How to avoid false patent marking litigation, and the fines that accompany it

Philip Moy, Partner, Fay Sharpe

Last year, companies were hit by a flood of lawsuits claiming they falsely marked patent numbers on their products. This flurry of litigation has spurred intense interest in “false marking,” in part due to the threat of excessive penalties being imposed on offending companies.

Now, the way the law is enforced is changing.

“The scare is over,” says Philip Moy, a partner with Fay Sharpe LLP. “It’s going to go away, either through court decisions or legislation. However, the suggestions as to how to avoid the problem are good practice.”

Smart Business spoke with Moy about what businesses need to know about false marking and what the future holds for this statute.

What is false marking?

Section 287 limits the damages recoverable by a patent owner who manufactures and/or sells products covered by the patent in suit. It provides a strong incentive for a patent owner to mark its patented products with the numbers of all patents covering the product, because it then can recover infringement damages from the time marking began irrespective of when the infringer might have received notice of the patent in suit.

Section 292, the false patent marking statute, imposes penalties on a company that marks a patent number on either a product or advertising for a product when that patent does not cover the product and when such marking is done ‘for the purpose of deceiving the public.’ A patent marking is considered ‘false’ when either (a) no claim of the patent covers the product or (b) when the marking continues on a product actually covered by a patent after the patent has expired.

Why is proper marking important?

Proper patent marking has always been important (at least since 1952, when the current patent statute was enacted) to provide the constructive notice benefit of Section 287.  Without proper patent marking, a plaintiff in a patent infringement action might not be able to recover damages for infringements that occurred before the infringing defendant had actual notice of the infringement allegations.

Improper patent marking, primarily in the form of continuing to mark products after the applicable patent expired, became important after Dec. 28, 2009, when the U.S. Court of Appeals for the Federal Circuit decided The Forest Group, Inc. v. Bon Tool Company. Section 292 is a qui tam statute that allows anyone to sue another party for false patent marking on behalf of the United States. The statute provides that anyone who engages in false patent marking ‘[s]hall be fined not more than $500 for every such offense’ and that any person bringing suit may retain one-half of the fine, the other half going to the United States.

Prior to Forest Group, courts had interpreted ‘every such offense’ to mean the decision to mark articles with the patent number. Therefore, marking one million widgets with the number of an expired patent was a single offense subject to a fine of no more than $500.  In Forest Group, however, the Federal Circuit held that each article falsely marked and sold was a separate offense. This decision opened the flood gates for false patent marking litigation beginning in 2010, frequently brought by patent law firms or by business entities newly formed by patent attorneys.

What are some examples of false marking?

The two primary examples of false patent marking are marking a product with the number of (a) a patent whose claims do not cover the product and (b) a patent that has expired. In either situation, the product is ‘unpatented’ insofar as the marked patent number is concerned.

How can a company defend itself against false marking lawsuits?

First, have a policy of applying patent numbers only to those products that are covered by an issued patent. This requires consultation with in-house or outside patent counsel to make sure that the product and marked patents match up. This must be an ongoing assessment if a product undergoes changes, both to add new patents that might come into play and to remove patents that no longer cover a revised product.

Second, have a policy of removing from such products the numbers of patents that expire within an economically reasonable time. This does not mean that large sums of money need to be spent to change production tooling as soon as a patent expires. It does mean, however, that some thought should be given to re-ordering packaging or labeling that contains a patent number. As the time approaches for the expiration of a patent marked on packaging, a company should not be ordering several years’ worth of the marked packaging.

The Federal Circuit decision in Pequignot v. Solo Cup Company provides useful insight into one company’s policies for removing patent numbers from tooling. Because the product tooling containing the patent numbers would have been expensive to modify during its useful life, the court found it reasonable for the manufacturer to wait until a particular tool wore out before the numbers of expired patents were removed. Of course, if the tooling at issue is readily modifiable to change markings made on the product, then expired patent numbers should be removed more quickly.

What is the future for false patent marking lawsuits?

Recent case law and pending litigation have taken some of the steam out of the false patent marking movement.

The courts have acknowledged that Section 292 is a criminal statute and recently began applying more rigorous requirements to the parties bringing such actions. The complaint must satisfy pleading requirements that normally attach to allegations of fraud, so that allegations that the defendant acted ‘for the purpose of deceiving the public’ must set out with particularity the circumstances that demonstrate deceptive intent.

The ‘who, what, when, where and how’ of the alleged fraud must be set forth in the complaint. It is insufficient to allege merely that the defendant is a sophisticated company that should have known that a product was marked with the number of an expired or inapplicable patent. This presents a problem for parties bringing an action under Section 292, as they probably have no idea how to answer the ‘who, what, when, where and how’ inquiries.

Moreover, two district courts (one in Ohio and one in Pennsylvania) have found Section 292 to be unconstitutional on the basis that the government does not exercise sufficient control over the party suing on behalf of the U. S. to ensure that the president meets his constitutional obligation to ‘take care that the laws be faithfully executed.’ At least one of these cases has been appealed to the Federal Circuit.

Finally, pending legislation in Congress primarily directed to reforming substantive patent law revises Section 292 in a dramatic fashion that essentially kills the statute as it has recently been used. Under the revisions, (a) only the United States would be able to bring an action for a civil penalty; (b) individuals and companies would have no right to bring an action for false patent marking unless they have suffered a competitive injury as a result of false marking, and their remedies would be limited to damages adequate to compensate for the injury; (c) a safe harbor would be created for expired patents so that no liability would attach to marking a product with the number of an expired patent during the first three years following its expiration or to marking a product with the number of an expired patent where ‘expired’ is placed before the patent number; and (d) the revision would have retroactive effect to all actions pending on the date of enactment.

Philip J. Moy, Jr. is a partner with Fay Sharpe LLP. Reach him at (216) 363-9109 or [email protected]