Guest post: attorney liable for bad-faith C&D letter?

Prompted by a spirited discussion in the E-Trademarks listserv, I blogClipboard01ged the other day asking whether the signer of a bad-faith Cease-and-Desist letter might risk personal liability for it.  Here is a guest posting from listserv member Michael E. Hall about this.

I don’t buy the “no harm no foul” line of thought.  Yes, paying attorneys to read and perhaps respond to a bad-faith C&D would be one form of damages.  But that’s not the real (or primary) purpose of sending a bad-faith C&D.

No, the real purpose is to disrupt the recipient’s business in some manner, such as by inducing it to undertake costly revisions to its trade dress, or perhaps delay a roll-out while it determines if it should undertake those revisions.  Or maybe the purpose is to intimidate the recipient into forgoing fair use of descriptive wording (again, reworking packaging and/or marketing literature).  Or the purpose might be to gain leverage in an unrelated proceeding between the parties:  “I’ll drop my bs claims here if you give me a more favorable settlement on the other matter.”  In all of these cases the intent is not to vindicate legitimate rights, but rather to inflict damage on a competitor.  We might have difficulty assigning dollar amounts to these other damages, but that doesn’t mean they aren’t real.

The more I look into this, the more I’m persuaded there is a real, potent, and possibly underutilized independent cause of action for unfair competition (and/or state statutes proscribing unfair competition) for sending a bad-faith C&D and similar conduct.  It’s a tort.  In this 2000 article from the California Bar Journal, the author — Robert Helfing — opens with a hypothetical interaction between an attorney and his client who’s upset with a competitor:

No problem, you tell him, you’ll send off a “cease-and-desist” letter, demanding that the infringing conduct cease, threatening litigation if it does not … . Often, you tell your client, the sending of a cease-and-desist letter is enough to induce infringers to terminate the accused conduct, possibly even to extract concessions or even compensation from them.  At the very least, it serves to shut off any claim of innocent infringement, subjecting the infringer to increased liability.  In any event, you say, there is no harm in sending a cease-and-desist letter.

This article is for those who do not question the wisdom of that last bit of advice.  A cease-and-desist letter is a dangerous weapon for the owners of intellectual property.  The letter can, however, also become a dangerous weapon against them.  The purpose of a cease-and-desist letter is to cause a competitor to terminate a presumably gainful business practice.  The letter is intended to, and often does, cause loss to business rivals.  If used improperly, cease-and-desist letters . . . may subject the issuer to liability under various legal theories including unfair competition…

In General Linen Service, Inc. v. General Linen Service Co., Inc., 25 F.Supp.3d 187 (D.N.H. 2014), the district court in New Hampshire denied a 12(b)(6) motion and found that a counterclaim defendant, who had received a C&D from plaintiff, had stated a claim under (i) a NH statute proscribing “any unfair method of competition,” (ii) unfair competition under the Lanham Act, and (iii) unfair competition under NH common law.  The court first addressed the NH statute:

[C&D recipient] alleges that: “By sending a cease and desist letter when [sender] knew that the alleged mark was generic and incapable of servicing [sic] as an indicator of source, [sender] engaged in a scheme of advancing groundless trademark infringement claims based upon an invalid, abandoned, generic, or otherwise unenforceable mark.”

[Sender] moves to dismiss the claim, arguing that “[t]he fact [recipient] received a cease and desist letter that it did not take seriously falls woefully short of articulating a [claim under the unfair competition statute].”  It further argues that “given the fact that defendant did not take the letter seriously, how can it possibly claim to have been deceived or otherwise injured?”

25 F.Supp.3d at 195.  The court found the recipient had stated a claim under the statute and, with respect to the sender’s argument the recipient had not alleged injury, pointed out the NH statute “does not require a showing of actual damages for the claimant to be awarded the statutory minimum and attorney’s fees.”  Also, the court went on to find that recipient’s allegation that sender advanced “meritless claims in a scheme to exact unfounded and baseless settlements from” recipient stated a claim under both the Lanham Act and NH common law.  Id. at 196.

In a case cited by McCarthy, Iowa Health System v. Trinity Health Corp., 177 F.Supp.2d 897 (N.D.Iowa 2001), the court, citing Eighth Circuit precedent, found that “Lanham Act ‘unfair competition’ claims may be based on conduct far broader than the bare language of the statute might suggest.  The ‘doctrine of unfair competition’ under Iowa law is at least as broad…”  Id. at 929.  And held:

In light of [precedent], and the breadth of “unfair competition” under § 43(a) of the Lanham Act and Iowa common law, the court finds that the [plaintiffs] have alleged sufficiently wrongful conduct to state an “unfair competition” claim under either the Lanham Act or state common law.  Again, just as allegations of frivolous, groundless, or oppressive assertion of trademark rights could state a claim of “unclean hands,” the court now holds that the allegations here are sufficient to state a claim of “unfair competition” under either the Lanham Act or Iowa common law, because they go beyond allegation merely of legitimate enforcement of trademark rights to conduct intended to create confusion about the proper scope of the trademark rights of the parties, with the purpose of damaging [plaintiffs’] business.

Id. at 932.

Circling back to damages, there may be some quantifiable damages or maybe some specified minimum damages are available under a state statute like NH’s.  Or, yes, even punitive damages.  Comment n to Section 36 of the Restatement for Unfair Competition states “[a] successful plaintiff in an action for unfair competition may recover punitive damages under the rules generally applicable to awards of punitive damages in tort actions.  The purpose of punitive damages is to punish the wrongdoer for egregious conduct, and normally proof of malice or willful misconduct is required.”

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