Out of the Frying Pan and into the Fire – The Brave New World of Patent Marking

Out of the frying pan and into the fire. That is the reaction of many patent owners to the recent decision of the Court of Appeals for the Federal Circuit in The Forest Group, Inc. v. The Bon Tool Company, 590 F.3d 1295 (Fed Cir. 2009). Patent owners who make or sell articles covered by patents are required to mark those articles with the applicable patent numbers, or they may lose the ability to recover damages for infringement. On the other hand, under the Federal Circuit’s opinion in Forest, a patent owner who marks articles with patent numbers that do not cover the article can be tagged with potentially huge false marking penalties. The Forest opinion has not gone unnoticed. A new class of plaintiffs, the so-called “marking trolls” has launched a torrent of lawsuits, seeking to cash in on the Forest opportunity.

In order to fully appreciate the impact of Forest, it is critical to understand both sides of the issue. This article first looks at the significance of the statutory obligation to mark covered articles with patent numbers. The article then turns to consideration of the policies underlying the statutory prohibition on false marking. Last, the article review the monetary consequences of false marking and some of the issues left unanswered by Forest.

The Statutory Obligation to Mark

Section 287 of Title 35 requires that “patentees, and persons making, offering for sale, or selling within the United States any patented article for or under them or importing any patented article into the United States may” (emphasis added) mark the covered article with the applicable patent number. Stated otherwise, if the patent owner makes, sells or imports an article covered by its patent, or has licensees who make, sell or import such an article, such an article “may” be marked with the number of the patent covering the article. The use of the permissive “may” in the statute is not really permissive at all. The statute further provides that if the patent owner or its licensee fails to mark, “no damages shall be recovered by the patentee in any action for infringement, except on proof that the infringer was notified of the infringement and continued to infringe thereafter,” in which event damages are available only for periods following the date on which notice was given. In many cases this means that damages are available only after a lawsuit has been filed.[1]

The importance of compliance with the marking statute is borne out by the Federal Circuit’s opinion in Amsted Industries, Inc. v. Buckeye Steel Castings Co., 24 F.3d 178 (Fed. Cir 1994). In that case, the patent owner did not mark, nor did its licensee. The infringer, however, clearly knew of the patent and his infringement of it. Discovery revealed that the lawyer for the infringer told his client that its device “would likely to be found to infringe [the patent owner’s] patent.” 24 F.3d at 182. Notwithstanding that the infringer actually knew of the existence of the patent and knew that it likely infringed, damages were limited to the period after the date on which actual notice of infringement was given by the patent owner.

The policy behind the marking statute is simple. In the absence of some other legal impediment,[2] competitors are free to copy articles that are not patented. Requiring the patent owner and its licensees to mark patented articles puts competitors on notice that the article is protected by a U.S. patent. Patent marking is designed to put potential infringers on notice so as to minimize the possibility that they will invest time, money and effort in making an infringing article that could ultimately result in a large money judgment for patent infringement.

Given the substantial loss of right that can occur if patent owners do not comply with the marking statute, the incentive for patent owners to mark their patented articles with the applicable patent numbers is very high. If, for example, the patent owner does not mark, and an infringer makes a large number of sales before receiving actual notice of the patent and its infringement thereof, the patent owner will lose the opportunity to recover damages for all pre-notification sales. Similarly, if there is a large number of infringers, and the patent owner is only able to sue them one at a time, significant time (and infringing sales) may pass between the filing of a lawsuit against one infringer and the patent owner’s ability to pursue other infringers. The passage of time will almost inevitably bring with it the accrual of damages resulting from sales of infringing articles by potential defendants. If the patent owner wishes to have the opportunity to capture such damages, it is critical to comply with the patent marking statute.[3]

The Prohibition Against False Marking

Section 292 of Title 35 prohibits “false marking.” Specifically, the statute provides that “[w]hoever marks upon, or affixes to, or uses in advertising in connection with any unpatented article, the word patent or any word or number importing that the same is patented for the purpose of deceiving the public . . . [s]hall be fined not more than $500 for every such offense.” Half of the fine goes to the government, and the other half goes to the plaintiff asserting the false marking claim.[4]

The policy underlying the prohibition against false marking is based on the premise that acts of false marking deter innovation and stifle competition in the marketplace. According to the Forest court, “If an article that is within the public domain is falsely marked, potential competitors may be dissuaded from entering the same market” and “[f]alse marks may also deter scientific research when an inventor sees a mark and decides to forego continued research to avoid possible infringement.” Last, “[f]alse marking can also cause unnecessary investment in design around or costs incurred to analyze the validity or enforceability of a patent whose number has been marked upon an article with which a competitor would like to compete.”[5]

