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Published: 2008-03-26

Emerging State Law Claims Prompted by Patent Enforcement



At first glance, it would appear that state law would have no place in a patent dispute. As experience has dictated, this is simply not the case. From establishing declaratory judgment jurisdiction in a tenuous forum to adding a litany of potent counterclaims, state law can be used (or used against you) during the course of patent litigation in a variety of ways. While a patent infringement dispute will never be litigated in a state court, the patent litigator should be very wary of ignoring state law.

Personal Jurisdiction

Many state law causes of action may be triggered when a party who claims to be the holder a valid patent sends a cease and desist letter to either the alleged infringer or a customer of such alleged infringer. In these cases, since the sending of these demand letters may constitute a separate state law tort, the patent holder may find itself subject to jurisdiction in the forum to which it sent these letters. The level of minimum contacts required, therefore, may depend largely on the tort involved.

The number of contacts with the forum state is not, alone, determinative of whether specific personal jurisdiction exists. If the contact with the forum "resulted from the defendant's conduct and created a substantial connection with the forum state, even a single act can support [specific personal] jurisdiction." Ham v. La Cienega, 4 F.3d 413, 415 (5th Cir. 1993).

Further Examples of "Minimum Contacts":

  • A mere telephone call.

  • Mailing of insurance contract.

  • A single demand letter.

  • Demand letter coupled with contact with plaintiff's customers.

While federal courts must generally look to the law of the Federal Circuit to determine whether personal jurisdiction is appropriate in patent cases, state law must not be ignored. State law relating to both long arm statutes and various business torts, may be a useful tool for establishing or avoiding personal jurisdiction over an out-of-state defendant.

State Law Causes of Action

While infringement is certainly the hallmark of patent litigation and clearly a uniquely federal claim, the prudent patent litigator cannot ignore the veritable plethora of state law causes of action that may be utilized in a patent dispute. As a general rule, these state law claims will be heard by a federal court under jurisdiction that is supplemental to the federal question conferred by the issue of a patents infringement or validity. However, in some cases federal courts may exercise original and exclusive jurisdiction over such state law causes of action even if a patent claim arising under 28 U.S.C. § 1338(a) is not yet ripe for adjudication. Oddly enough, in these instances, it is actually the state law claims that provide entrée to the federal courts.

Tortious Interference With Existing Contractual Relations and/or Prospective Contractual Relations

Tort liability based upon the premise of a prospective business relationship is sometimes confused with an interference of contractual relations. An examination of these two causes of action reveals that the most significant difference is that tortious interference with existing contractual relations requires the existence of a contract. Tortious interference with a contractual relationship, however, does not include the inducement of a breach. For example, if the defendant injures a party who is then unable to perform, or destroys or damages property that is the subject matter of the contract, or does any other act that makes performance more burdensome, difficult, or impossible, or of less or no value to the person entitled to performance, an actionable tort is constituted under the theory that there is an invasion of the property rights of the parties of the contract.

Three remedies exist for these torts of tortious interference with contract and/or prospective contractual relations: (i) compensatory damages; (ii) punitive damages; and (iii) injunctive relief. First, with regard to compensatory damages, the proper measure of such damages is generally the same measure as breach of contract. However, the breach of contract standard is not universally accepted by the commentators in other jurisdictions as the complete measure of damages. Indeed, the Restatement (Second) of Torts states that the damages for interference either with contract or with prospective contractual relations should consist of (i) pecuniary loss of the benefits of the contract of the prospective relation; (ii) the consequential losses for which the interference is a legal cause; and (iii) mental distress are actual harm to representation recently expected to result from the interference.

Business Disparagement and Defamation

Common law defamation consists of either (i) a communication that harms the reputation of another by lowering him or her in the community of opinion, or (ii) a communication that deters others from associating with or becoming otherwise involved with the person. Both libel and slander fit within the common law definition of defamation. Libel involves written communication; slander involves oral communication.

Business disparagement, like libel and slander, is a species of the tort of "injurious falsehood." Both defamation and business disparagement involve the imposition of liability for injury sustained through publications to third parties of a false statement affecting plaintiff. However, the two torts protect different interests. The action for defamation is to protect the personal reputation of the injured party, whereas the action for injurious falsehood or business disparagement is to protect the economic interest of the injured party against pecuniary loss. Significantly, an injured party may sue for both personal defamation and business disparagement in the same suit so long as he avoids duplication of damages.

