Stites & Harbison, PLLC

Our recent Client Alert (12/26/2009) discussed the potential risks highlighted by recent lawsuits against false marking patentees who violate 35 USC § 292.  The level of risk for significant monetary penalties under §292 has now been clarified by the United States Court of Appeals for the Federal Circuit (“CAFC”).  The CAFC also acknowledged that the legal fee shifting provision of the patent code would be available at the discretion of the district courts.

Section 292 states, in relevant part, that any person found to have falsely marked “Shall be fined not more than $500 for every such offense,” half of which goes to the plaintiff and half to the United States.  35 U.S.C. § 292(a) (emphasis added).  The Federal Circuit’s opinion in Forest Gp., Inc. v. Bon Tool Co., No. 2009-1044 (Fed. Cir. Dec. 28, 2009), definitively holds that this penalty must be assessed on a per article/product basis, precisely the losing argument made by the individual plaintiff in Pequignot v. Solo Cup Co., 2009 U.S. Dist. LEXIS 76032 (E.D. Va. August 25, 2009), a case now on appeal to the CAFC.  The “possible rise of ‘marking trolls’ who bring litigation purely for personal gain” has just been made more possible by Forest Group’s interpretation of Section 292’s penalty provision.  Id. at *12.  The per article standard gives hope to individual plaintiffs of a big payday if the defendant has mass produced the falsely marked product.

In Forest Group, the district court found that the patentee committed false marking, but in holding that the violation constituted one continuous offense, assessed a total penalty of only $500.  Overturning the district court’s decision, the Federal Circuit explained that the “plain language of the statute does not support the district court’s penalty of $500 for a decision to mark multiple articles. Instead, the statute’s plain language requires the penalty to be imposed on a per article basis.”  Id. at *8.

Forest Group dismissed the “continuous act” rationale established by London v. Everett H. Dunbar Corp., 179 F. 506 (1st Cir. 1910) and its progeny, mainly because it interprets the false marking language from the Patent Act of 1870.  Id. at *9.  The Act was amended by Congress in 1952, changing in language and in underlying policy rationale.  Policy-wise, Forest Group states that generally, “[a]cts of false marking deter innovation and stifle competition in the marketplace.”  Id. at *11.  Logically, “[t]he more articles that are falsely marked the greater the chance that competitors will see the falsely marked article and be deterred from competing.” Id. at *11-12. Therefore, the per article penalty “is consonant with” the false marking statute’s underlying purpose. Id. at *12.

Indeed, as Forest Group notes, “Congress’ interest in preventing false marking was so great that it enacted a statute which sought to encourage third parties to bring qui tam suits to enforce the statute.” Id. The Court rejected the patentee’s arguments that the per article penalty should not be adopted because it “would encourage ‘a new cottage industry’ of false marking litigation by plaintiffs who have not suffered any direct harm.” Id. Acknowledging “an amicus brief [was] filed in this case by an individual who created a holding company to bring qui tam actions in false marking cases,” the Federal Circuit notes that “[r]ather than discourag[ing] such activities, the false marking statute explicitly permits qui tam actions.” Id. at *12-13. The Court further justified its per article standard by noting that “[p]enalizing false marking on a per decision basis would not provide sufficient financial motivation for plaintiffs—who would share in the penalty—to bring suit. Id. at *13.

Finally, Forest Group reminds courts that the underlying rationale for Section 292 “does not mean that a court must fine those guilty of false marking $500 per article marked.” Id.  The statute provides for a range of penalties, and district courts have the discretion to assess the per article fine at any amount up to $500 per article.  The Court explicitly instructs 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.” Id.  In view of this sliding scale approach to the amount of the penalty, the Federal Circuit notes that district courts have “the discretion to strike a balance between encouraging enforcement of an important public policy [i.e., ensuring that acts of false marking do not stifle competition or innovation] and imposing disproportionately large penalties for small, inexpensive items produced in large quantities.” Id.  When it remanded the question of the amount of the fine, the CAFC did not offer any further practical framework to district courts in setting the amount of the penalty, and this has the potential to result in considerable uncertainty for future defendants. For example, one court could assess a penalty of one dollar per article on one hundred falsely marked products while a second court, on the same facts, could find that ten dollars is the proper rate, thereby imposing a penalty 100 times larger than the first court.  

However, Forest Group provides a clear guideline that will deter district courts from any reliance on the prior cases that cut down fines by looking at increments of time (e.g., a day, a week) when false marking is used.  [See Client Alert - 12/26/2009, pp. 3-4]. 

Patentees must now be very vigilant in their patent marking practices and remove any expired, lapsed or unrelated patent numbers from their product or service promotions.