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Penalty for Patent False Marking Set at Highest Sales Price
May 11, 2010
Following remand from the Federal Circuit in the Forest Group vs. Bon Tool1 false marking patent case, the U.S. District Court for the Southern District of Texas ruled on April 27, 2010 that, due to the penal nature of the false marking statute, the appropriate penalty for falsely marking a product with an incorrect patent number would be assessed at the maximum price the articles were sold2 instead of assessing the penalty based on the profit margin3 or economic benefit to the defendant for marking the product.4 Judge Atlas noted that by fining Forest Group for an amount equal to the highest sold price, Forest Group would be deprived "of more than it received for the falsely-marked stilts, [thereby] fulfilling the deterrent goal of § 292's fine provision."5 Although the total award was a modest $6,840 ($180 for each of the thirty-eight items sold), the potential ripple effect this opinion could have on other district courts grappling with the decision of how to monetize the penalty could prove to be quite costly for some companies. This is particularly true for cases in which defendants to these types of lawsuits have potentially mismarked thousands or even millions of articles.
As we noted previously,6 the Forest Group v. Bon Tool7 decision significantly upped the ante for defendants accused of false marking. For almost an entire century, courts typically had only fined false marking defendants on a per decision basis. The Federal Circuit, however, distinguished 100 year old precedent,8 and declared that every article falsely marked is subject to a penalty up to the maximum fine.
The Federal Circuit acknowledged the possibility that a "new cottage industry" would likely emerge as a result of their decision; however, the court noted that the penalties would not likely get out of control since 35 U.S.C § 292 does not impose an automatic penalty of $500 per article.9 Rather, the statute allows a range of penalties, and thereby, "provides district courts the discretion to strike a balance between encouraging enforcement of important public policy and imposing disproportionately large penalties for small, inexpensive items produced in large quantities."10 The Federal Circuit further attempted to soften the blow by specifically noting that in some cases awarding a fraction of a penny per infraction could be proper.11
The district court noted that the Federal Circuit's prediction regarding a new cottage industry has come true.12 Following the December 2009 decision, private enforcers have not hesitated to file suit. In fact, in the just over three months since that case was decided, private enforcers have already filed about 140 false marking claims.13 The lower court also briefly alluded that the Federal Circuit might be out of touch with Congress' intention with respect to § 292, since both the House and the Senate currently have pending legislation that would require all future and pending false marking plaintiffs to show a competitive injury.14 While there is a possibility for relief from Congress, companies should continue to mark their products with caution.
Additionally, patent holders should be aware that more change on the horizon is likely. The Federal Circuit has already heard oral arguments in the much anticipated Pequignot v. Solo Cup15case, with an opinion expected to be delivered sometime within the next few months. Central issues in that case include what is the liability for marking products with expired patents, what is the relevant burden of proof for Section 292 cases, and what type of evidence is required to overcome a presumption of intent to deceive when marking with knowledge of its falsity. We will keep you updated on this second leading false marking case as well.
Although the outcome of Pequignot v. Solo Cup is unknown, what is known, however, is that private enforcers are not waiting around to file suit. Therefore, we highly recommend that patent holders and litigants take the following actions in order to minimize their risk of being sued:
For new product designs or inventions:
- Communicate to patent counsel the commercial embodiments of your product and update counsel as to any changes in the product's design that may need to be incorporated into a patent application. If patents claims covering the product have not issued, your patent attorney may still be able to claim commercial embodiments using the same application or a continuation of your pending application.
- Analyze final product designs with patent counsel to compare all applicable issued patent claims with your commercial embodiment prior to marking. If the final product design is not covered by one or more claims of the patent, do not mark the product with the patent number.
- Once a patent issues with one or more claims covering a commercial product line – after the final review of counsel, mark the product line according to the statute, i.e., with patent or pat. and the patent number.
For existing product lines and patents:
- Determine whether any product line redesign, update, or modification is still covered by one or more claims of all applicable patents. If the redesigned product line is not covered by one or more claims of one of the patents, immediately discontinue marking the product line with this patent.
- Periodically review all patent numbers on every product to ensure expired patents are no longer marked. If a patent is expired, immediately discontinue marking the product with this patent.
- Instruct manufacturing to immediately update, retool or revise manufacturing or labeling equipment upon notice that a patent number can no longer appear on housings, labels, casings, or the like for a particular product – and have systems in place to make certain the markings have been changed or updated on the products before shipment.
In existing litigation:
- If a patent has an adverse claim construction or summary judgment ruling, analyze all product lines marked with that patent number with counsel. If the product no longer falls within the claim construction ruling, discontinue marking the product line with the patent.
- When defending a patent suit, obtain an opinion as to whether the patent holder's products comply with the false marking statute. If so, file or amend counterclaims to assert the statute. A successful claim could mean a windfall from any penalties assessed.
By taking prudent steps to wisely mark products with appropriate patent numbers, relying on opinions of counsel with regard to marking, and inspecting products to make certain that expired or non-applicable patent numbers have been removed, it is likely false marking penalties from inadvertent mistakes can be avoided. But, as the facts of the Forest Group case suggest, ultimately there is no substitute for a good pair of eyes.
1 Forest Group, Inc. v. Bon Tool Co, 590 F.3d 1295 (Fed. Cir. 2009).
2 During trial, the evidence showed that Forest sold the thirty-eight falsely-marked stilts at prices between $103 and $180.
3 Forest alleged that its profit margin was approximately 40% of the price of the goods.
4 Forest Group, Inc. v. Bon Tool Co., 2010 U.S. Dist. LEXIS 41291 (S.D. Tex. Apr. 27, 2010).
5 Id. at *2.
7 See Forest Group, 590 F.3d 1295.
8 See London v. Everett H. Dunbar Corp., 179 F. 506 (1st Cir. 1910).
9 Forest, 590 F.3d at 1304.
11 Id. ("In the case of inexpensive mass-produced articles, a court has the discretion to determine that a fraction of a penny per article is a proper penalty.").
12 Forest Group, 2010 U.S. Dist. LEXIS 41291 at *2.
13 If a theme can emerge from these most recent cases, it appears that companies with large patent portfolios that sell consumer products, i.e., companies that are “patent sophisticated,” may be the ones most vulnerable, initially, to the false marking statute. Moreover, these types of companies are also most likely to sell products in volumes that would garner the most damages for a qui tam litigant, thereby further increasing their attractiveness as targets. Ashley L. Kirk and Jeffrey S. Whittle, Beware: First Round of Cases Hits the Courts After Federal Circuit Clears the Way for Large False Patent Marking Fines, 79 Pat. Trademark Copyright J. (BNA) 649 (March 26, 2010), available online here.
14 The Senate has pending a Patent Reform Amendment, Senate Bill S.515, and the House has introduced H.R. 4954. Both pieces of legislation require that the plaintiff in a 35 U.S.C. § 292 action must have suffered a competitive injury as a result of the false markings.
15 646 F. Supp. 2d 790 (E.D. VA 2009).