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A recent federal appellate decision has unleashed a wave of whistleblower suits accusing companies of falsely labeling their products as covered by patents.
In December, a U.S. Court of Appeals for the Federal Circuit ruling steeply increased the potential fines in so-called "false marking" cases, from a typical $500 for an offense to hundreds of thousands, or even millions of dollars, depending on the number of items sold. Since the ruling, plaintiffs lawyers have filed more than 130 new lawsuits (pdf), and defense lawyers are bracing for more.
The lawsuits have targeted companies in a variety of sectors, including such corporate giants as Costco Wholesale Corp., Kimberly-Clark Corp., The Procter & Gamble Co. and Pfizer Inc. Plaintiffs lawyers say the suits are justified, because the public is harmed when companies label products or packaging with a U.S. patent number that's expired or does not cover the product's technology. Defense lawyers charge that these are nuisance suits brought by "bounty hunters."
The false-marking statute allows whistleblower plaintiffs to file suits and calls for fines of up to $500 per offense. Plaintiffs are entitled to one-half of the penalty; the other half goes to the United States. Before the December ruling in The Forest Group Inc. v. Bon Tool Co. (pdf), lawyers say district courts often issued just one $500 fine per incident for false marking, no matter how many individual products were mismarked. That gave plaintiffs little incentive to bring whistleblower suits. In Forest Group, the Federal Circuit ruled that the law's plain language required a per-article penalty, not a $500 total penalty.
But the lawsuit pileup could be short-lived: Two pending Federal Circuit appeals would curb such suits. One asks to restrict the right to file suits to those actually harmed by the company's actions, such as a company's competitors. The other case will decide how courts should determine a company's intent to deceive buyers or competitors when it sold products with the false patent information. In addition, a recent amendment to the leading patent reform bill in the U.S. Senate -- and a newly filed bill in the U.S. House of Representatives -- would allow only competitors harmed by a rival's false marking, not whistleblowers, to file such suits.
The Public Patent Foundation at Yeshiva University Benjamin N. Cardozo School of Law has five pending suits based on the statute, including one that claims The Quigley Co. sells several kinds of Cold-EEZE cold-remedy lozenges with expired patent numbers listed on the packages. The foundation filed the cases because "there's a whole basket of public harms that are caused by this lying by companies," said executive director Daniel Ravicher.
"The reason why we do it as an organization is that we think people lying about their products is a harmful thing," Ravicher said. "It creates a chilling effect on potential competitors. It harms consumers and harms legitimate patentees."
Ted Karkus, Quigley's chief executive officer and chairman, said the company's packaging uses the words "developed under patents" and lists two patent numbers. "Our packaging accurately states [that the products were] developed under [the] patents," Karkus said.
The foundation and patent lawyers filing the false-marking cases say the law is designed to encourage whistleblower actions to protect consumers, would-be competitors and inventors from companies falsely claiming a patent monopoly. "I know that there's lots of complaining going on by companies being sued," said Matt Miller, a Chicago solo practitioner who has filed or is co-counsel on seven false-marking cases in the Northern District of Illinois, including five for plaintiff Heathcote Holdings Corp. Inc. "It's pretty simple to follow the law. Look at your patents and check them periodically to make sure they're properly marked."
But inventors and competitors can easily find out whether a patent is expired though a quick search on Google's patent database or the U.S. Patent and Trademark Office Web site, said Justin Gray, a Madison, Wis., associate at Foley & Lardner. The firm represents defendants in false-marking suits, and Gray tracks and blogs about new cases.
'CLEARLY INJURED'
Raymond Stauffer, a pro se litigant and patent attorney in Roseland, N.J., whose appeal of Stauffer v. Brooks Brothers Inc., a false-marking case, is pending at the Federal Circuit, defends the whistleblower suits. "The Federal Circuit has already said unequivocally that the public is clearly injured by false marking," said Stauffer, referring to the court's 2005 ruling in Clontech Labs. Inc. v. Invitrogen Corp. That case held that the public interest is "clearly injured by false marking because the act of false marking misleads the public into believing that a patentee controls the article in question."