The fact that false marking is prohibited and that it can result in a fine of up to $500 for every offense has been clear for a long time. What was not clear was what constitutes an “offense,” and hence how the fine is to be calculated. Trial courts faced with this issue took a variety of approaches. One court found the false marking of 15,000 lanterns over a period of two years as a single “offense.”[6] Other courts have imposed a time-based approach for determining what an “offense” is, imposing penalties for each day or week that false marking occurred.[7] Because it was unclear what constituted an “offense,” fines were usually low and the number of false marking claims was relatively small.[8] Forest, however, has dramatically changed the false marking landscape.

Forest Group, Inc. v. Bon Tool, Inc.

The article at issue in Forest was a spring-loaded stilt of the type often used by construction workers in hanging sheetrock. The two inventors, Lin and Armstrong, filed an application for a patent, which ultimately issued as the ‘515 patent. The ‘515 patent was assigned to Forest. Mr. Lin and Mr. Armstrong formed separate companies to sell stilts. Mr. Lin created Forest Group, Inc. (“Forest”), and Mr. Armstrong created Southland Supply Company, who sold stilts to Bon Tool (“Bon”). Forest eventually sued Bon for infringement of the ‘515 patent. Bon counterclaimed, alleging that Forest had falsely marked its stilts with the ‘515 patent number, when the Forest stilts were not in fact covered by the ‘515 patent.

The trial court ruled on summary judgment that the Bon stilts did not infringe the ‘515 patent because they did not include a “resiliently lined yoke.” Significantly, this ruling followed an earlier summary judgment ruling by another court in a related case to the same effect. The ruling that the ‘515 claims required a “resiliently lined yoke” also gave rise to the false marking claim. Specifically, the trial court in Forest found that the Forest stilts, like the Bon stilts, did not include a “resiliently lined yoke.” As a result, Forest’s marking of its stilts with the ‘515 patent number constituted false marking. The trial court in the Forest case found that there was a deceptive purpose to the false marking, beginning at the date of the first summary judgment ruling. The trial court found that Forest placed at least one order for stilts marked with the ‘515 patent number after the first summary judgment ruling, and fined Forest $500 for a single offense of false marking. Forest appealed.

On appeal, the Federal Circuit ruled that a claim for false marking requires proof of two elements, namely: (1) marking an unpatented article and (2) intent to deceive the public. There was no dispute about the first element in Forest. As to intent, the Federal Circuit held that “a party asserting false marking must show . . . that the accused party did not have a reasonable belief that the articles were properly marked,” and that “[a]n assertion by a party that it did not intend to deceive, standing alone, ‘is worthless as proof of no intent to deceive where there is knowledge of falsehood.’” The Federal Circuit then held that the first grant of summary judgment of non-infringement based on the lack of a resiliently lined yoke was sufficient to put Forest in a position where it did not have a reasonable belief that its stilts were properly marked. Forest offered no excuse for its continued marking after the summary judgment ruling. Therefore, that ruling was not surprising. What was surprising was the Federal Circuit’s ruling on what constitutes an “offense” for purposes of assessing damages under the false marking statute.

Relying almost exclusively on the language of the false marking statute, the Federal Circuit held that “each article that is falsely marked with intent to deceive constitutes an offense under 35 U.S.C. § 292” and that “[false marking] injuries occur each time an article is falsely marked.” That means that if a million widgets are falsely marked, a million “offenses” have occurred, and each is subject to a fine. And what of the amount of the fine? The statute allows a fine of “not more than $500” for each offense. If each offense resulted in a $500 fine, the offense in this hypothetical could be $500,000,000. The article in question might have only cost $10, which means that such a fine could easily put the patent owner out of business. In response, the Federal Circuit pointed out that the statute provides district courts with discretion “to strike a balance between encouraging enforcement of an important public policy and imposing disproportionately large penalties for small, inexpensive items produced in large quantities.” Indeed, the Federal Circuit opined that “[i]n 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.”

Ramifications of Forest and False Marking Precedent

In Forest, both the policy and practical issues were fairly straightforward. The patent owner had sued a competitor for patent infringement, the competitor obtained a summary judgment of non-infringement, and the finding of false marking flowed from the summary judgment ruling. The Federal Circuit then determined that the false marking penalty must be calculated on an article-by-article basis. How the Forest district court is to determine what the amount of the fine should be, e.g., where the line falls in the spectrum between “a fraction of a penny” per article and $500 per article was not addressed by the Forest court. That issue and others raised by Forest are far-reaching and their resolution is anything but straightforward.

