Will Patent False Marking Litigation Flame Out?

by: Robert Wagner, intellectual property attorney at Picadio Sneath Miller & Norton, P.C.

With the House and Senate passing versions of the America Invents Act that will reform the patent laws as we know them, I thought it would be interesting to look back at how patent false marking litigation burst onto the scene in 2010 and how it appears to be flaming out now in 2011. In the last two years, the patent world has been abuzz with claims of false marking brought by individuals against some of the largest companies in America. There were fears that this litigation would result in monstrous penalties where there was little “wrongful” action. As typically happens, these fears appear to have been overblown. While certainly a headache for those companies that were sued and for those companies that have gone to great lengths to verify compliance with the statute, the result seems to be more of a short-term inconvenience.

History of False Marking Law

False patent marking has been around for a long time, first appearing in the Patent Act of 1842, which prohibited the false marking of products with the intent to deceive the public with a fine of not less than $100. Later, in 1952, Congress changed the statute to impose a penalty of not more than $500 per offense:

(a) Whoever, without the consent of the patentee, marks upon, or affixes to, or uses in advertising in connection with anything made, used, offered for sale, or sold by such person within the United States, or imported by the person into the United States, the name or any imitation of the name of the patentee, the patent number, or the words “patent,” “patentee,” or the like, with the intent of counterfeiting or imitating the mark of the patentee, or of deceiving the public and inducing them to believe that the thing was made, offered for sale, sold, or imported into the United States by or with the consent of the patentee; or 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; or Whoever marks upon, or affixes to, or uses in advertising in connection with any article, the words “patent applied for,” “patent pending,” or any word importing that an application for patent has been made, when no application for patent has been made, or if made, is not pending, for the purpose of deceiving the public– Shall be fined not more than $500 for every such offense.

35 U.S.C. § 292(a). Prior to 2009, courts interpreting these statutes held that the penalty should not be imposed for each article falsely marked, but rather should be imposed for the decision to falsely mark a product line. See, e.g., London v. Everett H. Dunbar Corp., 179 F. 506 (1st Cir. 1910). As a result, there was little incentive for a litigant to bring a false marking claim and few cases were filed.

Pequignot v. Solo Cup and Forest Group v. Bon Tool

In 2007, things began to change. Matthew Pequignot, a patent attorney, filed suit against Solo Cup for falsely marking its plastic cup lids with expired patent numbers. Pequignot argued that the prior holdings were incorrect and that penalties should be imposed per article. Because there were potentially over 21 billion cups that were falsely marked, Solo Cup theoretically faced more than $10 trillion in potential penalties under Pequignot’s interpretation.

As the case was winding its way through the courts, the Federal Circuit heard an appeal in an unrelated case Forest Group, Inc. v. Bon Tool Co., 590 F.3d 1295 (Fed. Cir. 2009) that would ultimately spark a huge new cottage industry. Forest Group had a patent covering stilts commonly used in construction and sued Bon Tool for infringement of its patent. Bon Tool counterclaimed, alleging that Forest Group falsely marked its stilts. The court found that (1) Bon Tool did not infringe; (2) Forest Group had falsely marked some of its stilts and fined it $500 for a single offense of false marking; and (3) the case was not exceptional, so the court did not award attorney fees. Bon Tool appealed the last two findings, and the Federal Circuit determined that the fine under the false marking statute applies to each article falsely marked, not the decision to mark as the district court had held. (The Federal Circuit affirmed the decision not to award attorney fees). On remand, the district court imposed a fine of $180 for each of the 38 stilts that were falsely marked. Thus, the case that lit the false marking industry on fire and resulted in thousands of subsequent lawsuits was ultimately over a $6,840 fine.

Forest Group Launches a Thousand Suits

From 2007 to 2009, only 47 false marking cases had been filed in federal courts, but after the December 28, 2009 decision in Forest Group, patent attorneys and litigants stormed court houses across the country, filing almost 1,500 cases in the next year and a half. Given the potential $500 per article fine, companies that mass produced products were understandably concerned about facing potentially huge liability for wrongly marking their products.

Because false marking is a qui tam action and the statute appeared to authorize anyone to file suit, there was no need for patent attorneys to find clients who had been actually injured by the alleged false marking. Instead, patent attorneys were filing suit on their own or creating their own corporations to file suit against alleged false markers. The lawsuits tended to focus on products that had expired patent numbers, rather than products that were marked with inappropriate, but still valid, patent numbers. The reason was obvious—there was no need to go through the costly exercise of proving that the patent did not cover the product when the patent had expired. One could immediately jump to the question of whether the product was falsely marked with the intent to deceive the public.