The Brooks Brothers appeal challenges the Southern District of New York's dismissal of Stauffer's case against the clothing company for making adjustable bow ties that are marked with expired patent numbers. The district court ruled that Stauffer lacked standing to sue because he failed to specify an actual injury to a competitor, the market for the product or the U.S. economy.
Stauffer's brief emphasizes that he's a member of the public with the right to bring a whistleblower suit when misled by a company's false patent markings. "In all of the false-marking cases, the good guy is the plaintiff bringing the suit and the bad guy is the one defending the suit," he said.
Ryan McGonigle, an associate at Raritan, N.J.-based Baker & Rannells who is representing Brooks Brothers, said the bottom line is that Stauffer shouldn't be able to sue because he didn't allege an injury to the United States or to anyone else. Many of the new false-marking cases have been filed by pro se patent lawyers or holding companies formed by pro se patent lawyers, not by competitors alleging they've been harmed by false marking, said Neil Friedman, a Baker & Rannells partner who is also representing Brooks Brothers. "It's all the bounty hunters trying to make a buck on the ill-conceived statute everyone is getting interested in," Friedman said.
As the cases wend their way through the courts, the public policy debate is also heating up. A March 4 amendment to the Patent Reform Act of 2009 introduced by Sen. Patrick Leahy, D-Vt., would allow only individuals who have "suffered a competitive injury" to file a federal lawsuit. The amendment would apply the law to all cases pending when the patent bill is enacted, so it would kill the new crop of whistleblower false-marking cases. The damages equation would change, too, by calling for recovery "adequate to compensate for the injury."
In a joint press release with other Senate Judiciary Committee leaders, Sen. Jeff Sessions, R-Ala., stated, "the reforms would guard individuals, small businesses, and universities from frivolous legal challenges and help prevent abuse of the administrative process." On March 25, Rep. Darrell Issa, R-Calif., filed a House bill with the same damages language as the Senate amendment. It would restrict false-marking lawsuits to competitors and apply to pending lawsuits.
The Federal Circuit will hash out the intent issue in Pequignot v. Solo Cup Co., which is scheduled for hearing on Tuesday. Solo Cup marked billions of plastic cold- and hot-drink cup lids with patent numbers, despite knowing that the patents had expired. It also marked some packages with the phrase "This product may be covered by one or more U.S. or foreign pending or issued patents," despite knowing that the products were no longer covered.
The Eastern District of Virginia granted Solo's summary judgment motion on the ground that there was no evidence of deceptive intent. The court found that Solo, on the advice of counsel, "formulated a policy under which [molds] with expired numbers would be replaced as they wore out or were damaged."
Matthew Pequignot's lawyer, Carl Kravitz, who chairs the litigation practice at Washington, D.C.-based Zuckerman Spaeder, declined to comment because of the upcoming hearing. Solo's lawyers at Howrey in Washington referred questions to the company.
Solo has "always maintained" that Pequignot's claims were without merit, said Solo's general counsel, Jan Stern Reed, in a statement. "We were very pleased with the lower court's decision to reject all of Pequignot's claims and to grant summary judgment in Solo's favor," Reed said. "Solo will continue to vigorously defend itself on appeal."
The fact that Solo knew it was selling some products with expired patent numbers and relied on outside legal advice when it developed its policy for replacing manufacturing molds is "fortuitous" for the company, said Joshua Slavitt, a patent partner at Philadelphia's Pepper Hamilton who isn't involved in the case.
Slavitt said it would be premature for companies to base corporate policies on a district court ruling, so Pepper Hamilton is urging clients to immediately review patent-marking practices. That includes arranging to remove markings when a patent is due to expire, evaluating markings when a product changes and reviewing product labels when acquiring a product from another company.
"People have not been deterred from casualness or have not taken a sufficient degree of care in their marking practices," Slavitt said. "Over the years, you've got a whole bunch of companies that mark their products and never follow up and remove their marks."
