Warning Letters: Annoying? Yes. Protected? Maybe. Lite-Netics v. Holiday Bright Lights
Many contemporary businesses complain about being sent broad sweeping warning letters of infringement that disturb their dealings or harm their reputations. See e.g., Hannah Jiam, Fee-Shifting and Octane Fitness: an Empirical Approach Toward Understanding “Exceptional”, 30 Berkley Tech. L.J. 611, 612-30 (2015)(“NPEs can leverage substantial defense costs to encourage defendants, who generally pay high hourly legal fees, into settlement before trial. … [M]any defendants determine that economic considerations favor settlement, even in frivolous suits.”); Rothschild Connected Devices Innovations v. Guardian Protection Services, 858 F3d 1383, 1389-90 (Fed Cir 2017). This has especially been true in the emerging areas of business method patents and newly computerized products/processes, where an accused infringer might not be patent savvy entities, like banks, retailers or mail providers. Damaging publicity can provide a strong incentive to settle a lawsuit… and to do so ASAP. But it is not necessarily fair to litigants (or good business practices) to pay underserving patentees just to avoid or silence them. Accordingly, counsel must know when to hold ‘em or fold ‘em when managing negative legal press.
A patent holder has the responsibility to be competent and not bring objectively baseless assertions of infringement. An accused infringer may otherwise be able to enjoin a patentee from notifying others of their potential liability. As to obtaining equitable relief against bad press, instead of simply following the traditional four-factors test to determine whether an accused infringer can obtain a preliminary injunction against publishing infringement allegations, the Court of Appeals prohibits limitations on infringement speech unless the patentee makes said accusations in bad faith. Hence, bad faith is a prerequisite to the four-factors analysis.
A recent case out of the CAFC brings attention to the bad-faith criterion and the issue of the appropriate scope of a patentee’s rights in alleging infringement. Lite-Netics v. Nu Tsai Capital, d/b/a Holiday Bright Lights (HBL), Case No.: 2023-1146 (Fed. Cir. 2023). Lite-Netics’ patents are to decorative lights that can be more easily attached to a metallic surface by adding a magnet to the light socket base. US Patent Nos 7,549,779 and 8,128,264 both entitled “Magnetic Light Fixture.” HBL sells magnetic holiday string lights and clip-on attachments that Lite-Netics argues infringes their patents. In 2017, Lite-Netics sent a first cease-and-desist letter to HBL that went unanswered for nearly five years until a second warning letter was sent. The parties then went back and forth about the issue of infringement without resolution. Lite-Netics eventually brought a patent infringement suit against HBL in the District Court of Nebraska while also sending notices to its customers who were likewise purchasers of HBL’s products. The letters accused HBL of infringement and copying, and warned of the potential for additional lawsuits.
In response to the complaint, HBL moved for Rule 12(b)(6) dismissal and countersued for state and federal claims of unfair competition, false advertising, tortious interference, defamation and bad faith patent infringement communications under Colorado law. HBL also successfully motioned for a temporary restraining order and preliminary injunction under state tort law to enjoin Lite-Netics from communicating with HBL’s customers about their allegations of infringement. Remember that the four-factors test for preliminary injunctions includes assessing: (1) the movant’s likelihood of success on the merits, (2) the likelihood of irreparable injury to the movant without the injunction, (3) the balance of equities, and (4) the public interest. The district court did apply the four-factors test and under, for example, factor one found that HBL was likely to succeed on the merits because HBL’s state law claims were not preempted by federal patent law since Lite-Netics’ communications were made in bad faith.
Applying the Eight Circuit’s standard of review, the Court of Appeals panel vacated the preliminary injunction finding that the district court abused its discretion because Lite-Netics’ claims were not objectively baseless. First, though the panel agreed that infringement claims made in bad faith can be preempted by state law, it insisted that infringement claims made in good faith preempt state law claims such that HBL would not have a likelihood of success on the merits of its state claims. J. Taranto indicated that enjoining speech is much more serious than forbidding infringement because speech is protected under the First Amendment. “The First Amendment principles are particularly significant when an injunction against speech is at issue.” citing GP Industries v. Eran Industries, 500 F3d 1369 at 1375-77 (Fed Cir 2007). Since speech is constitutionally protected, restrictions must be appropriately tailored, i.e., bad faith is required to enjoin such self-advocacy.
The bad-faith precursor to injunctive relief must be both subjectively and objectively demonstrated; where the claims are not objectively baseless no bad faith can be found. “A patent-infringement allegation is objectively baseless only if ‘no reasonable litigant could realistically expect success on the merits.’ ” quoting again GP Industries. Lite-Netics’ infringement allegations were not nearly objectively baseless, they were probably not even incorrect as to either literal or DOE infringement at this stage in the litigation. For example, the lower court had not yet had a full claim construction proceeding or heard experts on infringement. One claim term the district court found to be unmet related to the requirement of “a magnet” where HBL used two magnets to accomplish the same pull strength. However, claim terms using “a” or “an” before an element are often understood to mean one or more of said element. This is especially true when, as here, nothing in the specification indicated that the patentee intended to limit the covered embodiments to those only having a single magnet. So, HBL was arguably unlikely to succeed on the merits with respect to its literal infringement claims. Moreover, Lite-Netics’ DOE arguments were just as strong as their direct infringement positions since the district court did not address the function-way-result test in its analysis and two magnets arranged similarly to the recited one would probably perform substantially the same function, in substantially the same way, to produce substantially the same overall result as the claimed magnet. Thus, the COA panel vacated the preliminary injunction and remanded the case back to the district court.
