In a ruling that could affect hundreds of false patent marking cases pending in district courts throughout the country, Judge Polster of the U.S. District Court for the Northern District of Ohio struck down 35 U.S.C. § 292(b) ("Section 292(b)") as violating the "Take Care" Clause of Article II of the U.S. Constitution in Unique Product Solutions, Ltd. v. Hy-Grade Valve, Inc., No. 5:10-cv-01912-DAP (N.D. Ohio Feb. 23, 2011).
Background: The False Marking Statute and Its Qui Tam Provision
Section 292(a) of the Patent Act is a criminal statute that prohibits, among other things, marking upon, affixing to, or using in advertising in connection with any unpatented article the word "patent," a patent number, or any other marking implying that the article is patented. 35 U.S.C. § 292(a). The penalty for violating Section 292(a) is a civil fine, or penalty, of up to $500 for each offense. Id. Section 292(b) is short; it reads in full: "[a]ny person may sue for the penalty, in which event one-half shall go to the person suing and the other to the use of the United States." 35 U.S.C. § 292(b). Section 292(b) thus creates qui tam standing for private citizens to enforce federal law, but it does not provide any specific statutory provisions for government oversight or control over enforcement. Stauffer v. Brooks Bros., Inc., 619 F.3d 1321, 1325 (Fed. Cir. 2010); see Vt. Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 777-78 (2000).
The lack of specific statutory controls in Section 292(b) stands in stark contrast with other qui tam statutes that have survived Article II scrutiny, such as the False Claims Act, 31 U.S.C. §§ 3729-3733 ("FCA"). Whether Section 292(b) violates Article II has not yet been addressed by the United States Court of Appeals for the Federal Circuit.
Article II Requires that Qui Tam Statutes Afford the Executive Branch "Sufficient Control" Over Litigation
Because the constitutionality of Section 292(b) under Article II has not yet been considered by the Federal Circuit or any other federal court of appeals, courts look for guidance to broader qui tam jurisprudence, mainly arising under the FCA, which is the most commonly litigated qui tam statute. Qui tam statutes descend from medieval English law, and the early American Congress enacted several such statutes.
Because qui tam statutes put governmental power in the hands of private citizens, they have the potential to run afoul of the U.S. Constitution and are subject to constitutional challenges. For example, the Supreme Court weighed in on the constitutionality of the FCA in Vermont Agency. There, the Court considered two constitutional issues; first, whether private citizens had Article III standing to bring suit under the FCA (despite having not suffered any personal injury-in-fact), and second, whether qui tam statutes such as the FCA violate the Appointments and/or Take Care Clauses of Article II. The Supreme Court held that qui tam Article III standing derives from a partial assignment of the government's right to sue for damages, but it expressly refused to decide whether qui tam statutes violate Article II. As a result, the issue remained unresolved.
In Morrison v. Olsen, 487 U.S. 654 (1988), the Supreme Court provided insight as to what constitutes sufficient governmental control when it considered the constitutionality of the Ethics in Government Act of 1978 ("EGA"). This Act provided Congressional appointment of an independent counsel to investigate violations of federal criminal law by high-ranking government officials and prosecute, if appropriate. The independent counsel had authority to hold grand jury proceedings and to participate in civil and criminal proceedings, as well as standing to appeal decisions in which it participated. The EGA, the Supreme Court held, did not violate the Appointments Clause because the independent counsel was an "inferior officer" whose appointment is exempted. And, while not specifically citing it, the Supreme Court found that the EGA did not violate the Take Care Clause. This was based on four features of the EGA, under which the Executive Branch retained "sufficient control" over the independent counsel.
The regional circuit courts of appeal have also examined the FCA under the Appointments Clause and the Take Care Clause, and found that, applying Morrison, the FCA's extensive statutory controls preserve its validity under Article II. For example, in the Sixth Circuit, the court relied on Morrison to uphold the qui tam provisions of the FCA in United States ex rel. Taxpayers Against Fraud v. Gen. Electric Co., 41 F.3d 1032 (6th Cir. 1994). As the Sixth Circuit noted, the qui tam provisions of the FCA "have been crafted with particular care to maintain the primacy of the Executive Branch in prosecuting false-claims actions." These statutory provisions provided the Executive Branch with the "sufficient control" required under the Take Care Clause. Additionally, the qui tam provisions of the FCA did not violate the Appointments Clause. The Sixth Circuit held that a relator in an FCA action is not vested with governmental power; it does not have "tenure, duration, continuing emolument or continuous duties" and therefore did not qualify as an "officer" under the Appointments Clause.
Section 292(b) Does Not Afford the Executive Branch "Sufficient Control," Thereby Running Afoul of the Take Care Clause
It is against this legal backdrop that the district court took up the issue in Unique Product Solutions. There, the defendant argued that Section 292(b) violated Article II under the Appointments Clause and the Take Care Clause. The former requires that the Executive Branch "shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States." U.S. Const. art. II, § 2. The latter provides that the President "shall take Care that the Laws be faithfully executed." Id. § 3. Because Section 292(b) does not afford the Executive Branch sufficient control over litigation in which a private citizen proceeds on behalf of the United States, the defendant argued, Section 292(b) violates both clauses.
