patent publication privilege mostly protects licensee against licensor's false advertising claims

 AU New Haven, LLC v. YKK Corp., No. 15-cv-3411-GHW, 2020 WL 4366394 (S.D.N.Y. Jul. 30, 2020)

Summarizing only a few key issues: YKK entered into an exclusive licensing agreement (the ELA) with the owners of a recently issued patent. The ELA provided YKK an exclusive (but limited) field of use license: “an exclusive, worldwide right to manufacture, use, sell, offer for sale and otherwise use and practice the invention... except for zippers placed in finished goods in the high end outerwear, marine, military and luggage (excluding sports and cosmetic bags) markets.” Plaintiffs sued YKK because, among other things, they believe that, for years, YKK has been selling laminated zippers into the unlicensed, high-end outerwear market.

Issues in the current motions: whether the patent publication privilege barred plaintiffs’ Lanham Act false advertising claim; whether plaintiffs could use Connecticut’s CUTPA to sue YKK for selling to customers all around the world; and whether the remaining contract claim presented triable issues, given YKK’s offer of judgment for the amount sought (about which I will say no more).

False advertising: plaintiffs alleged that YKK falsely advertised its field of use license by advertising that it was “licensed,” “the exclusive licensee,” or similar statements. Precedent establishes that, to avoid conflict with patent law, false statements about patent rights “are actionable under the Lanham Act false advertising provision only if they are made in bad faith.” But are statements about licensee status similarly covered? The court said yes: Such statements “fall squarely within the scope of the patent publication privilege: They inform the marketplace of the existence of the ’214 patent and YKK’s rights under that patent.”

Plaintiffs argued that, since there was no need to look at patent law to determine whether the statements were false—as there would be if the alleged falsity went to patent validity or what infringes—the patent privilege didn’t apply. The court disagreed: The “privileged right of a patentee to notify the public of its patent rights is statutorily rooted in the patent laws at 35 U.S.C. § 287, which authorizes patentholders to ‘give notice to the public’ of a patent by marking [their] patented articles and makes marking or specific notice to the accused infringer a prerequisite to the recovery of damages.” Even if most of the time this means that a court has to apply patent law to determine whether the challenged statement was true or false, the privilege isn’t necessarily limited to that context.

Plaintiffs then made a clever argument about the inherent nature of patent rights that the court had no interest in at all:

[B]ecause the core right conveyed by a patent is the right to exclude others from using the claimed invention, that fundamental right must necessarily define the scope of the patentee’s privilege to notify the public of its patent rights. Thus, according to Plaintiffs, because a licensee does not obtain the right to exclude by virtue of its license—it merely obtains a covenant from the patentee not to sue for infringement—a licensee’s statements about its own license rights cannot fall within the scope of the publication privilege.

But the caselaw doesn’t support this; one key Federal Circuit case explicitly treated exclusive licensees and patentholders identically for the purposes of analyzing the privilege’s applicability. Also, the statute from which the publication privilege is derived, 35 U.S.C. § 287, specifically permits not just patentees, but “persons making, offering for sale, or selling within the United States any patent article for or under them or importing any patented article into the United States” to “give notice to the public” that an article is patented. And finally, YKK’s exclusive license in fact gave it a right to sue infringers.

More simply, plaintiffs argued that the publication privilege applied only to statements claiming potential infringement. That too was wrong. The patent laws permit marking to give notice to the world in general. “That marking is not a statement that infringement has already occurred; it is a warning to potential infringers.”

I’m more sympathetic to the plaintiffs’ argument, though I’m not convinced the court is wrong—the question is about balancing the interests served by the two bodies of law. If one were convinced that the specific aim of protecting consumers against deception often overrides ancillary patent law aims, then it could make sense to limit the privilege where a marketing statement isn’t so much a warning to potential infringers as a promise of the advertiser’s own ability to deliver. After all, the problem here is allegedly that YKK told customers it could supply them with zippers it had no right to supply, possibly converting the customers into patent infringers as well/deterring them from contracting with the actual owner of the patent rights for the relevant segment.

