Sukumar v. Nautilus, Inc.

In a precedential case of first impression interpreting 35 U.S.C. § 292 of the America Invents Act (AIA), the new “False Marking Statute,” the U.S. Court of Appeals for the Federal Circuit explained that even potential competitors may suffer a competitive injury and thus be entitled to civil damages for a false marking violation, but only if they meet a two-prong test involving intent and activity. Applying the two-prong test, the Court affirmed a summary judgment ruling that a false marking plaintiff lacked standing because it failed to proffer evidence of both intent and action to enter the relevant market. Sukumar v. Nautilus, Inc., Case No. 14-1205 (Fed. Cir., May 4, 2015) (Prost, J.)

In 2010, Ponani Sukumar and his corporation, Southern California Stroke Rehabilitation Associates, Inc., (SCSRA) (collectively, Sukumar) sued Nautilus for false marking. Sukumar alleged that certain of Nautilus’ rehabilitation fitness equipment were falsely marked with patent information. Sukumar purported that the false marking deterred his entry into the market for selling rehabilitation fitness equipment.

Sukumar recognized a need for rehabilitation fitness equipment suitable for aging seniors. To satisfy this need, Sukumar ordered customized, modified equipment from Nautilus and, in 2004, founded SCSRA. The business of SCSRA was to open and run senior rehabilitation facilities employing the modified Nautilus equipment. According to Sukumar, SCSRA twice attempted to negotiate a license with Nautilus for the modified equipment. However, at the time of suit, SCSRA had no business plan, no employees other than Sukumar, no office space and no equipment prototype designs.

During the pendency of the suit, Sukumar moved for, and the district court granted, partial summary judgment that Nautilus’ equipment were falsely marked. In response, Sukumar ramped up SCSRA’s efforts, creating a business plan for selling rehabilitation equipment, designing initial prototypes of rehabilitation equipment, consulting with relevant engineers, and seeking to acquire land for offices and a manufacturing facility. In the interim, the AIA amended § 292 to eliminate qui tam false marking suits, permitting a private right of action only to a “person who has suffered a competitive injury as a result of a [false marking] violation.” Later the Federal Circuit, in a non-precedential opinion, held that the amendment to § 292 applied retroactively to a suit pending at the time the AIA was enacted (IP Update, Vol. 16, No. 1).

Thereafter the district court permitted a second round of motions and cross-motions for summary judgment, and this time granted Nautilus motion for summary judgment on Sukumar’s false marking claim, finding that Sukumar had not suffered competitive injury and thus lacked standing to bring the claim. 

On appeal, Nautilus argued that competitive injury under § 292 can only be suffered by a competitor actively selling products in the relevant market, and that Sukumar never sold any products in competition with Nautilus. Sukumar contended that a mere potential competitor may suffer competitive injury. The Federal Circuit, looking to the plain meaning of the term “competitive injury,” the legislative history to § 292, and similar terms in analogous areas of law, concluded that a potential competitor may suffer competitive injury only if it makes an attempt to enter the market and its competitive injury is caused by the false marking. Entry in the market requires a showing of (1) intent to enter with a reasonable possibility of success and (2) an action to enter.

Intent to Enter the Market

The Federal Circuit found that the evidence only showed that Sukumar placed orders for custom Nautilus equipment, and established no evidence of intent to competitively produce such designs. Sukumar testified that his intent was to develop and operate a series of rehabilitation and spa centers, and Nautilus’ failure to provide certain modified equipment prevented him from doing so. As to the latter argument, the Court explained that Sukumar could not rely on actions taken after he filed suit, since to do so would allow parties to manufacture evidence during litigation.

Action to Enter the Market 

Consistent with the findings of the district court, the Federal Circuit found that even if Sukumar had intended to enter the market for selling rehabilitation fitness equipment, he failed to take sufficient action to manifest market entry. Sukumar had little engineering knowledge or business knowledge relating to such equipment, did not attempt to design a prototype, hired no employees and did not investigate manufacturing. The Court concluded Sukumar did not attempt to compete with Nautilus and thus suffered no competitive injury. 

Accordingly, the Federal Circuit confirmed that Sukumar lacked standing to bring a claim for false marketing under § 292.