• False Marking Penalties Dramatically Increased by Recent Federal Circuit Decision
  • February 1, 2010 | Author: James Moore Bollinger
  • Law Firm: Troutman Sanders LLP - New York Office
  • Recently in The Forest Group, Inc. v. Bon Tool Company, the Federal Circuit issued a unanimous decision establishing a new standard for assessing the size of the penalty in an action for false patent marking.  The new rule of Forest Group has the potential to greatly increase the use of this cause of action as both a defense in a patent dispute and an affirmative qui tam private cause of action. 

    The Patent Act makes it illegal to mark a product with a patent number for the purpose of deceiving the public into believing the product is covered by that patent.  Accused infringers are the entities most likely to bring a cause of action for such “false marking,” usually as part of their defense to an allegation of infringement.  Violators of this provision also can be sued in federal court in a separate qui tam action, which can be brought by any person with the penalty split 50:50 between the plaintiff and the U.S. Government. 

    In this decision, the Federal Circuit first affirmed the false marking finding against the plaintiff, holding that the required “intent to deceive” was established where the product (construction stilts) was marked after an adverse summary judgment/claim construction ruling that pushed the product outside the bounds of the patent claims. 

    It is the second aspect of the Court’s ruling, on the penalty, that is far more dramatic.  The Federal Circuit held that the false marking statute’s $500 maximum penalty was to be assessed on a per falsely-marked unit basis, as opposed to the century-old prior standard, which assessed a maximum penalty of $500 per false-marking decision.  In so doing, the Federal Circuit effectively changed what was routinely thought of as a nominal $500 fine for false marking an entire production run of products, to a potentially multi-million dollar verdict for false marking--where each and every manufactured unit carries with it its own maximum $500 fine. 

    To illustrate the impact of this change, a production run by a patent owner of 10 million mismarked units, authorized immediately after an adverse summary judgment ruling, could translate into $5 billion of potential exposure to the patentee under the new rule, where the exposure was a mere $500 under the old rule.  Not only did the Federal Circuit recognize the potential increased litigation that this change might trigger, but it also found that this is precisely what Congress intended in drafting the current statute 58 years ago. 

    In addition to an increased number of independent qui tam claims, the new more expansive rule will likely create new opportunities to gain leverage in defending patent claims from a practicing patent owner.  It will also provide a substantial incentive for practicing patent owners to carefully evaluate each product they sell before marking them with a patent number - for this same reason. 

    Additional Discussion Points

    The Forest Group decision delves into an issue that sees very little appellate review.  False marking claims were largely resolved at the District Court level applying a First Circuit rule from a 1910 decision, London v. Everett H. Dunbar Corp., 179 F. 506 (1st Cir. 1910).  In that decision, issued 100 years ago, the false marking statute was construed as limiting the penalty to not less than $100 - but, more importantly, to “impose a single fine for continuous false marking.” 

    Noting that this statute was rewritten years after the London decision in 1952, the Federal Circuit applied a “plain meaning” analysis to the more recent statutory language, and found that each “offense” was tied to an improperly marked “unpatented article” and not the mismarking decision per se.  Support for the change in penalty assessment came from the changes made to the statute in the 1952 Act.  Under the prior 1870 statute as construed by the London court, the penalty for each offense was not less than $100.  In contrast, the 1952 statute made the penalty not more than $500 per offense.  This change of the penalty from a minimum to a maximum fine eliminated the policy considerations set forth in London of not imposing disproportionate fines for the false marking of inexpensive articles.  Furthermore, Congressional intent was not contrary to the Federal Circuit’s plain meaning construction of the statute. 

    As noted by the Court in an extended policy discussion, the prior rule offered little disincentive to false marking as the effective penalty was dwarfed by costs of a typical patent litigation:  “it seems unlikely that any qui tam plaintiffs would incur the enormous expense of patent litigation in order to split a $500 fine with the government.” The new rule, however, allows future District Courts to consider a far broader range of penalties - both small and large - to better match the conduct.  As the Federal Circuit panel noted, “in the case of inexpensive, mass produced articles, a court has the discretion to determine that a fraction of a penny per article is the proper penalty.” That same discretion, however, extends upwards, potentially resulting in substantial penalties -- a fact that a new class of false marking trolls will surely notice.