History may record 2010 as “the year of the false patent marking suit.” In just the past week alone, a single plaintiff has filed more than 20 separate false marking lawsuits in the US District Court for the Northern District of Illinois, and scores of similar suits have been filed in a variety of courts in recent weeks. These complaints allege that products were physically marked with patent numbers or other notations indicating that the product was covered by a patent when, in fact, the seller knew that the patent had expired, did not cover the product or was invalid.
This avalanche of cases is not due to a sudden flourishing of false patent markings. It is the result of a recent Federal Circuit Court of Appeals decision that established a potentially lucrative payday for plaintiffs who prevail on such claims.
Under Section 292(a) of the Patent Act, marking an unpatented article with intent to deceive the public mandates a fine of “not more than $500 for every such offense.” In The Forest Group, Inc. v. Bon Tool Co., No. 2009-1044 (Fed. Cir. Dec. 28, 2009), the court construed that provision to require imposition of the fine on a per-article basis (as opposed to a per-decision basis). Thus, a false patent marking on one million individual articles could generate an award of up to $500 million. Any persons can serve as plaintiffs in this “qui tam” cause of action, whether or not they have an interest in a patent or suffer any personal injury.
The Federal Circuit recognized that its ruling would encourage “a new cottage industry” of false marking litigation by plaintiffs who have not suffered any direct harm, but it concluded that such a consequence is imposed by the plain language of the statute.
The predicted “cottage industry” emerged in no time. Plaintiffs immediately began to scour store shelves and ads to search for markings of expired or questionable patents and have flocked to court with their claims.
This development warrants immediate caution among companies that regularly mark products with patent numbers or other patent indicia. After briefly summarizing the marking issue, this alert suggests steps to help mitigate false marking risk and potential defenses when faced with false patent marking claims.
Patent holders have good reason to mark patented products. Section 287(a) of the Patent Act provides that failure to mark such a product requires proof of actual notice of the patent before an infringer can be subject to damages. Marking obviates that actual notice requirement. But this reward can be more than offset if one runs afoul of Section 292.
Section 292 prohibits marking a product with either another’s patent, another patentee’s name (akin to counterfeiting) or a patent or application number (or other patent indicium) where no patent or patent application exists (akin to false advertising). Prohibited marks include those signifying expired patents, patents without issued claims reading on the marked product and patents that have been narrowed (e.g., by claim construction) so that no claims read on the marked product. To violate the statute, such marking must be for the “purpose of deceiving the public.”
To limit the risk of patent marking claims, companies should consider the following:
Establish procedures for legal department approval of patent markings, including designating responsibility for early warnings on patent expiration dates so that packaging templates can be re-designed and put into production prior to expiration. Obtain legal opinions that a pending patent application or a patent covers a marked product, including evaluating the applicability of narrowed claims. Establish systematic patent marking audit procedures. Re-evaluate patent markings after key case rulings in offensive patent litigation, such as claim construction or summary judgment of non-infringement. The risk of follow-on false marking suits is particularly acute when a patent has been deemed unenforceable for inequitable conduct. In such cases, there will already have been a finding that the patentee intended to deceive the Patent & Trademark Office (PTO). Avoid “may be covered” warnings on products. Courts have suggested that such qualified warnings may be insufficient to avoid Patent Act liability. A company faced with a false patent marking claim has available several potential defenses. At the outset of the case, the constitutional validity of the statute could be attacked by a motion to dismiss. Although at least one court has considered and rejected a defendant’s arguments that the plaintiff lacked standing for lack of injury (Pequignot v. Solo Cup Co., 640 F. Supp. 2d 714 (E.D. Va. 2009)), there may be more to say on standing, and the Federal Circuit or the US Supreme Court may reach a different conclusion. For example, in Solo Cup, the court relied on cases holding that an assignee of a proprietary interest of the government (e.g., a qui tam fraud claim for damages under the False Claims Act) has standing. The defendant argued that in a Section 292 case, the interest asserted by the qui tam plaintiff is an interest of the government as sovereign in the enforcement of a law—not a proprietary interest in recovering monetary damages—and that a sovereign interest is not assignable. Although the district court rejected this argument in Solo Cup, commentators have supported the distinction, and we believe it remains viable.
The Solo Cup court also rejected a constitutional challenge to the statute under the “Take Care” Clause of Article II of the US Constitution, based on the government’s lack of control over the litigation. But the Federal Circuit or the Supreme Court might reach a different conclusion. After all, courts have characterized Section 292 as a criminal statute. Traditionally, prosecutors have discretion to decide whether harm to the public requires prosecution and can recommend a quantum of punishment that is commensurate with that harm. Here, a private party controls whether the action will be commenced and recommends the amount of the fine to the court. That problematic aspect of this type of litigation arguably prevents the executive branch from discharging its responsibilities to enforce the criminal laws. The harm is exacerbated by the fact that the court’s discretion is essentially unfettered under the Patent Act.
Defendants also might consider arguing that, insofar as the interest at issue is the sovereign’s interest in enforcement of a criminal law, the lack of standards to determine the amount of the penalty per act may be unconstitutionally vague or arbitrary. Enforcement of such an imprecise standard could lead to excessive fines, particularly given the Federal Circuit’s recent construction of the statute to render each improperly marked article an independent offense.
The most likely route to success in defending against a false patent marking claim is to show on summary judgment a lack of intent to deceive the public. For example, in Solo Cup, it was undisputed that the defendant had knowledge that its product bore marks of expired patents and its product packaging contained a warning that the product “may be covered” by patents when, in some cases, they were not. However, the court held that knowledge of falsity creates only a rebuttable presumption of intent to deceive. A defendant could, and in that case did, offer sufficient evidence to rebut the presumption. With respect to the false patent marks, the court found that Solo Cup, on advice of counsel and for valid business reasons decided to remove the marks over time to minimize costs rather than to deceive the public. With respect to the “may be covered” warning in the product packaging, the court found that Solo Cup, again consistent with advice of counsel, used the warning as a practical way to protect its patent rights where its patent portfolio was constantly changing and where the company had established procedures on its website and phone lines to handle inquiries regarding patents.
The rule in Solo Cup, if applied by other courts, should also preclude liability where a defendant can show that it was negligent only in not promptly removing expired marks. For example, an employee in the law department of a company may have known that the patent expired, information not known to employees in other departments responsible for advertising and marking the products. If the company can demonstrate that the failure to remove marks of expired patents resulted from administrative oversight rather than an intent to deceive, it should not be liable under Section 292. All facts and circumstances should be considered. For example, if a product bears the marks of many valid patents and one expired patent, a company would have a strong argument that it had no intent to deceive since it is difficult to imagine under those circumstances how the mark of one expired patent could mislead the public and chill competition – the concerns underlying Section 292.
Furthermore, even if intent is proven, district courts have discretion to impose per-article damages below $500. Accordingly, a defendant with hundreds of thousands or millions of articles in circulation will have an opportunity to persuade the judge that damages of anything more than, say, a fraction of a penny per article would be inequitable.