Some courts have established the elements of a claim for business disparagement as (i) publication by the defendant of the disparaging words; (ii) falsity of the statement; (iii) malice; (iv) lack of privilege; and (v) special damages. One state supreme court has held that "communication must play a substantial part in inducing others not to deal with plaintiff with the result that special damage in the form of loss of trade or other dealings, is established, for plaintiff to have a cause of action for business disparagement." Gulf Atlantic Life Ins. Co. v. Hurlbut, 696 S.W.2d 83, 96 (Tex. App.--Dallas 1985), rev'd on other grounds, Hurlbut v. Gulf Atlantic Life Ins. Co., 749 S.W.2d 762 (1988). Thus, proof of special damages is an essential part of the plaintiff's cause of action for business disparagement. The requirement goes to the cause of action itself and requires that plaintiff establish pecuniary loss has been realized or liquidated as in the case of specific lost sales. Therefore, unlike defamation, which is actionable without proof of special damages in certain cases, business disparagement requires proof of a specific economic loss. Additionally, while damages to reputation or consequential mental distress is recoverable in a slander action, such damages are not recoverable in a business disparagement suit. Thus, the kinds of damages sought are significant to the determination of the cause of action that is applicable.

Slander of Title

To recover in an action for slander of title, a party must allege and prove: (i) the utterings and publishing of disparaging words; (ii) that they were false; (iii) that they were malicious; (iv) that special damages were sustained thereby; (v) that the plaintiff possessed an estate or interest in the property disparaged; and (vi) the loss of a specific sale. Malice is a basis for recovery of actual damages in a slander of title case means merely that the acts must have been deliberate conduct without reasonable cause. A patent may well be the subject of a slander of title action as Prosser and Keeton state that intangible interest such as "trademarks, copyrights [and] patents" may be the subject of the tort.

As compared to other "injurious falsehood" causes of action, slander of title or property differs in that there is no presumption of damages. The plaintiff must show that he or she sustains special damage proximately, naturally and reasonably resulting from the alleged slander. Attorneys' fees are not recoverable in slander of title actions, and neither damages to reputation nor consequential mental damages are recoverable in action for slander of title. The plaintiff must prove the loss of a specific sale, i.e., that a pending sale was defeated by the slander. However, the reasonable expense of litigation necessary to remove the doubt, or cloud, from the property or title thereto has been held to be recoverable. Additionally, punitive damages are also recoverable in an action for slander of title. Thus, as was the case with a defamation cause of action, a plaintiff should allege that defendant's actions were both intentional and with malice.

Unfair Competition Under the Common Law

Unfair competition in its most basic form is almost universally regarded as a question of whether the defendant is misrepresenting his or another's goods or services, leading to confusion on the part of potential customers. This label has generally been associated with the common law torts of "palming off", "dilution", "false advertising", and "tarnishment." These were all codified into §43(a) of the Lanham Act.

Several jurisdictions have agreed that the action of "false advertising" is in fact actionable under the common law of unfair competition. This has been carried through in the formulation of §2(a)(5) of the Uniform Deceptive Trade Practices Act. This states that:

A person engages in a deceptive trade practice when, in the course of his business, he represents that goods or services have sponsorship, approval, [or] characteristics... that they do not have[.]

Also, the Restatement (Second) of Torts §761 notes that a misrepresentation of goods for the purpose, and with the effect, of diverting trade is actionable. Thus there is strong secondary authority supporting a contention that the tort of "false advertising," or misrepresenting another's goods, is actionable under a common law unfair competition claim.

Generally, the measure of damages for the tort of unfair competition is the lost profits based on the false advertising. This means the net of the sale price after the cost of goods and overhead is deducted. The damage amount, however, must be supported by evidence.

Use of Confidential Information

Unlike the previous state law claims, a cause of action for theft or misappropriation of trade secrets does not involve notice of infringement and may be used equally by the patentee (rather than the declaratory judgment plaintiff). Two scenarios illustrate the utility of trade secret protection in the patent context. First, before a patent issues the contents of the application may still be covered by trade secret protection. Second, while a patent applicant must provide a complete description of how a new invention works, there may well be valuable technology that it associated with an invention the disclosure of which is not necessary to meet the "best mode" requirement. If this technology is not disclosed, trade secret law may well protect it.

Minnesota Mining and Manufacturing Co. v. Johnson & Johnson Orthopaedics Inc., 24 U.S.P.Q.2d 1321 (Fed.Cir. 1992), provides an excellent example of how a state law cause of action for misappropriation of trade secrets can be used by a patentee in an infringement suit. In Minnesota Mining, a patentee sued for both patent infringement and misappropriation of trade secrets. Rather than simply analyze the state law tort on its own, the special master relied upon its finding that a theft of trade secrets had occurred in concluding that the defendant had engaged in willful infringement. The Federal Circuit affirmed the District Court's adoption of the special master's findings and held: "[A]lthough willfulness is generally based on conduct that occurred after a patent issued, pre-patent conduct may also be used to support a finding of willfulness." Restatement (Third) of Unfair Competition § 40 cmt. d (1993)

Conclusion

While patent protection is originally and foremost a creature of federal law, state law causes of action cannot be overlooked when representing and advising clients on patent issues. From trial tactics to damages, state law causes of action can be useful tools in patent litigation. Patent attorneys must be aware of the role that state law can play in their practice or risk being outmaneuvered by a better prepared opponent.

This article is a condensed version of a paper presented to the Intellectual Property Institute. The full version can be found at: http://www.lockeliddell.com/Public/index.asp?page_ID=252&content_id=1578