Sep 07, 2010

Federal Circuit addresses standing and pleading requirements for patent false-marking suits

While it is probably not surprising that the patent law of the United States prohibits companies from falsely claiming that a product is protected by a patent when it is not, what may surprise some is that the same law provides that any person can sue companies that do so on behalf of the United States government, and can pocket half of any penalty that is awarded in the case for their efforts.

35 U.S.C. § 292(a) provides that “[w]hoever marks upon, or affixes to . . . 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,” while 35 U.S.C. § 292(b) provides that “[a]ny 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.” While this false-marking statute has existed in its present form since 1952 (and in previous forms since before then), for decades few people actually brought such suits because there was little economic incentive to do so. That changed in December of 2009, when the Federal Circuit Court of Appeals in Forest Group v. Bon Tools clarified that the statutory maximum $500 fine should be applied on a per-article basis, as opposed to a per-decision basis. In other words, if a company were to make one decision to falsely mark 500,000 products, before Forest Group that would have constituted one “offense” (and would have subjected the company to one $500 fine, to be split in half by the government and the person bringing the suit); after Forest Group it constitutes 500,000 offenses (with a potential fine of up to $250 million dollars). As the Federal Circuit anticipated, this change (and the increase in potential monetary awards that came with it) quickly created a “cottage industry” of false-marking litigation, in which private individuals — serving as qui tam “relators” under the provision that “any person” may sue for false markings — filed suit against various companies whose products were marked with patents that had expired. One consequence of this history — with the field dormant for decades, followed by a rapid expansion in the number of suits filed in a short amount of time — is that many of the procedural and substantive rules of false-marking litigation are still being developed by the courts. For example, on August 31, 2010, the Federal Circuit Court of Appeals issued an opinion in the appeal of Stauffer v. Brooks Brothers, Inc. that contained at least two noteworthy pronouncements for all false-marking litigation.

The Federal Circuit’s August 31, 2010 decision in Stauffer v. Brooks Brothers provided helpful guidelines on at least two issues in patent false-marking litigation. First, the Federal Circuit held that the private individual who had filed the lawsuit against Brooks Brothers had had standing to do so under the qui tam provision of § 292(b). While there had been some questions about whether and to what extent qui tam relators must plead an injury to themselves to have standing to file a false-marking suit, and about whether it mattered if the injury to the United States that was assigned to those relators was “proprietary” or “sovereign,” the Federal Circuit held that neither of those issues was dispositive of the standing issue. To the contrary, the Federal Circuit held that when Congress provided in § 292(b) that “any person” could sue on behalf of the United States, it truly meant any person: all a relator must show to have standing to sue is that the United States has suffered an injury that is causally connected to the alleged false marking at issue. The Federal Circuit further defined such an injury in broad terms, holding that by passing the statute prohibiting false marking Congress had determined that such conduct was harmful, and thus that any violation of the false-marking statute inherently constituted an injury to the United States. Given these pronouncements, it is difficult to imagine any person who would not have standing to sue for false marking on behalf of the United States.

While its standing analysis thus appears unlikely to slow the growing number of false-marking lawsuits, the Federal Circuit in Brooks Brothers did offer one possible argument for companies that are facing such suits. Specifically, the Federal Circuit remanded the case with instructions that the district court address, among other issues, the question of whether the relator’s complaint sufficiently alleged that Brooks Brothers had falsely marked the products at issue with the requisite “intent to deceive” the public. The Federal Circuit called this question of intent a “critical” element for a false-marking claim, and noted that the district court should address whether it had been plead with sufficient specificity to meet the heightened pleading requirements for claims of fraud imposed by Federal Rule of Civil Procedure 9(b). Thus, while the Stauffer v. Brooks Brothers, Inc. decision appears on its face to be yet another win for the “cottage industry” that was created by Forest Group, there remains the possibility that the heightened pleading standard for the “intent to deceive” element of the false-marking cause of action could limit the number of false-marking cases that survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) in the future. In any event, companies would be well-served to audit the patent markings on their products and take reasonable steps to change out product inventories to limit their exposure while the procedural and substantive requirements of false-marking litigation continue to be developed.

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