Regardless, given the result, plaintiffs had to show that YKK made its statements in bad faith. They mostly couldn’t do so. The first requirement of bad faith was that the statements were “objectively baseless,” which usually means that “the infringement allegations [are] such that no reasonable litigant could reasonably expect success on the merits.” Of course, the statements here aren’t infringement allegations, but the Federal Circuit has held that “the ‘objectively baseless’ standard applies to publicizing a patent in the marketplace as well as to pre-litigation communications.”

The court found that three of the four challenged statements was “objectively true on its face, and accordingly does not lack a reasonable, objective basis.” Not objectively baseless: (1) “YKK is the Exclusive Licensee of the [relevant tech]”; (2) “YKK Corporation is licensed to manufacture and sell across the world, products protected by these patents”; and (3) “YKK Corporation is a licensee to manufacture and sell products protected by [the ’214 and related foreign patents]”. But the same could not be said for: (4) “YKK is the exclusive licensee of the water repellant slide fastener technology embodied in U.S. Patent No. 6,105,214 and its corresponding foreign patent. YKK has the exclusive right to manufacture, use, sell and import zippers incorporating this water repellant technology.”

How to distinguish (1) and (4)? “The mere fact that the exclusive license was not an unlimited exclusive license does not render these statements objectively baseless,” but a reasonable jury could conclude that the second sentence in (4) was objectively baseless, because YKK actually shared that right with the licensor’s company.

Causation: Was there enough evidence for a reasonable jury to find that YKK’s fourth category of statements caused plaintiffs’ alleged injury? Yes. The court excluded proposed expert testimony from “a clothier, creative director, and brand manager “who was set to testify “that companies would not have purchased the accused zippers from YKK if they had known that YKK was infringing upon Uretek’s patents.” The opinion was excluded for being rooted in hypothetical speculation, “abstract belief[s],” and attorney argument.

Still, plaintiffs had a theory: “Customers in excluded markets, having decided that they wanted to purchase a patented water-resistant zipper, believed they had only one choice after reading YKK’s false advertisement—YKK-laminated zippers. Had YKK’s advertisements made clear that only Uretek could sell in the excluded market, YKK’s customers would have had to buy from them instead. Thus, every sale of a YKK zipper in the excluded market was a sale stolen from Uretek.” In a footnote, the court noted that it had looked for record evidence that customers in the excluded market were “sensitive to the intellectual property rights of their component suppliers” and would not have purchased infringing products. There wasn’t much, but it was enough. Three emails suggested, with varying degrees of firmness, that desire to respect patent rights would affect purchases. E.g., a reference to one customer who wouldn’t buy non-YKK “because of the patent issue,” and another who “is not interested in buying non-YKK or violating our patent.” Also: “YKK needs to educate and inform Brand Holders (LandsEnd) that YKK is an exclusive licensee and Uretek is a patent owner of this products. They know what this means and what they need to do and you know that.” Drawing all inferences in favor of plaintiffs, this evidence was sufficient to support plaintiffs’ causation theory. The court cautioned, however, that the emails might not be admissible at trial; they were arguably hearsay.

“Tricky as this link might be to prove at trial, the evidence presented here is sufficient to survive summary judgment. It presents a cogent reason why YKK’s profits on sales in the excluded market might have been at Uretek’s expense: every sale of a YKK zipper was a diverted sale.”

CUTPA (Connecticut Unfair Trade Practices Act): This goes, because there was no evidence that YKK engaged in any unfair or deceptive practices “in the conduct of any trade or commerce” in Connecticut, as required by the statute. Even if YKK’s “underlying business is associated with Connecticut,” CUTPA “covers only unfair or deceptive practices that occur in the course of trade or commerce in Connecticut.” Plaintiffs never alleged that YKK made any sales into the excluded markets in Connecticut, and the court was dubious that the act of negotiating the terms of a contract to secure the exclusive license—“an act at least two steps removed from any eventual sale of a zipper (first: acquire the license, next: manufacture zippers, finally: sell them to customers)”—qualified as “trade or commerce” within the meaning of CUTPA.