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The State of False Marking Law After Brooks Brothers

Intellectual Property Law Update Terri S. Flynn, Gavin J. Milczarek-Desai

On August 31, 2010, the United States Court of Appeals for the Federal Circuit handed down another in a string of recent court decisions relating to the false marking statute. This decision, Stauffer v. Brooks Brothers, Inc. is the latest of four decisions since 2005 interpreting the false marking statute. These cases, in order decided, are Clontech Laboratories, Inc., v. Invitrogen Corporation (2005), Forest Group, Inc. v. Bon Tool Co. (2009), Pequignot v. Solo Cup Company (2010) and Stauffer v. Brooks Brothers, Inc. (2010). This update will give a brief overview of the false marking law as a result of these decisions and the future implications. Companies marking their products with "patented" or "patent pending" should take particular notice as false marking litigation continues to unfold because they may be exposed to significant liability for improper markings. To avoid potential liability, companies are strongly encouraged to review their patent portfolio and establish appropriate marking practices and procedures.

Among these cases, Forest Group, Inc. v. Bon Tool Co. had the most dramatic effect on false marking litigation, leading to a sharp increase in the number of false marking lawsuits. Under 35 U.S.C. 292, the penalty for falsely marking a product as being covered by an issued or pending patent is "up to $500" per offense. Prior to the Forest decision, the exact meaning of "offense" was not clear. Many courts interpreted marking an entire product line, regardless of the number of individual items marked, as a single "offense." The Federal Circuit in Forest, however, found the term "offense" to mean each individual item marked. As such, a company producing one million items of a single product, all of which are falsely marked, would, before Forest, be liable for up to $500, but after Forest, would be liable for up to $500,000,000. With such a dramatic increase in potential penalties, the fact that false marking actions are one of the few qui tam actions (those that allow anyone to file suit), and the fact that a successful plaintiff shares one half of any penalties imposed (the other half going to the government), it is clear why the number of false marking qui tam lawsuits filed jumped from only a handful in 2008 to nearly 400 in the first three quarters of 2010 alone.

Two related factors leading up to Forest created a "perfect storm" of potential liability for many companies. First, before Forest, the penalties were so minor, no more than $500 in most situations, that companies did not have an incentive to develop and maintain business practices to ensure that their products were properly marked. Secondly, because the amount collected by a successful plaintiff was typically capped at $250 (since any award is split with the government), the award to a successful plaintiff was so low as to not even cover court costs. Therefore, there was little incentive for plaintiffs to bring such suits. This abruptly changed after the Forest decision with the effective increase in false marking penalties.

Despite the significant rise in false marking cases, many of the decisions thus far have not resulted in significant penalties for defendants. Instead, many of these cases are being decided or remanded upon appeal based on other attributes of the statute, including the "intent to deceive" requirement and constitutional challenges aimed at the qui tam nature of the statute.

Intent to Deceive (Solo Cup)

An element of the false marking statute, which must be satisfied before any penalty is imposed, is that the false marking was made with an "intent to deceive" the public. Furthermore, this intent must be established by a preponderance of the evidence (discussed in Clontech). Simply put, there must be some specific evidence that the decision to falsely mark was made with an intent to deceive. For example, in Forest, the defendant continued to mark products as patented after a court, in a previous decision, made the determination that the patent did not cover the product. The intent to deceive was established by, among other factors, clear knowledge that the patent did not cover the product and the defendant's continued marking after such knowledge.

Knowledge that a product is falsely marked, however, only creates a rebuttal presumption of an intent to deceive. This means that the court will assume that an intent to deceive was present unless the defendant can prove otherwise by a preponderance of the evidence. This was the case in Solo Cup, where the process of replacing cup molds to remove expired patent markings (that would imprint onto each manufactured cup) would be very expensive and disrupt production. Instead of immediately replacing the molds upon expiration of the patents, Solo Cup, on advice of counsel, chose to implement a policy of replacing existing molds with new mold that did not contain the expired patents markings only when the existing molds wore out. Under these facts, the court found that even though Solo Cup was aware of the falsely marked product, they lacked the intent to deceive to be liable under the statute, in part due to the high cost of mold replacement and the procedures enacted to remove improper markings from new molds on replacement.

Standing and Constitutional Challenges to the False Marking Statute (Stauffer)

Most recently, Brooks Brothers, the defendant in Stauffer, attempted to quickly dismiss the suit claiming that the plaintiff did not have standing to bring the suit because the plaintiff did not suffer an injury as a result of the false marking. The Federal Circuit rejected this argument and found that standing is satisfied because the government has standing to enforce its own laws, and the false marking statute assigns this right to "any person" to sue on the government's behalf and receive half the fine.

While Stauffer removes one strategy that a defendant may have used to dismiss a false marking suit, the court replaced it with another potential strategy by hinting that the false marking statute may violate the "take care" clause of Article II, §3 of the Constitution. Under this theory, Article II, §3 is violated when the executive branch is stripped of its duty to "take care that the laws be faithfully executed" by an act of Congress that instead delegates the power to sue to any member of the public. The court, however, declined to decide this issue without it being raised and argued by the parties. Therefore, it is safe to assume that this or a future defendant will raise this argument soon.

Overall, the Stauffer decision did little to alter the false marking legal landscape that was substantially reshaped after the Forest decision. The standing argument appeared to be an attempt by defendants to battle the rise in false marking lawsuits and, while unsuccessful, it may have uncovered a viable constitutional argument to stop the wave of false marking litigation.

Conclusion

The Forest decision has led to a wave of false marking lawsuits due to years of lax marking policies and practices by companies and substantially increased potential rewards to plaintiffs. The requirement of a specific showing of an "intent to deceive" on the defendant's part, however, has generally prevented any substantial penalties from being imposed, even when the defendant was aware of the false marking (Solo Cup). Also, attempts by defendants to weaken the false marking statute itself, such as by challenging the standing requirements and raising constitutional questions, have yet to succeed. Considering that there are hundreds of false marking cases yet to be heard, we can expect further developments on false marking law in the coming months.

It is important to stress that, even though the increased penalty formulation of up to $500 per article has yet to be applied after Forest, the litigation costs for any company accused of false marking can be substantial, even if they are ultimately not found liable under the statute. A number of different situations could prompt a false markings suit. We, therefore, strongly encourage companies to (i) review their patent portfolio, (ii) review their marked products, and (iii) develop business policies to comply with the false marking statute, such as implementing procedures to ensure that products are properly marked, and that patent numbers and "patent pending" designations are removed when no longer applicable.

If you have any further questions or would like us to assist you in verifying that your products are properly marked or in developing business guidelines for product marking, please contact Terri Flynn at (414) 277-5229 / terri.flynn@quarles.com, or Gavin Milczarek-Desai at (520) 770-8716 / gavin.milczarek-desai@quarles.com.