How to Stop Business Rivals from Making Groundless Threats of Patent Infringement Action?


Obtaining patent rights is generally a means to protect the rights of patent owners. However, if it is used for making groundless threats of infringement against actual or potential customers of rivals to deter them from dealing with the rivals, the aggrieved rivals could rely on Section 89 of the Patents Ordinance (Cap. 514) to lodge defensive action against the threatening party.  

Statutory defensive action
Section 89 of the Patents Ordinance (“PO”) provides for a defensive cause of action against groundless threats of patent infringement action. Where any person threatens another person with legal action for patent infringement (for example, by way of advertisements, numerous demand letters, circulars or otherwise), anyone aggrieved by such threat (whether or not he is the person to whom the threats are made) may apply to the court for a declaration that the threats are unjustifiable, together with an injunction against the continuance of the threats, and damages sustained by reason of the threats. 

The victims of groundless threat are likely to succeed in the defensive action against the threatening party, if the threatening party cannot prove that the acts of the victims constitute an infringement of its patent, or the victims can show that the threatening party’s patent is invalid. Such defensive cause of action is also provided for in respect of trademarks (section 26 of the Trade Marks Ordinance (Cap. 559)), copyrights (section 187 of the Copyright Ordinance (Cap. 528)) and registered designs (section 57 of the Registered Designs Ordinance (Cap. 522)).

Applying for security for costs against the defendant (alleged patent holder)?
In the recent decision of the Court of First Instance in Bulova Corp v San Ma Industrial Ltd HCA1831 and 1912/2013 (“Bulova Corp”), the proprietor of a short-term patent (the “Patent”) sent demand letters to at least 16 watch shops, claiming that the watches manufactured and sold by the 1st Plaintiff were infringing products and demanded the shops to cease dealing in the alleged infringing products.

To stop the threats, the Plaintiffs started an action under s.89 PO to apply for an injunction to restrain the Defendant from making the threats of infringement and a declaration that the Patent was invalid. Later, the Defendant commenced proceedings against the Plaintiffs for infringement of the Patent in another action.  An interlocutory injunction was subsequently granted against the Defendant pending trial on the issues. During the window period before trial, the Plaintiffs applied for security for costs against the Defendant to cover the Plaintiffs’ costs up to the conclusion of the exchange of witness statements and expert reports, to safeguard against the abovementioned risk in recovering the legal costs. The Defendants then discontinued (purposely, with a view to escaping the liability to provide security for costs as explained below) all the counterclaims of patent infringement against the Plaintiffs.

The Law on security for costs
A party’s liability to pay security for costs is provided for under Order 23 of the Rules of the High Court (Cap. 4A) and section 905 of the Companies Ordinance (Cap. 622). For example, where the plaintiff is ordinarily resident out of Hong Kong or where a plaintiff is a nominal plaintiff (such as a shell company) and the court has reason to believe that it will be unable to pay the defendant’s costs, the Court may order the plaintiff to provide security for costs. A defendant generally cannot be ordered to pay security for the plaintiff’s costs (except for a counterclaiming defendant, who is in effect in the position of a plaintiff). 

The issue in Bulova Corp is whether a defendant in a s.89 PO action is “in the position of a plaintiff” such that it may be ordered to provide security for costs. An essential element of the cause of action under s. 89 PO was that a threat had been made. It is therefore essential that a patent owner has already taken steps to enforce the patent rights. In Bulova Corp, the court held that the Defendant had taken steps to enforce its patent rights by threatening proceedings in the demand letters and was therefore the true “attacker”. The Plaintiffs, as “persons aggrieved” by threats, commenced the s.89 PO action as a defence. The Defendant’s discontinuance of its counterclaims was held to a superficial step and it remained that Defendant was in the position of a plaintiff for the purpose of the security for costs application. The Defendant was also held to be a nominee plaintiff with no assets and business other than holding the Patent. The Defendant was therefore ordered to pay HK$800,000 as security for the Plaintiff’s costs. 

The court’s decision in Bulova Corp has helpfully clarified the law: the fact that a party is named plaintiff is not conclusive and the court looks to the substance and not the form in deciding whether a party is a plaintiff. This would relieve the financial concerns of parties who are facing groundless threats from unscrupulous patent owners and want to commence defensive action to stop the threats. 

The law and procedure on this subject are very specialized and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
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Published by ONC Lawyers © 2015