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CLIENT ALERT: FOREST GROUP V. BON TOOL COMPANY INCREASED LIABILITY FOR IMPROPER PATENT MARKING

by Louis Bonham

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On December 28, 2009, the United States Court of Appeals for the Federal Circuit held that "any person" can bring a qui tam action (explained below) against a party accused of false patent marking, and that in such cases the award is to be calculated based upon the number of articles that have been improperly marked. This decision (Forest Group v. Bon Tool Company) is widely expected to unleash a torrent of such cases against owners of United States patents and other parties who mark their products, as well as to make allegations of improper marking a common counterclaim in patent infringement lawsuits. Because of the potentially broad sweep of this new decision, we believe it is critical for our clients to understand its implications and to take appropriate precautions to minimize any potential liability.

Background: Patent Marking & Qui Tam Actions

Under United States patent law, no pre-notice monetary damages for patent infringement may be awarded unless the patent owner marked with the patent number the articles covered by the patent (or their packaging if marking the articles themselves is not practical). Where there has been a failure to mark articles covered by the patent, damages for patent infringement are recoverable only when the infringer was sent notice of the infringement and thereafter continued to infringe – and in such case are limited to damages for infringements committed after receipt of the notice. See 25 U.S.C. § 287(a). Because a failure to mark can thus dramatically reduce a patent owner's remedies for infringement, proper marking of patented articles is an important part of an effective patent enforcement regimen.

At the same time, however, United States patent law makes it illegal to mark an unpatented article, to falsely mark an article as "patent pending," to falsely represent or imply that an article is patented, or to mark a counterfeit good, if such improper marking was done with the intent of deceiving the public. Thus, for instance, if a patent owner marks goods not covered by his patent in an attempt to discourage competitors from copying the unpatented article, he has committed false marking. Violations of this law are punishable by fines of up to $500 "for every such offense." 35 U.S.C. § 292(a).

Typically, violations of law that are punishable by fines are brought by a governmental agency, not by private parties. However, the false marking statute contains an unusual feature: it allows "any person" to sue for false marking, and to keep 50% of any amounts recovered in such a case. This feature – by which private parties can sue on behalf of the government and share in the recovery – is known as a qui tam action. Qui tam actions were once common long ago when the government had very few law enforcement officers and agencies, but the practice is now very rare and severely restricted in American law.

While the statute authorizing qui tam actions for false marking has been on the books for over a hundred years, courts have traditionally interpreted the statute in a fashion that curtailed or otherwise discouraged its use. For example, some courts required a qui tam plaintiff to prove that he (or the federal government) was injured or otherwise directly impacted by the false marking. Other courts interpreted the provision providing for fines "for every such offense" as referring to each decision to falsely mark, as opposed to each individual act of false marking (e.g., a production run of 10,000 falsely-marked articles would be treated as one offense rather than 10,000 offenses). Such interpretations made it uneconomical to pursue such actions, as the expense of bringing such claims would greatly exceed the potential recovery.

Recently, however, some enterprising parties began to test these old interpretations of the law, arguing that the plain meaning of the statute allowed "any person" – not just persons who could demonstrate injury – to bring qui tam actions. Similarly, they argued that because the statute prohibited the false marking of "any unpatented article," the plain meaning of the statute was that the false marking of each individual article was a separate offense that could be fined up to $500. Thus, for example, in Pequignot v. Solo Cup Company, the plaintiff (a patent attorney from Virginia) argued that the defendant's production of hundreds of millions of disposable cup lids marked with a patent number that had expired over 20 years before constituted hundreds of millions of offenses – and he was therefore entitled to recover up to $500 for each one (and to keep 50% of the amounts obtained).

