This is one of the worst communication methods that a wholesaler has received from one of its retail customers: “____ claims that the following products you provide infringe at least one patent/copyright/trademark of ______. Please within 48 hours Confirm that your company will fully perform its compensation obligations. Failure to do so will result in us choosing our own lawyers to defend ______’s claims at your expense.” or something similar. The point is simple. In an era when economically viable retailers are dwindling, wholesalers are lucky to attract any customer. Moreover, within the scope of any intellectual property infringement allegations brought by anyone against them, these customers usually do not hesitate to demand full compliance with the indispensable obligation of compensation as a wholesaler-retailer relationship. Usually, the task of ensuring the fulfillment of the compensation obligation is left to the retailer’s internal legal counsel to work with the wholesaler’s buyer to communicate the retailer’s requirements.
For most wholesalers, non-compliance with retailers’ requirements is not an option at all. Yes, in some cases, wholesalers may take certain risks and risk the retailer’s imminent bankruptcy, so compensation can be ignored. But even in this era when retailers often explode, this situation is rare. Instead, wholesalers have no choice but to respond quickly to retailers’ needs, including by fully ensuring that they value their relationships with customers and take full responsibility for intellectual property claims. Considering the increasing connection between large retailers and their suppliers, there is usually no other choice because their company’s viability is increasingly dependent on their sales to shrinking retailers.
Savvy wholesalers will usually decide not to hand over the defense to the lawyer of the retailer’s choice, although in some cases the retailer will insist on choosing a lawyer, and the wholesaler has little room to protest. If the retailer has prior experience related to the company’s allegations and may prompt the retailer to pay the same lawyer who previously represented the retailer (hoping to achieve some success), the latter may be against the same claimant. Add to that the fact that it is usually retailers who force wholesalers to produce products that avoid (and sometimes cross) intellectual property infringements, and the whole process seems unfair. But in an environment with such a limited number of potential retailers, what options do wholesalers really have?
Another situation in which a retailer’s choice of lawyers may be a drag on wholesalers is that allegations of intellectual property infringement are aimed at a range of products provided to retailers by different suppliers. In this case, it may be more effective (and cheaper) for the retailer to choose a company as a defense lawyer to coordinate the defense of all the retailer’s claims. Each wholesaler shared the defense costs in proportion to the sales of the defendant’s products to the retailer.
Having said that, when faced with a claim for compensation, it is usually in the interests of the wholesaler to make it clear to the retailer that its compensation obligation only applies to the products that it actually provides to the retailer. In addition, it is almost always better for wholesalers to hire their own lawyers in accordance with negotiated terms of employment to handle intellectual property disputes related to products supplied to retailers. Of course, wholesalers must at least seek potential compensation from their suppliers for the alleged infringing products.
Part of the problem for wholesalers is that their competitors know that retailers will rely on existing suppliers to meet their compensation obligations. This motivated challengers to try to disrupt the retailer’s relationship with the wholesaler by filing claims for intellectual property infringement against products already on the retailer’s shelves or even products that the retailer is considering.
In short, competitors of wholesalers sometimes try to give retailers an impression of risk when choosing wholesaler goods. The effectiveness of these strategies usually depends on the retailer’s IP complexity and the depth of the relationship between the retailer and the threatened wholesaler. The more confident the retailer is in the wholesaler’s promise of compensation, the less likely it is that random infringement claims will be sufficient to disrupt the transaction between the two parties. However, when the retailer lacks confidence, the threat of infringement of intellectual property rights may be sufficient to prevent the retailer from conducting business with the defendant wholesaler.
To be sure, wholesalers accused of infringement of intellectual property rights are not powerless, but they often burden them with decisive actions to decisively respond to allegations of infringement. In fact, in patent disputes concerning ultra-luxury “female stimulation devices”, there has recently been at least one outstanding example showing that wholesalers have decided to proactively make non-infringement statements to retailers.The plaintiff in the latest case was the maker of the case “The heroine” (The link may be NSFW) series of devices, which sued an Oregon competitor for patent infringement. One of the interesting things about the complaint is that the defendant has apparently sent a notarized letter from his general counsel to “various retailers and distributors in the industry,” stating that his product does not “conflict” any patents. The success of this type of strategy is still an open question, but it can illustrate the efforts that wholesalers need to make to avoid retailers’ concerns about intellectual property rights.
Ultimately, when considering claims for compensation for allegations of intellectual property infringement, there is a strong “customer is always right” element. Although most wholesalers will do their best to fulfill their compensation obligations, wholesalers always tend to decide to make themselves scarce when filing a lawsuit or dispute against a customer. The depth of the relationship, the amount in dispute, and the retailer’s own contribution to the alleged infringement are all factors to be considered in any compensation situation. However, in most cases, the recognition of the wholesaler’s obligations is straightforward. Intellectual property claims are serious-wholesalers should compensate…otherwise.
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Gaston Kroub lives in Brooklyn and is the founding partner of New York State Kroub, Silbersher and Kolmykov PLLC, An intellectual property litigation boutique, and Markman Advisors LLC, This is the leading consulting company on patent issues in the investment community. Gaston’s practice focuses on intellectual property litigation and related consulting, especially patent matters.You can contact him in the following ways firstname.lastname@example.org Or follow him on Twitter: @gkroub.