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 firstname.lastname@example.org.
Normally, people are advised to stay away from cliffs. The steep vertical drop, the hard rocks, the water below — there’s too much danger if you get too close.
However, a different kind of “cliff” is looming on the horizon and for employers it doesn’t represent danger, but rather opportunity.
“They call it the ‘patent cliff,’” says Chronis Manolis, RPh, the vice president of pharmacy for UPMC Health Plan. “It refers to the years 2012 to 2014, when many pharmaceutical companies will lose patent protection on some of their most popular products.”
Smart Business talked with Manolis about the “patent cliff” and the opportunity it presents for employers.
What exactly is the ‘patent cliff’?
The term ‘cliff’ is used because pharmaceutical companies are facing a steep revenue shortfall as their blockbuster products lose patent protection. It’s estimated that drugs representing approximately $100 billion in sales will be available as generic drugs over the next several years. That loss to the pharmaceutical industry creates a significant opportunity for employers and employees alike.
When a pharmaceutical company develops and markets a new drug, it gets patent exclusivity for a specified number of years. What that means is that for that period there can be no generic equivalents to the brand-name drugs for the public to choose from. Over the next few years, a number of the most popular and biggest-selling drugs of recent years will all have their patents expire.
These include Lipitor, the top-selling anti-cholesterol drug in the world; Plavix, the top-selling antiplatelet medicine; Viagra, the most popular erectile-dysfunction drug; Singulair, an anti-asthma medicine; Lexapro, an anti-depressant; and several others. Every year, drugs have their patents expire, but there have never been so many popular drugs all losing patent exclusivity at the same time as there will be over the next two to three years.
Why is this an opportunity for an employer?
This is a truly unique time for employers. They have the opportunity to leverage the introduction of all these generic versions of top-selling drugs to help them bring down their health care costs. Employers need to work with their health insurer to ensure their pharmacy benefit design can leverage this significant opportunity. Generic drugs are a win-win for both the employer and employee. In addition to the cost savings, there is substantial evidence to suggest that cost is a barrier to medication adherence and lower co-pays for generic drugs can remove these cost barriers.
In conjunction with innovative formulary management, co-pay designs that promote generic drugs are the easiest way to leverage the patent cliff. For example, having a material difference in co-pay amounts between brand and generic drugs is a powerful incentive for employees. Additional examples include applying deductibles to only brand drugs as well as having co-insurance only for brand drugs while having flat dollar co-pays on generic drugs.
Can employers increase awareness and acceptance of generics?
It’s important to implement promotional and educational campaigns with your benefits administrator to educate employees. This can include educational materials, work-site promotional materials and pharmacist informational sessions to build employee awareness and confidence in generics.
There continues to be a general lack of confidence in generic drugs in regards to safety and effectiveness. Generic drugs save patients money without compromising quality and safety. The patent cliff will bring many ‘first-in-class’ generics to treat conditions such as diabetes, stroke, asthma and hypertension. We will have unprecedented access to high-quality generic drugs in almost all of the major therapeutic categories.
The ultimate goal is to get plan members talking to their physicians about therapeutic alternatives. This inquiry into generic drugs will provide a shift from brand name to generic drug utilization and help reduce benefit costs. For every 1 percent increase in generic drug use, employers can save approximately 1.5 percent in drug costs.
Is there a significant difference between generics and brand-name drugs?
The Food and Drug Administration requires generic drugs have the same effectiveness as the brand-name product. Generic drugs have exactly the same dosage, intended use, safety profile and side effects as the brand drug.
Brand-name drugs develop reputations with consumers, much of which is created through extensive media campaigns that raise awareness of the product and also increase its cost. Generic drugs have the same chemical make-up but are not backed by expensive advertising. That helps to make them less expensive and is the reason that insurance companies can offer these drugs to members for a much lower co-payment.
What kind of savings can be expected by going with generics?
For generics, employees pay, on average, co-pays that range from $5 to $15 compared to $20 to $40 for the brand-name drug. The average retail price plan sponsors pay for a brand-name drug is now approximately $128 compared to the average retail generic price of $18. So the savings are material for both employers and employees alike.
Will the ‘patent cliff’ help to increase the acceptance of generics?