Two later decisions by the Federal Circuit only intensified the flames sparked by the Forest Group decision. In Pequignot v. Solo Cup Co., 608 F.3d 1356 (Fed. Cir. 2010), the Court confirmed that marking a product with an expired patent number fell within the scope of the false marking statute (although it affirmed the judgment against Pequignot because he could not prove that Solo Cup acted with an intent to deceive). And, in Stauffer v. Brooks Brothers, Inc., 619 F.3d 1321 (Fed. Cir. 2010), the Court confirmed that anyone had standing to bring suit under the false marking statute, even if they did not suffer any direct personal injury.

The Federal Circuit appeared to be showing no inclination to beat back this fire. All indications were that a new form of patent “trolling” litigation was here to stay.

The Tide Begins to Turn

With courts and companies having to deal with this large number of lawsuits, the defenses began to intensify. Companies began arguing that the “intent to deceive” prong of the statute was grounded in fraud and must be pleaded specifically under Rule 9(b). Because most of these lawsuits involved no real evidence of fraud, courts began granting defendants’ motions to dismiss under Rule 9(b).

In the first real set back to plaintiffs, the Federal Circuit in In re BP Lubricants USA Inc., 637 F.3d 1307 (Fed. Cir. 2011) held that the allegations of a defendant’s intent to deceive the public must be pleaded with the specificity required under Rule 9(b). This created a larger hurdle that was and still is difficult for many plaintiffs to overcome.

In addition, two districts courts have held that the false marking statute is unconstitutional under the “Appointments” and “Take Care” clauses of the Constitution (Article II, Sections 2 and 3). See Unique Product Solutions, Ltd. v. Hy-Grade Valve, Inc., (No. 5:10-cv-1912, N.D. Ohio Feb. 23, 2011) and Rogers v. Tristar Products, Inc., (No. 5:11-cv-1111, E.D. Pa. June 2, 2011) . The courts reasoned that the statute as written does not provide sufficient control by the government over this kind of litigation. Currently the Federal Circuit is hearing an argument on this issue in FLFMC, LLC v. Wham-O, Inc., (2011-1067), which is scheduled for oral argument on July 7, 2011.

Finally, a perhaps most importantly for companies facing these false marking lawsuits, Congress has stepped in and dramatically rewritten the false marking section of the Patent Act in the patent reform litigation that has now passed both the House (HR 1249, § 16) and the Senate (S 23, § 2(k)). The new false marking statute will limit lawsuits to being filed only by the government or those that can show a competitive injury from the false marking:

(1) IN GENERAL- Section 292 of title 35, United States Code, is amended–

(A) in subsection (a), by adding at the end the following:

‘Only the United States may sue for the penalty authorized by this subsection.’; and

(B) by striking subsection (b) and inserting the following:

‘(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.’.

(Text from Senate version, S 23, § 2(k))). Most importantly, these limitations will expressly apply to any cases currently pending when the legislation becomes law. This will have the effect of stripping jurisdiction from most of the pending cases.

(2) EFFECTIVE DATE- The amendments made by this subsection shall apply to all cases, without exception, pending on or after the date of the enactment of this Act.

(Text from Senate version, S 23, § 2(k))). President Obama has indicated that he intends to sign this legislation once it emerges from Congress.

Retrospective and Prospective

Like a meteor shooting through the sky, false marking burned brightly for a short time but does not appear to be lasting. In the year and a half since the Forest Group decision, almost 1,500 false marking cases have been filed. Most of these cases have settled for an average of around $45,000 with a range between $5,000 and $350,000. The cases undoubtedly were lucrative for some plaintiffs, especially those that were filing multiple cases, but they have not resulted in the large verdicts or settlement amounts that many feared. With the upcoming changes to the statute, and its retroactive applicability, it is likely that there will not be many more cases filed. It will be too easy for defendants to hold out until the patent reform act passes and strips the courts of jurisdiction for most cases.

Nonetheless, this flurry of litigation has prompted many companies to verify that they are properly marking their products and to evaluate whether they should be marking at all. While the social benefit of these lawsuits is questionable, companies’ better compliance with patent marking should ultimately be a benefit to the public and competitors who are better able to understand what products are patented.

While the patent marking “trolling” may be on its way out, false marking is likely to stay in the form of counterclaims in patent infringement lawsuits. It will be much easier for a competitor to show some form of injury from the false marking, and, given that patentees can be larger companies with much larger sales than some of the infringers they target, a false marking counterclaim may actually be more damaging than the underlying infringement claim. So, companies would still be well advised to continue policing their own marking to make sure they are in compliance with the patent marking statute, especially if they anticipate enforcing their own patents.

It will be interesting to look back at this time in a decade or so to see if false marking cases were, in fact, the blip they appear to be. But for now, the future does not look bright for patent marking “trolling.”