March 17, 2011

False Marking Claims: Endangered, But Not Extinct

Since 2009, companies have increasingly faced claims for inaccurate labeling regarding patents covering their products. Exposure for these claims can reach into the hundreds of millions of dollars. While a series of recent developments have restricted the scope of such claims, companies still need to be vigilant to ensure that their products are properly marked, and that there is communication between the IP group and marketing with regard to covered products and patent life cycles.

It is well known that companies routinely label (or “mark”) their products as being covered by certain patents. Indeed, patent law strongly encourages companies to mark products because of the public notice function it serves and the interplay with patent infringement damages. Since inaccurate patent markings serve no public notice function, patent law also discourages inaccurate marking of products. For intentionally falsely marking a product, the patent statute provides for a fine of $500. While this statute has been on the books for well over 100 years, it was rarely litigated until 2009.

In 2009, the court that hears all appeals of patent cases, the Federal Circuit, decided that a falsely marked item could expose the marking company to a penalty of $500 per product sold. For consumer product companies, this arguably created a potential exposure of millions, if not billions of dollars, half of which is shared with the government. In fact, in one case, the claim was for $10.8 trillion for including an expired patent on packages of coffee lids.

The dangers of inaccurate marking are demonstrated by a recent case in California against King Tuna. In that case, a competitor alleged that King Tuna had falsely promoted its tuna products as having been treated by a patented process. The district court agreed, and, on February 24, 2011, it assessed damages under the Lanham Act, and an additional penalty under the false marking statute of $1.8 million.

Since a false marking claim may be brought by any person, ostensibly on behalf of the U.S. Government, the Federal Circuit’s 2009 decision set off a stampede of litigation. Since 2009, plaintiffs filed over 1,000 false marking suits. Many of these lawsuits related to products sold that were marked with patent numbers that had once covered the product, but had since expired. And many of these lawsuits alleged nothing specific about the defendant company’s intent, beyond the mere fact that a product had been sold with the marking of an expired patent.

On March 15, 2011, in the case In re BP Lubricants USA Inc., the Federal Circuit toughened the pleading standard for claiming false marking. The false marking statute has always required proof that defendants intended to deceive the public, but false marking plaintiffs have often filed vague allegations that that the defendant is “sophisticated,” and that it “knew or should have known” that its patent markings were deceptive. The court rejected such pleadings as inadequate and required that the pleadings meet the heightened standards for allegations of fraud, namely that “a party must state with particularity the circumstances constituting fraud or mistake.”

Now, false marking complaints must identify “the specific who, what, when, where, and how” of the alleged false marking fraud. Thus, the mere fact that a product is sold and marked with an expired patent will no longer be sufficient to sustain a claim. The Federal Circuit held that parties must allege facts by which a court can reasonably infer fraud. The court stated that, even if specific individuals were not named, it might approve of a claim “that the defendant sued a third party for infringement of the patent after the patent expired” or if it alleged that the defendant had “made multiple revisions of the marking after expiration.”  The court’s own examples demonstrate how particularized these claims must now be.

False marking claims may become less frequent for other reasons. As part of patent reform legislation, Congress is considering curtailing false marking suits. One patent reform bill recently passed by the Senate would restrict parties who could file such suits to only competitors or the U.S. government, and would permit penalties to be recovered by the government only. Moreover, in one recent district court case in February 2011, and re-affirmed by the same judge last week, a federal judge in Ohio found the false marking statute to be unconstitutional. That decision has limited precedential value, because it was decided by a district court, and the issue has not yet been decided by any appellate court or any other district court, although it appears likely that the Federal Circuit will consider the issue soon.

These developments suggest that false marking claims are going to be increasingly rare, but not extinct. While the stampede to file false marking complaints may have ended, companies should remain vigilant to ensure that their products are accurately described and accurately marked with patents.