The Patent Reform Act Sounds the Death Nell For False Marking Trolls
While most of the publicity surrounding the recent enactment of the America Invents Act has focused on our change to a first-to-file patent system, one of the little known provisions of the Act created an immediate and substantial victory for all U.S. manufacturers who produce products “marked” with U.S. patent numbers. Effective September 16, 2011, all “false patent marking” cases must be brought by a competitor and the plaintiffs in these cases can no longer collect up to $500 for each article of manufacture that was improperly marked with an expired or inapplicable patent number.
The Rise of False Marking Litigation
Since the 1950’s, it has been illegal for manufacturers to mark their products, packaging or advertising with “false” patent numbers. In this context, a “false” patent number is one that does not apply to the product being sold. This means that if a product was originally marked with a valid and applicable U.S. patent number, and the term of that patent later expired, the use of the expired patent number was “false” according to the statute.
Like many “whistleblower” statutes, this law was intended to protect the public and, therefore, allowed anyone to act as a “private attorney general” to enforce the statute. As such, persons with no connection to the industry itself (even lawyers!) could file these lawsuits on behalf of the government and collect statutory damages for technical violations of the statute.
The reason this law was little-used for more than 50 years was because trial courts had almost universally interpreted the law to allow for only a single $500 statutory damages award for each improper patent number that was used. Thus, the manufacturer of more than 20 billion plastic lids for styrofoam cups could only be exposed to a $1,000 award for its use of two expired patent numbers on those lids.
Nevertheless, in December 2009, the Court of Appeals that is assigned all of the patent cases from across the United States interpreted the false patent marking statute as requiring that the statutory penalties be imposed on a per-article basis rather than a per-offense basis. This turned the $1,000 exposure faced by the Solo Cup Company for the Solo plastic cup lids into an exposure greater than $10 trillion. In reaching this decision, the Appellate Court acknowledged that its ruling would create a “new cottage industry” in false marking lawsuits, but ruled that it was up to Congress, not the Courts, to change the statute. The Court of Appeals was correct on both accounts.
In 2010, more than 500 false marking lawsuits were filed in federal courts across the United States. Over half of these suits were filed by just 8 plaintiffs, each of which being a newly formed “corporation.” Since most manufacturers considered these to be “nuisance” lawsuits, and since patent litigation is extremely expensive, many of these cases settled. Between May 2010 and August 2011, 427 false marking cases settled. Of those cases, the average total settlement amount was approximately $48,500 (for a total of approximately $20,700,000) in settlements.
These cases became even more dangerous when taken to trial. In February 2011, a trial judge in Southern California issued a decision involving competitors in the preserved seafood market. After finding that the plaintiff had marked its products with a valid U.S. patent, but that the plaintiff was not processing its product using the patented method, the Court ruled that the patent holder was required to disgorge 20 percent of its revenues for the product in question, resulting in an additional award of $1.5 million in damages. In the same Order, the Court assessed a $1 per article penalty, resulting in an additional $1.8 million statutory award. (King Tuna v. Anova Food, 2011 U.S. Dist. LEXIS 18774).
While the Trolls May Have Been Ousted, False Marking Litigation is Not Dead
Three days after the America Invents Act was signed by the President, one of the chief trial judges in the Eastern District of Texas dismissed several false marking cases on its own motion. The Court stated: “The statute notes that the amendments made shall apply to all cases that are pending on or commenced on or after the Acts date of enactment, which was September 16, 2011. The Court has reviewed plaintiff’s complaint in light of the new amendments to the law. In accordance, the Court holds that plaintiff’s complaint is dismissed for failure to state a claim…. This dismissal is without prejudice for plaintiffs to re-file its complaint in the event plaintiff can prove it has suffered a “competitive injury” and can satisfy the other requirements under the statute.”
As stated above, the amendments to the false marking statute eliminated the ability of anyone to file a false marking lawsuit. Instead, the amendments require plaintiffs to have suffered “competitive injury” in order to have standing to sue. Moreover, while the government can sue for a $500 per-item penalty, competitors can sue only for damages adequate to compensate for competitive injury suffered as a result of the false marking. Finally, the Act states that marking a product with an expired patent number is not a violation of the false marking law, meaning only products marked with patents that never covered the item count as false marking.
As set forth above, as a result of these amendments, it is anticipated that the vast majority of false marking suits will be dismissed in the near future. Only those cases involving competitors who have suffered harm as a result of the false marking will survive. Nevertheless, those that survive remain dangerous. As noted in the seafood case above, lost profits from false marking can result in substantial damage awards. In addition, patent holders who file infringement actions against competitors are likely to see counterclaims for false marking in order to create risk in moving forward with litigation in order to potentially prompt settlement. Manufacturers would be well advised to adopt an intellectual property review system that checks the validity of any patents marked on their products or packaging so as to limit their exposure to false marking cases.