A recent ruling by the United States Court of Appeals for the Federal Circuit held that penalties in qui tam false marking actions must be imposed on a per article basis. Forest Group, Inc. v. Bon Tool Co., 590 F.3d 1295 (Fed. Cir. 2009). Although many undecided issues remain with respect to the scope of false marking actions, the Federal Circuit’s decision in Bon Tool will almost certainly spawn a new wave of patent litigation by qui tam plaintiffs.

Pursuant to 35 U.S.C. § 292, any person that marks an “unpatented article” with any word or number importing that the article is patented, with the intent to deceive the public, “[s]hall be fined not more than $500 for every such offense.” The same penalty applies when an article is marked with words indicating that a patent application is pending but no such application has been filed. Any person, not merely one that has been harmed, can bring an action pursuant to § 292, so long as the recovery is split with the government.

In Bon Tool, the Federal Circuit rejected the district court’s interpretation of the statute, which construed “every such offense” to mean each decision to falsely mark an article. For a variety of reasons, as explained below, the Federal Circuit held that a separate penalty of not more than $500 accrues for each article that is falsely marked.

Background of Case

The Forest Group (“Forest”) brought a patent infringement action against Bon Tool for the sale of an improved form of a spring-loaded parallelogram stilt. Forest sold identical stilts bearing its patent markings. Forest received an unfavorable claim construction ruling and the court granted summary judgment in favor of Bon Tool, finding that the stilts at issue did not infringe the patent because they did not include a “resiliently lined yoke.” In a separate action for declaratory judgment, brought by Warner Manufacturing Company, the United States District Court for the District of Minnesota construed the term “resiliently lined yoke” in a manner nearly identical to the Bon Tool court and granted summary judgment of noninfringement in favor of Warner.

Since Bon Tool’s stilts were “identical replicas” of Forest’s stilts, and could not be covered by the Forest patent, the claim construction of both courts bolstered Bon Tool’s counterclaim for false marking under § 292. Indeed, the district court found that Forest had falsely marked its springloaded stilts with a patent number. Although the court determined that Forest lacked the intent to deceive with respect to most of its sales, it held that Forest possessed the requisite intent for those sales made after the summary judgment ruling in the Warner action, as Forest knew at that moment that its stilts did not practice the patent. The court, however, imposed only a $500 penalty for a single offense of § 292, despite the fact that many falsely-marked articles had been sold, under the rationale that Forest had made a single decision to falsely mark its products.

Appeal

The Federal Circuit held that the district court erred in imposing penalties for only a single “decision to mark its stilts.” The Federal Circuit first explained that the plain language of the statute, which bars the marking of “any unpatented article” and imposes a fine for “every such offense,” requires the “penalty to be imposed on a per article basis.” Apart from the language of the statute, the court noted that policy considerations supported this interpretation. Specifically, it explained that the statute would be rendered “completely ineffective” unless penalties were imposed on a per article basis, as members of the public would lack sufficient financial motivation to bring qui tam actions and incur the enormous expense of patent litigation unless substantial penalties were recoverable.

In support of its position, Forest relied on past decisions imposing a single fine for continuous false marking. The court found this argument unpersuasive, as the rationale underlying those decisions rooted from a century-old decision interpreting a different form of the statute that imposed a penalty of not less than $100 per offense. The Federal Circuit held that Congress’ amendment of the statute in 1952, which modified the penalty to be a maximum rather than a minimum, eliminated the policy rationale that imposing a fine on a per-article basis would be inequitable. It was acknowledged that a number of district courts had improperly continued to construe the statute as imposing a single fine for continuous false marking, or alternatively applying a time-based approach – for example, imposing a fine for each day or week articles were falsely marked.

Apparently recognizing that fines imposed on a per-article basis could result in extraordinary large penalties, the Federal Circuit provided some guidance as to the proper means of determining the amount of fines, though it stopped short of offering a specific formula.

First, the court stressed that a fine of $500 per article is the maximum, not the default. The court also explained that lower courts should “balance between encouraging enforcement of an important public policy and imposing disproportionately large penalties for small, inexpensive items produced in large quantities.” When dealing with inexpensive mass-produced articles, the court noted that a penalty of a fraction of cent per article may be appropriate.

The Federal Circuit’s guidance that mass-produced products should incur smaller penalties on a per article basis is unlikely to dissuade potential qui tam plaintiffs, as the penalties can still result in very large awards. For example, in a case against Solo Cup, which was dismissed by the district court before the determination of penalties, the plaintiff alleged that twenty-one billion disposable lids were falsely marked. Pequignot v. Solo Cup Co., 646 F. Supp. 2d 790 (E.D. Va. 2009). Even a fine of one-half cent per lid would exceed $100 million in penalties.

Forest argued that imposing penalties on a per article basis under § 292 would encourage a “‘new cottage industry’ of false marking litigation by plaintiffs who have not suffered any direct harm.” The Federal Circuit rejected Forest’s argument and noted that such litigation is explicitly authorized by the statute. Not surprisingly, as predicted by Forest, the Bon Tool decision has sparked a wave of qui tam actions. Indeed, since the middle of February, an entity named “Patent Compliance Group” has filed twelve separate false marking actions, including actions against Activision, Wright Medical Technology, Hunter Fan, Timex, and Brunswick.

Outstanding Issues

A number of undecided issues remain regarding the application of § 292. For one, it is unclear whether falsely marking an article with one patent number will lead to the imposition of penalties if that same article is covered by another patent. The language of the statute bars the false marking of an “unpatented article,” not just falsely marking an article. As such, even if an article is falsely marked with one patent number, it may be a defense that the article is also covered by other patents.

The scope of the “patent pending” provision of § 292 also will likely be subject to future litigation. Is merely having a pending patent application generally related to the article sufficient to avoid penalties? Or must the pending claims of the application cover the article? Obviously, the scope of pending patent claims evolves during the prosecution process, and continuations offer the possibility of submitting an entirely new set of claims apart from pending applications.