Absolutely. With the influx of new generics, we should approach generic drug use rates greater than 80 percent. With high-cost biotech drugs projected to increase significantly in the next several years, maximizing generic drug adoption will be a key strategy to contain costs in the overall pharmacy benefit. Additionally, the savings is achieved without compromising safety and quality.
Chronis Manolis, RPh, is vice president of pharmacy for UPMC Health Plan. Contact him at email@example.com or (412) 454-7642.
The success or failure of an idea often hinges upon timeliness. Was the time right for a particular innovation? If you have a great idea and want your business to capitalize on it, you need to apply for a patent. However, the average patent application takes almost three years to process. By the time you obtain your patent, someone else may have taken your patent pending idea to the marketplace, and your innovation may not be innovative anymore.
“The Fast Track Exam enhances your intellectual property by expediting the patent process,” says Jay Moldovanyi, partner with Fay Sharpe LLP. “Getting that patent prevents competitors from copying your patented idea themselves.”
Smart Business spoke with Moldovanyi about how to determine if you should fast track your idea.
How does a Fast Track Exam enhance your IP?
The Fast Track Exam is helpful for situations when you introduce a new product to the marketplace and you want to prevent another company from creating and selling a knock-off version of your intellectual property.
For example, say you run a stapler company and you want to introduce a brand new stapler. How are you going to prevent a competitor from introducing the same stapler?
It’s important to note that a patent is a negative right, not a positive right. Let’s assume your patent is for a new shift mechanism for a bicycle and someone else has a patent on the bicycle itself. Can you sell bicycles with your shift mechanism? No, because someone else has the patent on the bicycle. Can the owner of that patent sell a bicycle with your shift mechanism? No, because they need your permission to put your patented shift mechanism on their bicycle.
You have to make a deal with the bicycle’s patent-holder in order for you to sell bicycles with your shift mechanism. Conversely, he has to make a deal with you; otherwise he is unable to sell a bicycle with your shift mechanism.
You can’t enforce that negative right if you don’t have it. That’s why it is important for businesses to patent-protect their intellectual property.
What are the pros and cons of using a Fast Track Exam?
The upside of the Fast Track Exam is that you are going to get a patent faster. Normally, patents take almost three years to make it through the system. The average is 34 months. A Fast Track Exam can get the examination done in 12 months.
The downside is simple: It is very costly to expedite a patent’s consideration. The cost of a Fast Track Exam is $4,000 on top of normal patent application filing fees, which are dependent on your company’s total number of employees.
The total cost is broken out into a basic filing fee, a search fee and an examination fee. When you add those up, for a large entity (more than 500 employees) the fees are $330, $540 and $220, so the total is $1,090 for a normal patent application (there can be other costs for additional claims, etc.). For a small entity of fewer than 500 employees, the total cost for normal patent application is $545.
That is just for the patent application — in effect, just to get the show rolling. There are many more fees as you go through the process.
What are some examples of ideas that may be critical enough to fast track their patent application?
A new cell phone design, new engine design for motor vehicles, new antenna design for cell phones, new polymer composition to be used in tires — these are all examples.
The business owner has to decide which applications are important enough to fast track. That decision should be made in consultation with the lead engineer/VP of engineering and a patent attorney.
You have to have justification for spending that money. You certainly don’t want to do it cavalierly and file a Fast Track Exam for every application. The patent office has actually made this more difficult by capping the number of applications for expedited patents at 10,000 per governmental fiscal year.
Why does it take so long for patent applications to be considered, and why are all the fees necessary?
The reason for all those fees is that the patent office is fully user-funded; no taxpayer money goes to the patent office.
The process takes 34 months, on average, because the patent office is overloaded with patent applications. There is an avalanche of patent applications that have been submitted in the last five to 10 years. Because of the backlog, the patent office created the Fast Track Exam as a stopgap measure — prioritized examination for a fee.
Also, the patent office hasn’t been able to hire as many examiners as they would like because Congress controls its budget. Even though the patent office is fully user-funded, Congress has to appropriate that money to the patent office in order for them to use it. Bills have been introduced in Congress to overhaul the patent system, but so far none has been passed.
Fast track is indefinitely postponed because Congress has hit the USPTO with a $100 million budget cut for the 2011 fiscal year (ending October 1, 2011).
Jay Moldovanyi is a partner with Fay Sharpe LLP. Reach him at (216) 363-9127 or firstname.lastname@example.org.