The Floodgates Have Opened

The Federal Circuit acknowledged Forest’s argument that an article-by-article calculation of false marking fines would lead to a “cottage industry” of false marking suits and a flood of false marking litigation. Forest was correct. By the count of at least one commentator, there were over 160 false marking lawsuits filed between January 1, 2010 and March 30, 2010.[9] Many of these cases are against manufacturers of widely sold consumer goods. The defendants include Clorox, Glad Products, Maybelline, Fujifilm Corporation, Allergan, Adobe Systems, UPS, Colgate-Palmolive, Playtex, Timex, Procter & Gamble, Bose, 3M, S.C. Johnson & Son, and other well known brand names. The reason these giants of industry have been named is simple. Because the government receives half of whatever penalty is determined, a so-called “marking troll” has to find a false marking claim that involves millions of “offenses” in order to make pursuit of the false marking claim economically viable.

Who is On First, Who Is On Second and Who Gets the Money?

The plaintiffs in the post-Forest false marking litigation surge are almost universally not competitors of the defendants in those cases. Instead, they are what some commentators pejoratively refer to as “marking trolls.” “Marking trolls” are individuals who have little or no connection to the technology disclosed and claimed in the patent. They are, in many cases, individuals or consortia who view Forest as a bonanza for obtaining large recoveries with little downside risk. That is because the false marking statute provides that “any person may sue for the penalty” provided for by the statute. In other words the false marking claim has no requirement for standing, thus the claimant has no duty to show that the claimant is somehow damaged by the acts complained of. That means that anyone, regardless of their connection or lack of connection as a competitor of the products which are the subject of the false marking claim can sue. And in fact, lots of people have sued, and virtually none of them has been harmed in any way by the alleged false marking. It seems evident that the primary motivation for the current raft of false marking claims is recovery of windfall profits.

The fact that anyone can bring a false marking claim, combined with the post-Forest financial incentive to bring such claims, has raised troubling practical and jurisdictional issues. Because anyone can bring a false marking claim, can separate plaintiffs bring separate claims against the same patent owner for marking the same article with the same patent?[10] If two or three or twenty plaintiffs file such lawsuits, which one should proceed, and where? In false marking litigation, as in conventional patent litigation, some districts will undoubtedly emerge as more generous to plaintiffs than others. Where there are similar false marking claims in multiple districts, should they proceed in the first-filed district, or will opportunistic plaintiffs be allowed to move cases more quickly in generous districts? If there is a recovery, who should receive it? Should it be the first plaintiff to file, or should all plaintiffs have to divide the spoils? For example, the false marking statute provides for a fine of “not more than $500” per offense. Assume that plaintiff A prevails and is awarded $2 per offense and that there are 10,000 offenses, for a judgment of $20,000. Assume that plaintiff B also prevails in a different forum, and is awarded $3 per offense, for a judgment of $30,000. The fine is now up to $5 per offense. Does that mean that other plaintiffs can continue to sue until the maximum of $500 per offense is reached, or is there presumptively one value for each offense, and must that value be divided between all plaintiffs? Which court should decide what should happen? Forest does not offer any hints, much less any solutions, to these questions.[11]

False Marking Issues for Live Patents

Forest involved a claim that an article was falsely marked with a live (unexpired) patent. The summary judgment order by the Forest trial court and another district court that the ‘515 claims required a “resiliently lined yoke,” combined with the fact that the Forest stilt had no such yoke, was sufficient evidence for the Federal Circuit to find that Forest did not have a reasonable belief that its stilt was covered by the patent and that its continued marking of the stilt was deceptive. The summary judgment order in Forest resolved all of the issues in the case, allowing Forest to appeal. A problem not addressed in Forest is what the patent owner is to do about marking after the issuance of adverse interlocutory orders or while the case is on appeal. If the patent owner does not stop marking, he risks a finding of deceptive intent. On the other hand, patent marking must be substantially consistent and continuous in order for the patent owner to avail itself of the constructive notice provisions of section 287. Forest thus puts the patent owner on the horns of a dilemma.