Forest Group v. Bon Tool Company

Such arguments also began to appear in counterclaims in patent infringement suits, in which accused infringers would bring qui tam actions for false marking against the suing patent owner. Such occurred in Forest Group v. Bon Tool Company, where the plaintiff (Forest Group) filed a normal patent infringement claim against the defendant, who then counterclaimed for a declaration of the invalidity of the patent and for false marking. In that case, the trial court found that another court had previously ruled that Forest Group's marked product was not, in fact, covered by its patent, and yet Forest Group thereafter continued to mark its product. The trial court therefore concluded that Forest Group intended to mislead the public by marking an unpatented article, and thus violated the false marking statute. However, the trial court rejected the argument that "each such offense" required the fine to be calculated on the number of articles falsely marked, and found that because there was only one "decision to mark," the award was limited to a single $500 fine.

On appeal, the Federal Circuit reviewed the history and public policy of the false marking statutes, and ruled that the plain language of the statute required the penalty to be based on the number of articles that were improperly marked. The court also rejected arguments that a qui tam plaintiff must show that he (or the government) suffered some injury or effect from the false marking, ruling that the statute plainly envisioned qui tam actions that could be brought by "any person." While the court recognized that this might create a new "cottage industry" of bounty hunters bringing such lawsuits, it held that the history and plain language of the statute allowed such a result. The court did, however, recognize that the false marking statute does not require a $500 fine per improperly marked article, but instead allows for fine of "not more than $500" per offense. Thus, according to the Federal Circuit, the trial court would have the discretion to set then penalty as a fraction of that amount, and the court therefore remanded the case for a new calculation of the fine.

Implications of the Decision

Assuming that the panel's decision is not overturned by the Supreme Court, an en banc decision of Federal Circuit, or a change in the false marking statute, the potentially severe implications of this decision cannot be ignored by anyone who marks their products in the United States market.

While the Forest Group decision certainly gives a trial court the discretion to award penalties of a fraction of a cent per article, it also leaves open the possibility of huge awards. Take, for instance, the Pequignot v. Solo Cup Company case. If the trial court ultimately concludes that Solo Cup's practice of marking its disposable cup lids with expired patent numbers was improper and done with the intent of deceiving the public, the ultimate award will be based on hundreds of millions (or probably billions) of violations. While a court could base an award on a fraction of a cent per violation, it could also set it at a level that could prove ruinous. Further, there is no way to anticipate or intelligently quantify the potential risk before trial: it will be a matter of discretion for the court after the presentation of all the evidence. These cases thus present what may be unacceptable business risks for many companies, and thus they may be forced to settle such cases on extortionate terms.

Compounding matters further, because "any person" can bring such an action, one would expect such "bounty hunters" to research what judges and venues would be most amenable to granting large awards, and to attempt to bring their qui tam actions in those courts. One should also expect that competitors will investigate the marking practices of their rivals, and for purposes of business advantage either bring qui tam actions themselves or induce others to do so.

However, it must be recognized that the false marking statute is not one of strict liability – in addition to acts of false marking, it must also be shown that the marking party acted with the intent of deceiving the public. While such intent can be inferred in many cases, a party who can demonstrate that improper marking was the result of mistake or inadvertence should have a valid defense.

We strongly urge our clients to deal with this issue proactively by carefully auditing current marking practices and, where not already present, developing and implementing corporate marking policies. Such policies may include, for example:
• requiring the approval of management before a product is marked;
• obtaining an opinion of counsel if there is any doubt whether an article is covered by a valid claim of a patent;
• calendaring patent expiration and ceasing marking as of that date;
• reassessing marking decisions in the event of an adverse ruling in a reexamination proceeding or infringement lawsuit; and
• reviewing competitors' marking practices for potential violations.

We also urge you to carefully investigate marking practices prior to filing any lawsuits for patent infringement, as one should expect defendants to use the discovery process to look for instances of false marking to assert by way of counterclaim. In the same vein, parties that are defendants in patent infringement cases should investigate whether the plaintiff may have violated the false marking statute.

If you have any questions or require assistance in these areas, please do not hesitate to contact us.

© Osha Liang LLP 2010
 

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