Federal Circuit Interprets False Marking Statute: Expands Patentee Liability

On December 28, 2009, the U.S. Court of Appeals for the Federal Circuit issued a decision that is a significant development for patent owners and licensees. In Forest Group, Inc. v. Bon Tool Co., No. 2009-1044 (Fed. Cir. Dec. 28, 2009), the Federal Circuit interpreted the false marking provisions of U.S. patent law in a way that greatly expands the potential liability of patentees, their licensees, and other parties in product manufacturing and distribution chains. The Federal Circuit held that the false marking statute imposes a penalty of up to $500 per article that is marked with an incorrect patent number for the purpose of deceiving the public.

Because the statute provides that any person may sue for the penalty and split any award with the federal government, this decision likely will encourage suits by plaintiffs seeking windfall damage awards. In response to this decision, patentees and licensees should reevaluate their internal procedures for placing patent numbers on products.

Penalties Apply to Each Falsely Marked Article

The false marking statute states, in relevant part:

Whoever 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 … Shall be fined not more than $500 for every such offense. 35 U.S.C. § 292.

The statute also prohibits falsely marking products with the words “patent pending” or “patent applied for” with the purpose of deceiving the public. The statute has a broad standing provision that permits “any person” to sue for the penalty and split the proceeds with the federal government.

In Forest Group, the Federal Circuit held that the plain language of the statute “clearly requires” that the $500 penalty be imposed on a per-article basis. The Federal Circuit rejected arguments that the false marking statute should be interpreted to impose a single penalty for continuous false marking. The Federal Circuit distinguished an earlier false marking case, London v. Everett H. Dunbar Corp., 179 F. 506 (1st Cir. 1910), which had reached that conclusion. The Federal Circuit noted that the London court was interpreting an earlier, differently worded, version of the false marking statute. Significantly, the earlier statute provided for a $100 minimum penalty, while the current provision imposes a $500 maximum penalty.

The Federal Circuit recognized that its interpretation of the statute might increase the number of false marking lawsuits against patentees. Forest Group had argued that allowing per article penalties would encourage a “cottage industry of false marking litigation by plaintiffs who have not suffered any direct harm.” In fact, an individual who had set up a holding company for the purpose of bringing false marking lawsuits filed an amicus brief in the appeal. The Federal Circuit, however, found that Congress intended for “individuals to help control false marking.”

The Federal Circuit suggested that the potential for an increased number of false marking suits might be diminished by the fact that trial courts have discretion to award per-article penalties less than the $500 maximum:

By allowing a range of penalties, the statute provides district courts the 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. 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.

Forest, slip op. at 13.

Intent to Deceive Still Required

Parties who accidentally mark their products incorrectly are not subject to liability under the statute. The Federal Circuit made clear that the plaintiff asserting a false marking claim must show, by a preponderance of the evidence, that the accused party did not have a reasonable belief that the articles were correctly marked. However, a party’s assertion that it did not intend to deceive “’is worthless as proof of no intent to deceive where there is knowledge of falsehood.’” Forest Group, slip op. at 6 (quoting Clontech Labs. Inc. v. Invitrogen Corp., 406 F.3d 1347, 1352 (Fed. Cir. 2005)).

The Forest Group decision provides a good illustration of what can constitute proof of intent to deceive. Forest Group is the assignee of U.S. Pat. No. 5,645,515, which claims an improved stilt of the type commonly used in the construction industry. Forest Group sued its competitor, Bon Tool, alleging that Bon Tool had sold stilts that infringed the ’515 patent. Bon Tool counterclaimed, alleging that Forest Group had violated the false marking statute by marking its stilts with the ’515 patent even though the patent did not cover Forest Group’s product.

In February 2007, the district court issued a claim construction that was contrary to Forest Group’s reading of the claims at issue and later granted summary judgment of noninfringement against Forest Group. Nevertheless, the district court found that those decisions, by themselves, did not give Forest Group the requisite knowledge that it should no longer mark its products with the number of the contested patent. The district court noted that the patent was written by an experienced patent lawyer, that the inventors did not have strong academic backgrounds, and that neither of them was versed in patent law. However, in November 2007, a court in another lawsuit involving the same patent construed the claims at issue in a manner similar to that of the first lawsuit and likewise granted summary judgment against Forest Group. The district court concluded that after the second adverse ruling, Forest Group had the requisite knowledge that any continued patent marking would be false. Yet, Forest Group continued to mark its products with the patent number after that date. The district court did not believe Forest Group’s claim that it had instructed its manufacturer not to mark the products.

Citing the highly deferential “clearly erroneous” standard of review, the Federal Circuit upheld the district court’s determination that Forest Group had a good faith basis to believe that its products were correctly marked prior to the November 2007 summary judgment order. The Federal Circuit noted, however, that “the quantum of proof regarding Forest Group’s knowledge in this case is quite high” and went out of its way to point out that it is not necessary to have multiple adverse claim construction and summary judgment rulings in order to prove knowledge of falsity.

Because the district court had not determined how many articles were falsely marked by Forest Group after November 2007, the Federal Circuit remanded the case. On remand, the district court will have to determine the number of falsely marked articles and how large a civil penalty, not to exceed $500 per article, should be imposed.

Implications

The Federal Circuit’s holding that the false marking statute imposes a penalty for each improperly marked article creates the potential for significant liability for patentees and licensees. Although the Federal Circuit emphasized the trial court’s discretion to impose a penalty significantly less than the statutory maximum, the statute’s broad standing provision encourages plaintiffs to file lawsuits that may impose costly discovery obligations on patentees and their licensees. For this reason, patentees and licensees likely will need to pay more attention to their product marking decisions.

Specifically, patentees and licensees need to make sure that they have a good faith basis to place their patent numbers on products and continue to make certain the marking is appropriate as products are modified. It also will be important to diligently investigate any assertions that the products are improperly marked. Patentees also will need to establish mechanisms to make certain that products are not marked with expired patent numbers.

Patent licensees who are required to mark as a condition of their license also are affected by this decision. Such licensees may want to consider including in their licenses provisions requiring the patent owner to indemnify them for false marking.

For some parties, it may be too late. The statute of limitations for false marking actions is five years. As a result, some patentees and licensees may already be exposing themselves to financial liability on a much greater scale than they ever anticipated.

Fear of liability, however, should not cause patentees to refrain from marking altogether. Correct marking remains essential to maximizing a patentee’s award of damages against infringers. A correct marking can be made by placing the word “patent” or the abbreviation “pat.” together with the number of the patent on the patented product itself. If the nature of the product does not permit it to be marked, then the packaging should be marked. Although marking is not required for patents that contain only process or method claims, patentees should consider marking end products where feasible.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

George C. Best
Palo Alto, California
650.251.1147
[email protected]

Jeffrey A. Simmons
Madison, Wisconsin
608.258.4267
[email protected]