Assume, for example, that a district court enters a Markman ruling that construes the claims in a way that would exclude the patent owner’s article (or that of its licensee) from the scope of the patent in suit. The Markman ruling is interlocutory in nature, and therefore generally not yet appealable. If the patent owner, concerned about false marking claims, stops marking its article, it will have lost the ability to pursue damages against other infringers in reliance on the constructive notice provisions of section 287. Given the Federal Circuit’s strict construction of the notice provisions of section 287, the resulting waiver of pre-filing damages may persist even if the Federal Circuit later reverses the Markman ruling on appeal. On the other hand, if the patent owner does not stop marking, the adverse (but unappealable) ruling may give rise to an inference of deceptive intent and result in liability for false marking.

A summary judgment order of non-infringement or invalidity by the district court will in many cases raise similar issues. Assume, for example, that the complaint asserts patent infringement and a variety of other claims, such as trademark infringement, unfair competition, etc., or that the defendant counterclaims for infringement of its own patents or asserts other substantive counterclaims. A summary judgment ruling that effectively excludes the patent owner’s product from the scope of the claims or summary judgment of invalidity would not result in a final appealable judgment because other claims would remain to be adjudicated. Without a right of immediate appeal, what is the patent owner to do about marking during the 2-3 year period the remaining claims move toward trial, and the additional time consumed by appeal? Assume that the patent owner continues to mark, based on the assertion that it has a good faith belief that the article is covered, and that the article is a big seller, say 100,000 units a year. The potential false marking fine under section 292 if the appeal turns out badly could be substantial.

If, on the other hand, the patent owner stops marking, other infringers may claim that the patent owner has waived years worth of damages by failing to comply with the marking statute. Alternatively, if the patent owner opts for putting infringers on actual notice pursuant to section 287, such notice may subject the patent owner to declaratory judgment actions in districts friendly to the infringer and unfriendly to the patent owner. Such actions could exponentially increase the cost of enforcement for the patent owner, and may also impact the potential for adverse outcomes. None of these scenarios is particularly appealing to the patent owner, and all are fraught with risk.

False Marking Issues for Expired Patents

Many patent marking trolls believe that the simplest case for false marking is where patent owners have marked patent numbers on articles where one or more of the patents in question has expired. The argument is that an article cannot be covered by a patent that does not exist, so the “false marking” part of the plaintiff’s proof easy. All that remains to be proven is that the patent owner had the required intent, i.e., that the patent owner had no reasonable belief that the article was covered by the patent in question. Marking trolls have argued that proof of expiration is sufficient, by itself, to prove deceptive intent, because no reasonable could possibly form a reasonable belief that an article is covered by an expired patent. Marking trolls rely on statements by the Federal Circuit in Clontech Laboratories v. Invitrogen Corp., 406 F.3d 1347 (Fed. Cir. 2005) to the effect that a false marking, combined with knowledge of the falsity, “warrant[s] drawing the inference that there was a fraudulent intent,” and that this inference cannot be rebutted by “the mere assertion by a party that it did not intend to deceive.” Id. at 1352.

Patent owners, on the other hand, have successfully argued that marking an article with an expired patent that once covered the product is fundamentally different than marking an article with a live patent that never covered the article. For example, in Pequignot v. Solo Cup Company, 1:07cv897 (LMB/TCB) E.D. Va. (8/25/2009) Judge Leonie Brinkema held that the Clontech presumption of deceptive intent is rebuttable. She further held that where the false markings at issue are expired patents that previously covered the marked products, the Clontech presumption is weaker, because the possibility of actual deceit, as well as the benefit to the false marker, are diminished. Specifically, Judge Brinkema held that any person confronted with an article marked with an expired patent can go to the Patent Office website and quickly and easily determine whether the patent is expired. The likelihood of deceit in those circumstances is greatly reduced. Based on facts peculiar to the Solo case, including evidence that the patent owner relied on the advice of counsel in attempting to comply with the marking statute, Judge Brinkema granted summary judgment to the patent owner. The case is now on appeal to the Federal Circuit, with argument set for April 6, 2010.[12]

In the past, some patent owners have attempted to deflect the “expired patent marking equals false marking” argument by marking their articles with a number of patents, or by stating that the article “may be covered” by “one or more” of a list of patents. The theory is that if the article was covered by any claim of any one of the list of patents, the article was “patented” and no intent to deceive could be found. The Federal Circuit rejected that theory in Clontech, finding that false marking occurs (assuming deceptive intent) unless a marked article is covered by at least one claim of every patent marked on that article. Id. at 1356-57. On the other hand, while Clontech makes it clear that conditional patent marking language does not provide a safe harbor, a number of courts have considered such language when dealing with the issue of deceptive intent.[13]

What Is the Measure of False Marking Damages When Marking Is Not On the Article?

