Last week, the Court of Appeals for the Federal Circuit ruled that a complaint for false patent marking must provide specific facts from which the court can reasonably infer an intent to deceive the public, thus raising the bar to initiating such a suit. A conclusory statement that the defendant knew or should have known that a patent has expired is insufficient to meet this pleading requirement. As discussed below, this holding, along with previous court decisions, will likely significantly curtail the number of false patent marking suits filed. And if proposed legislative amendments to the false marking statute recently passed by the U.S. Senate become law, false marking lawsuits may become a thing of the past.

In 2007, Matthew Pequignot, a patent attorney, filed a lawsuit in the U.S. District Court for the Eastern District of Virginia against the Solo Cup Company seeking a monetary penalty available under the Patent Act’s “false marking” statute, 35 U.S.C. § 292. At the time, few probably predicted that by 2011 nearly a thousand such lawsuits would be filed, including some against well known companies like Proctor & Gamble, Gillette, Brooks Brothers, and Crayola. Section 292 states that:

“(a) Whoever marks upon, or affixes to, or uses in advertising in connection with any unpatented article, the word “patent” or any word or number importing that the same is patented for the purpose of deceiving the public . . . [s]hall be fined not more than $500 for every such offense. (b) Any 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.”

Section 292 is a qui tam action, which is an action whereby a private individual or company sues on behalf of the U.S. government and himself, and in return gets a share of any penalty imposed by a court. Section 292 is one of four federal qui tam statues. See Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000). Section 292 is a criminal statute, but with a civil (i.e., monetary) penalty. See 16 James Wm. Moore et al., Moore's Federal Practice—Civil § 107(B)(2).

In 2010, the Federal Circuit, which hears all patent-related appeals, issued its decision in an appeal brought in Mr. Pequignot’s 2007 lawsuit. Pequignot v. Solo Cup Co., 608 F.3d 1356 (Fed. Cir. 2010). In its published opinion, the Federal Circuit affirmed the lower court’s judgment of no liability in favor of Solo Cup, and in doing so made several key findings about the false marking statute and its application. The Court stated unequivocally that “any article marked with an expired patent number is falsely marked” under the statute, and every falsely marked product (“unpatented article”) constitutes a separate “offense” under 292. Id. at 1362, 65. (That later finding is what has encouraged many false marking lawsuits, since a million falsely marked articles could mean a penalty fine of up to $500 million, half of which would go to the plaintiff.) With regard to the “purpose of deceiving” language in the statute, the Court said that any false statement with knowledge that the statement was false creates a “rebuttable presumption of intent to deceive the public.” Id. at 1462-63. But, the Court also said, because § 292 is in effect a criminal statute, the “bar for proving deceptive intent [ ] is particularly high.” Id. For example, the mere knowledge that a marking is false is insufficient to prove intent, especially where the defendant “can prove that it did not consciously desire the result that the public be deceived.” Id. The defendant also has an evidentiary burden, and must produce adequate proof to rebut the presumption that it intended to deceive the public. The “mere assertion by a party that it did not intend to deceive” is insufficient to overcome the presumption of intent. Id. Considering the evidence offered by both parties, the Court found in favor of Solo Cup on its motion for summary judgment partly because, while Solo Cup had knowledge that some of its products were falsely marked, it produced evidence that it had obtained and relied upon an opinion from its counsel and took other actions consistent with its argument that it did not intend to deceive the public.

Last week, in In re BP Lubricants USA, Inc., ___ F.3d ___ (Fed. Cir. March 15, 2011), upon a petition for writ of mandamus filed by BP Lubricants in another qui tam action brought under § 292, the Federal Circuit held that the particularity requirement under Fed. R. Civ. P. 9(b) “applies to false marking claims” under § 292, which was a question of first impression for the Court. At issue was plaintiff’s complaint, filed in the U.S. District Court for the Northern District of Illinois in early 2010, which alleged “mostly ‘upon information and belief,’ that: (1) BP knew or should have known that the patent expired; (2) BP is a sophisticated company and has experience applying for, obtaining, and litigating patents; and (3) BP marked the CASTROL products with the patent numbers for the purpose of deceiving the public and its competitors into believing that something contained or embodied in the products is covered or protected by the expired patent.” Applying Rule 9(b)’s requirement that fraud or mistake must be plead with particularity, the Court found that the relator’s complaint “provided only generalized allegations rather than specific underlying facts from which we can reasonably infer the requisite intent, [therefore] the complaint failed to meet the requirements of Rule 9(b).” The Court dismissed plaintiff’s argument that false marking inherently shows scienter, and that identifying individuals who had knowledge of expired patents was practically impossible at the pleading stage. The Court agreed with the plaintiff that “the Pequignot presumption informs the determination of whether a false marking plaintiff has met Rule 9(b),” but, the Court said, that is but “one factor in determining whether Rule 9(b) is satisfied; it does not, standing alone, satisfy Rule 9(b)’s particularity requirement.” The Court granted BP the “extraordinary remedy of mandamus.”

Companies that sell products marked with their patent numbers should find comfort in the fact that the Federal Circuit has made it more difficult for plaintiffs to bring false marking qui tam actions because of the burden to plead, with particularity, the underlying facts needed to establish scienter under § 292, and because of the difficulty in winning such lawsuits once they are filed because the presumption that a company intended to deceive the public can be rebutted. And if patent reform legislation passed in the Senate becomes law, companies will have even more to celebrate because the newly shaped false marking statute, as discussed below, would effectively put the brakes on the rush to file false marking lawsuits.

Under Sec. 2(k) of the “America Invents Act” (S.23; formerly the “Patent Reform Act of 2011”), which passed the U.S. Senate on March 8 by a wide margin (95-5 in favor of passage), § 292(a) of the statute would be amended by adding at the end: “Only the United States may sue for the penalty authorized by this subsection.” The bill would also replace § 292(b) of the statute in its entirety with the following new provision: ‘‘(b) Any person who has suffered a competitive injury as a result of a violation of this section may file a civil action in a district court of the United States for recovery of damages adequate to compensate for the injury.’’ Obviously, non practicing entities, like many of the plaintiffs who brought false marking lawsuits recently, would not likely suffer any “competitive injury” as a result of another’s falsely marked products unless they too were making and selling products in the same market segment. And even if they were making and selling such products, only an “adequate” recovery may be awarded to the plaintiff under the new law, not the $500 per falsely marked product as provided in the present statute. (Notably, under the new law, the government would bring suit under §292(a), and the private right of action is only in civil court under §292(b), which may address concerns expressed by at least one District Court that the current law is unconstitutional. See Unique Pro. Solutions Ltd. v. Hy-Grade Valve Inc., slip op. No. 5:10-01912 (N.D. Ohio Feb. 23, 2011) (holding that the qui tam provision of the false marking statute, 35 U.S.C. §292(b), is unconstitutional under the Take Care Clause of the United States Constitution, U.S. Const. Art. II, §3).)

At the time of this article, the U.S. House of Representa­tives has not taken up S.23. And if it does, there is no assurance Sec. 2(k) will survive the cut. But if the legislation passes without significant alteration, the threat of qui tam actions brought under § 292 could become much less of a concern to businesses.