Introduction

In recent years major Canadian retailers have been named as defendants in patent infringement lawsuits, including Wal-Mart (T-1841-11), Costco (T-1841-11), Canadian Tire (T-1002-12) and Home Depot (T-1112-13).  The common thread linking these and other cases is that the plaintiff is asserting patent rights against a retailer that sells, but does not manufacture, allegedly infringing products in its stores.

Indemnity agreements between retailers and manufacturers who supply product are common.  However, such agreements may not provide retailers with sufficient protection.  Plaintiffs will often pursue retailers because they are more likely to satisfy a judgment than manufacturers.  Sometimes, plaintiffs do not even know the manufacturer’s identity.  Even the best indemnities amount only to a contractual right to sue for losses, which may have limited value in the event that the manufacturer cannot cover the retailer’s losses or where the manufacturer’s interests significantly diverge from that of the retailer.

The appropriate response to a threat of patent infringement does not deviate significantly from case to case. It can be important to retain qualified experts, scrutinize the patent at issue, collect information relating to similar prior art and investigate whether the alleged infringing product falls within the scope of the claims.  However, particular issues may arise for retailers when responding to patent threats.  Below is a five-item checklist that every retailer should consider before responding to a threat of patent infringement:

Checklist

  1. Indemnities and Warranties
    Is there an indemnity and what does it provide?  Manufacturers who supply retailers with product may be required to indemnify the retailer for certain losses in the event that the retailer is sued for patent infringement.  Do the losses include legal fees?  Damages?  Costs?  Profits owed to the patentee (in the event of a loss)?  If no indemnity, is there a warranty that the product is free from claims?
    Ultimately, such protection is only worth as much as the manufacturer is able to pay.  Patentees name retailers as defendants in lawsuits precisely because the retailer typically has deeper pockets than the manufacturer.  If the manufacturer cannot satisfy the indemnity, any contractual protection may be worthless.
  2. Control
    An indemnity should contain a provision identifying who may select counsel.  Most large retailers have existing relationships with major Canadian law firms, though may have less experience dealing with litigators specialized in patent law.  Retailers who select and instruct outside counsel will invariably have greater control over the pace and outcome of the litigation than if these tasks are left to the manufacturer, who is often unfamiliar with the Canadian legal landscape.
  3. Conflicts
    The manufacturer’s interests and the retailer’s interests will typically be aligned, but not invariably.  Where the retailer only sells a small quantity of goods relative to the manufacturer’s portfolio the manufacturer may be more willing to settle with the plaintiff, and on unfavorable terms, than the retailer would have been.  Counsel for retailers need to ensure that their interests are always protected.
  4. Financials
    Patentees typically seek an accounting of profits as an alternative remedy.  While manufacturers may be willing to open their books, retailers have particular concerns since their books may have particularly sensitive information relating to markups and cost strategies which are applicable more broadly than the product at issue.
    Counsel’s Eyes Only orders, which prevent the sharing of financials with the opposing party and the manufacturer, may be required to advance the business interests of the retailer.
  5. Joining Together
    If allegedly infringing products are being sold by multiple retailers it may make sense for the retailers to present a united front.  This could include retaining single counsel to defend common interests, and could include a pre-emptive action to impeach the patent.
    For example, where multiple retailers receive demand letters threating an infringement action, retailers may be best served by taking the lead in such litigation and suing in Federal Court to invalidate the patent at issue.  This approach has the benefit of allowing the retailers to better control the pace of litigation (as plaintiffs), increases the downside risk for the patentee (since the patent could be invalidated), and selects a potentially favorable forum for the action (the Federal Court is loath to provide injunctive relief which could prevent sales prior to the resolution of the case).

Conclusion

Retailers have unique concerns when deciding how best to respond to threats of patent infringement.  By considering those concerns and taking the lead, retailers will put themselves in the best position to respond to threats of patent infringement in a way that serves their interests.