In addition to prohibiting marking or affixation of a patent number on or to an unpatented article, the false marking statute prohibits the use in advertising of the word “patent” or any word or number importing that an article is patented when it is not. It is therefore an “offense” under the false marking statute to advertise that an article is patented when it is not. The question remains, however, as to how the statutory fine is to be calculated for such “offenses.” The Forest opinion clearly states that the fine should be calculated on an article-by-article basis, where the false marking is actually placed on the article. Forest does not address how the fine should be calculated where the false marking occurs in advertising, and is not actually placed on the article itself, but instead occurs in advertising or marketing materials. There are a variety of potential resolutions to this issue.

Following the Federal Circuit’s lead in Forest, district courts could impose the fine on an article-by-article basis for every article sold during the time the advertising was in place, and for a reasonable time thereafter. Alternatively, since the false advertising occurs when the advertising is distributed / aired, every separate airing / distribution could be characterized as a separate “offense” and the fine calculated accordingly. This could yield potentially different results, depending on the media in which the advertising is distributed. If traditional print media is used, the trial court could simply count the number of advertising pieces printed / distributed. For TV advertising, the court could count the number of airings, or alternatively, multiply the number of airings times the number of false marking statements in each airing. Internet advertising presents a more difficult calculus. Most sophisticated internet advertisers use web analytics to determine how many visits their site has, how many visitors click on particular links, and how much revenue a particular advertisement generates. Using this information, a false marking plaintiff could argue that every viewing of an ad that includes false marking statements should be an “offense.” The reality, however, is that the ratio of purchases to views, even for the most successful internet ads, can be quite low. Calculating the fine based on the number of views of internet advertising may therefore unfairly inflate the false marking fine awarded. In the end, lawyers and trial judges are likely going to have to figure out where the trails ought to be in the wilderness of false marking claims.

False Marking and False Advertising Claims

Prior to Forest, it was common for false marking claims to be asserted both as a straight section 292 claim and alternatively as a false advertising claim under the Lanham Act. When false marking claims are asserted by competitors of the patent owner, the combination of false marking and false advertising claims makes perfect sense. In the post Forest environment, however, false advertising claims may not match up well with false marking claims.

False advertising claims under the Lanham Act may only be brought by one “who believes that he or she is likely to be damaged” by a violation of the Lanham Act. This requirement in turn generally requires that the plaintiff in a Lanham Act case be a competitor of the defendant. Additionally, a plaintiff in a Lanham Act case must prove that the false statement was material to potential purchasers of the goods or services in question. Section 292 false marking claims do not require “damage” in the Lanham Act sense, nor is materiality a relevant consideration in determining whether statutory false marking has occurred.

The differences between false marking and false advertising claims appear not to have escaped some members of Congress. Specifically, Senator Patrick J. Leahy recently proposed a revision to the Patent Reform Act of 2010 (S.B. 515) to provide that false marking claims under § 292 can only be asserted by those persons who have “suffered a competitive injury as a result of a violation.” Representative Darrell Issa has introduced H.R. 4954, a parallel bill in the House of Representatives. If section 292 is so amended, the age of the marking troll will expire with a whimper, not with a bang.

Recommendations

Patent owners should design and implement policies that allow them to accurately police their own marking practices. The expiration dates of patents and the articles on which they are marked should be overlaid with dates for printing of labels, advertising runs, and other advertising activities that may impact the marking issue. Expired patents should be removed from articles and associated advertising. Where patent marking is accomplished by molding the patent number into the article, careful attention should be determining whether portions of the mold containing the marking may be changed without the expense of re-designing or re-tooling the entire mold. If that is not possible, there should be a plan in place to change the molds as quickly as reasonably possible. In the meantime, it may be possible to put a sticker or other label over inaccurate markings.

Patent owners who are sued in multiple districts for identical false marking claims ought to consider moving to consolidate all related actions in one court. If multiple false marking plaintiffs can be forced to divide up a single recovery, false marking litigation may become less attractive and fewer false marking lawsuits will be filed.

Conclusion

The Forest opinion has undoubtedly changed the face of false marking litigation. Some argue that Forest has finally given the false marking statute teeth. Others argue that Forest has given birth to a new generation of trolls, who seek windfall damages and offer no countervailing contributions to industry or society. One thing is clear, however. Patent owners must pay careful attention to their marking practices, lest they find themselves in the middle of a very hot skillet.