The plaintiff/relator argued that Morrison's "sufficient control" test should not apply to Section 292(b), based on the Fifth Circuit's analysis in Riley v. St. Luke's Episcopal Hospital, 252 F.3d 749 (5th Cir. 2001) and a 2009 district court decision from the Eastern District of Virginia, Pequignot v. Solo Cup Co., 640 F. Supp. 2d 714 (E.D. Va. 2009). The plaintiff/relator further argued that Riley holds that Morrison's "sufficient control" test does not apply to the FCA because: (1) the relator sues on behalf of the United States (rather than acting as the United States itself); and (2) the FCA authorizes civil actions, whereas the EGA provided for criminal prosecution authority. And Pequignot upheld the constitutionality of Section 292(b) for four reasons: (1) the history of qui tam statutes in the United States; (2) the civil nature of Section 292; (3) the government's ability to intervene under Fed. R. Civ. P. 24 and the notice provisions of 35 U.S.C. § 290; and (4) the government's actual intervention in that case.
The district court in Unique Product Solutions held that neither Riley nor Pequignot was persuasive, finding no meaningful difference between suing "in the name of" the United States, as qui tam relators do, or "as" the United States. Unique Prod. Solutions, slip op. at 10. Both involve acting on behalf of the United States; moreover, the district court noted that the Federal Circuit (and Section 292(b)'s legislative history) indicated that Section 292 is a criminal statute, not a civil one, making such a distinction unsound. Id. at 10-11.
The district court also held that the long history of qui tam statutes in general was not dispositive of Section 292(b)'s constitutionality:
While there has been a long history of qui tam actions in this country, history alone is an insufficient justification, particularly when the issue is whether [Section 292(b)'s] qui tam provision is constitutional, not whether all qui tam provisions are unconstitutional.
Id. at 11. And, unlike in Pequignot, the government had not intervened (or even taken advantage of the opportunity to file a brief in support of the constitutionality of Section 292(b)). Id.
The district court also rejected the argument that Fed. R. Civ. P. 24 "sufficiently protected" the government's ability to intervene. Id. While the Federal Circuit held in Stauffer that the government has a right to intervene, the Federal Circuit did not address how Rule 24, a civil rule, could "ever provide the basis for a right to intervene in a criminal proceeding." And, even assuming the government's ability to intervene under Rule 24, the district court found that the government's interests were not sufficiently protected because Rule 24 "does not require that the government actually be served with a False Marking complaint or any relevant pleadings." Although 35 U.S.C. § 290 requires the clerk of a district court to inform the United States Patent and Trademark Office ("PTO") of cases involving a patent, the information sent to the PTO is limited to the names and addresses of the parties, the inventors' names, and the number of the patent at issue. There is nothing requiring specific notice that the action is one for false patent marking, and in any event, such notice goes to the PTO, not the Department of Justice. As the district court noted, a false marking case can be settled before the government even learns of its filing, binding the government under the doctrine of res judicata. Id. at 12. This stands in stark contrast to the FCA, which has extensive provisions that involve the government at every stage of the litigation, from pre-filing to settlement.
For these reasons, the district court found that "it is clear the government lacks sufficient control to enable the President to 'take Care that the Laws be faithfully executed.'" Id. at 12-13. Section 292(b), the district court held, "lacks any of the statutory controls necessary to pass Article II Take Care Clause muster." Id. at 13. To the contrary, Section 292(b) "essentially represents a wholesale delegation of criminal law enforcement power to private entities with no control exercised by the Department of Justice." Id. This, the district court observed, leads to a host of serious concerns over potential abuses and lack of government oversight and control:
Any private entity that believes someone is using an expired or invalid patent can file a criminal lawsuit in the name of the United States, without getting approval from or even notifying the Department of Justice. The case can be litigated without any control or oversight by the Department of Justice. The government has no statutory right to intervene nor does it have a right to limit the participation of the relator. The government does not have the right to stay discovery which may interfere with the government's criminal or civil investigations. The government may not dismiss the action. Finally, the relator may settle the case and bind the government without any involvement or approval by the Department of Justice.
In the district court's view, compelling policy reasons support vesting federal law enforcement in the President and the Attorney General. Those charged with the power to prosecute violations of federal law, i.e., federal prosecutors, have significant powers beyond those given to private litigants. The district court, therefore, found that with such power comes the responsibility to prevent abuse and ensure that prosecution only goes forward when it is in the public interest, and the public interest can, in certain cases, weigh against prosecution, in both the civil and criminal contexts. Id. at 13-14.
The district court concluded by noting that "[t]he danger of this uncontrolled privatization of law enforcement is exacerbated by the financial penalties" in Section 292(a). Id. at 14. Statutory penalties range up to $500 for each article falsely marked, making the possible payouts unpredictable and potentially very large. The district court reasoned that it was "essential that the government have control over when such cases are brought, and most importantly, how they are settled." Id. These decisions, the district court held, are better handled by government attorneys who do not have a financial stake in the outcome of the action, rather than private citizens litigating for personal financial gain.
What Comes Next?
Although several courts, including the Federal Circuit, have recognized that Section 292(b) creates serious Article II questions, Unique Product Solutions is the first decision finding that the statute is unconstitutional. The Federal Circuit should, however, consider the same constitutional questions in the pending FLFMC appeal. Briefing in FLFMC will be completed in spring 2011, with oral argument likely to be scheduled in late summer 2011.
In the meantime, the Unique Product Solutions decision casts serious doubt on the validity of the hundreds of false patent marking cases now pending in the district courts. Motions to dismiss based on Article II have been filed in hundreds of cases. Indeed, almost 800 false patent marking complaints have been filed since January 2010, representing approximately 20-25 percent of all patent cases filed in the district courts during that timeframe. Many of these cases were filed by patent attorneys seeking to enforce the false marking statute against companies whose products bear the numbers of recently expired patent numbers. Now, with at least one court finding that the statutory provision authorizing their suits to be constitutionally invalid, these so-called "marking trolls" may find their cases in jeopardy.