SCR 419).

The Court found that there was a serious issue to be tried that the allegations against the suppliers in the cease and desist letters constituted false or misleading statements under section 7(a) of the Trade-marks Act since neither the mere supply of raw chemicals such as hydrochloric acid, nor the mere storing and transportation of goods, were likely to constitute patent infringement pursuant to section 42 of the Patent Act.

Furthermore, the Court held that on the scale of "informative" to "threatening", Fluid's letters fell at the "very threatening" end. In this regard, the Court referenced the earlier decision of Excalibre Oil Tools Ltd v Advantage Products Inc (2016 FC 1279), which explains that while informative letters merely set out a patentee's rights and provide information that will enable the recipient to understand what may constitute infringement, threatening letters contain explicit or veiled threats that the recipient will be sued if they do not change a particular course of conduct. The Court found that threatening letters of the type sent by Fluid tend to discredit the goods or services of a competitor, namely Exaltexx.

The Court found that Exaltexx had demonstrated that it would suffer irreparable harm if the injunction were not granted, including damage to its business reputation, harm to its relationships with suppliers, and potential unquantifiable damage to Exaltexx's business as a whole. Since Fluid did not submit evidence of any harm it would suffer if the injunction were granted, the balance of convenience also favoured Exaltexx.

Accordingly, the Court found that all three prongs of the test for granting an interlocutory injunction were met and therefore ordered that Fluid immediately cease sending any further demand letters of this nature to Exaltexx's suppliers.

Lump Sum Costs Award

The Court found that Exaltexx was entitled to its costs and that a lump sum costs award was justified in the circumstance having regard to the following factors, among others: (i) both parties were sophisticated commercial litigants; (ii) even an award based on the upper end of Column V of Tariff B in the Federal Courts Rules would not have made a reasonable contribution to Exaltexx's incurred costs; (iii) the nature of the Plaintiff's conduct; (iv) the importance of the issues in the motion to Exaltexx; and (v) the amount of work and narrow timeline involved in preparing for and arguing the motion.

The Court awarded Exaltexx a lump sum costs award based on 25% of its actual legal fees plus all reasonable and necessary disbursements, totalling $25,848.04 and payable in any event of the cause.

Outlook

The Court's decision confirms there is potential risk for companies in sending threatening cease and desist letters to third parties in respect of a competitor's products and/or services. Accordingly, companies should be cautious in drafting such demand letters to ensure the allegations made are not likely to be considered false or misleading contrary to section 7(a) of the Trade-marks Act.

For more information on demand letters, please contact a member of our IP Litigation & Enforcement team.