Thinking of Sending a Cease and Desist Letter? Judge Rakoff Has Some Advice About the Declaratory Judgment Risk

A recent decision in federal court in New York serves both as a cautionary tale to companies looking to defend their trademarks and an important reminder to any company about to launch a new product under threat of an infringement claim.

Authored by Judge Jed Rakoff, the opinion in Classic Liquor Importers, Ltd. v. Spirits International, B.V. – Order on MTD considered whether the court had declaratory judgment jurisdiction to determine whether Classic Liquor’s announced plan to market vodka under the mark ROYAL ELITE infringed upon SPI’s ELIT and ELIT BY STOLICHNAYA marks, also for vodka.  Classic Liquor was a newcomer to the liquor distribution business, and had committed millions of dollars to the launch of the ROYAL ELITE product.

Upon learning of the ROYAL ELITE branding, competitor SPI sent a “cease and desist” letter. After exchanging further letters, and despite the fact that SPI backed off its threat of suing for infringement, Classic Liquor commenced a declaratory judgment action.

SPI moved to dismiss, arguing that the court did not have jurisdiction to hear the dispute because it was premature for four reasons: (1) Classic Liquor was not ready to begin marketing its ROYAL ELITE products; (2) Classic Liquor had not sufficiently finalized the design of its mark such that it could be compared to SPI’s marks; (3) evidence of actual consumer confusion was unavailable because the product was not yet on the market; and (4) SPI had no present intention, and had never threatened, to sue Classic Liquor for infringement.

SPI’s first three arguments were largely premised on the notion that Classic Liquor had not yet brought the ROYAL ELITE product to market.  After reviewing the evidence, the court concluded that Classic Liquor’s products had “entered the consumer marketplace.”  The court went one step further in its analysis, however, stating that “[e]ven if the product launch had not occurred, the result would be the same.”  Citing Starter Corp. v. Converse, Inc., 84 F.3d 592, 596 (2d Cir. 1996), the court reiterated that courts “routinely find subject-matter jurisdiction in declaratory judgment actions brought by businesses that are reasonably apprehensive that they will face infringement suits with respect to marks and products they are on the verge of introducing into commerce.”  In other words, the subject matter jurisdiction inquiry is focused less on whether a mark or product has actually been introduced into the market, and instead focused on whether a business is “reasonably apprehensive” that it will face an infringement suit.  If there is such a reasonable apprehension, then a declaratory relief action is appropriate.

Judge Rakoff also disagreed with SPI’s fourth argument – that the court did not have jurisdiction because SPI had never threatened suit.  After sending an initial letter claiming infringement, SPI sent a follow-up letter seeking clarification as to which products Classic Liquor planned to bring to market under its new mark.  Classic Liquor filed the declaratory judgment action after receiving the second letter.  Well after the action was filed, SPI sent a third letter stating that SPI had no present intention to sue Classic Liquor, but also reserving its rights to pursue litigation after Classic Liquor launched the products and SPI could assess the use and sales in the marketplace. SPI attempted to rely on what the court characterized as a “litigation-induced disclaimer” to argue that there was no case or controversy.  Judge Rakoff disagreed, concluding that SPI’s initial cease and desist letter was enough to create a case or controversy, and that SPI could not rely on the two subsequent letters – one of which was sent only after litigation was commenced – to disavow the existence of the controversy.  As the court put it, SPI could not take the position, after compelling Classic Liquor to sue to clarify its rights, that “it did not really mean what it said” in its initial protest letter.

Judge Rakoff’s ruling is an important reminder in two main respects.  The decision is a cautionary tale that highlights the risks associated with blasting off a cease and desist letter without a real appetite for litigation.  Companies often want to protect their mark, and are more than eager to send a cease and desist letter to a potential infringer.  But a strongly worded cease and desist letter, by itself, can create a case or controversy sufficient to allow the recipient of the letter to bring a declaratory judgment action immediately.  Any party who contemplates sending a cease and desist letter should be aware that doing so could result in immediate litigation, and be prepared to defend itself in such an outcome. One alternative is to be more careful in the phrasing of the letter, to make it clear that information or negotiation is being sought, rather than asserting a threat of litigation. Or, there may be times where it makes sense for a company to hold off on sending a cease and desist letter until the allegedly infringing mark is fixed or until there is evidence of actual consumer confusion.  This way, if the recipient does commence a declaratory judgment action, the party claiming infringement will have a stronger basis for asserting a counterclaim for infringement.

Judge Rakoff emphasized in his opinion that “The declaratory judgment procedure is of critical importance to new businesses that seek to clarify their rights before expending significant resources on activities that potentially infringe a more established business’s trademarks.” Similar to Classic Liquors, new businesses often commit significant human and financial capital to product launches.  Committing additional capital to defending against a full-fledged trademark (or other) infringement action early in the launch of a product will often prove difficult or even fatal to a fledgling company.  Under the standard cited by Judge Rakoff, however, a company can seek a declaratory judgment of non-infringement even before actually launching a new product into commerce, so long as it can establish that it is “reasonably apprehensive” that it will face an infringement suit.  The ability to seek a declaratory judgment even before launching a new product allows companies to potentially save significant resources on marketing and manufacturing a potentially infringing product.  While the decision of whether to seek a declaratory judgment before launching a product that reasonably could open a company up to an infringement action is a business decision, Judge Rakoff’s ruling in Classic Liquor reminds us that the decision exists.