Online Exclusive: False patent marks can add up to big fines.

The statute had been a joke for almost a century. No one, however, is laughing anymore.

The Federal Circuit’s recent decision in Forest Group, Inc. v. Bon Tool, Co. has given new vigor to what was once a little known, almost moribund provision of patent law. The December 2009 ruling threw out the existing interpretation of the false marking statute, 35 U.S.C. ? 292, and greatly strengthened the fines for violating it. As a result, patent owners need to be a lot more careful about marking their products as patented. Otherwise they could be hit with fines that could run into tens of millions of dollars.

“If I were an in-house lawyer I would be really concerned right now,” says Glen Belvis, a partner at Brinks Hofer Gilson & Lione. “I’d have to take quick action.”

The false marking statute has been around for a long time, and its terms are deceptively simple. According to the statute, if an entity, “for the purpose of deceiving the public,” falsely advertises or marks a product as patented, the entity can be “fined not more than $500 for every such offense.” This provision is enforced by qui tam suits, so anyone can file false marking suits, and the recovered fines are split between the successful litigant and the federal government.

For many years, two aspects of the statute discouraged litigants from using it. First, it was extremely difficult for the relator (the party alleging false marking) to prove that the accused intended to deceive the public. Second, it wasn’t worthwhile for a relator to sue because fines the statute imposed were minimal.

The Federal Circuit has eased both limitations. Now some experts fear patent owners will be hit with a wave of qui tam suits from people and companies seeking to make a quick buck–so-called “patent marking trolls.”

“Remember what happens in the movie ‘Gremlins’ when you feed them and get them wet? The Federal Circuit just poured water on them and fed them after midnight,” Belvis says.

Lawsuit Surge

The revitalization of the false marking statute began in 2005, with the Federal Circuit’s decision in Clontech Labs., Inc. v. Invitrogen Corp. That case made it easier to prove an intent to deceive.

Clontech held that such an intent is inferred if the relator shows “by a preponderance of the evidence that the party accused of false marking did not have a reasonable belief that the articles were properly marked (i.e., covered by a patent).” This inference cannot be rebutted by a patent owner’s mere assertion that it had no subjective intent to deceive.

After Clontech, filings of false marking suits jumped significantly. Cases were filed by large firms, solo practitioners and public interest organizations. Defendants have included Gillette (for alleged false marking on razor blades), Solo (plastic cup lids), Brooks Brothers (bow ties) and Target (closet organizers), according to Elizabeth Winston, assistant professor at Catholic University’s Columbus School of Law.

“There are a large number of false marking cases making their way up the courts,” she says.

Overturning “Offense”

That number seems likely to climb higher, thanks to Forest Group, which threw out a century-old interpretation of the statute and granted relators the possibility of collecting hefty fines against violators.

In 1910, the 1st Circuit drastically limited the fines imposed by the false marking statute. The statute imposes a fine for each “offense,” but the court held in London v. Everett H. Dunbar Corp. that each incorrectly marked product does not constitute a separate offense. Instead, a continuous false marking–such as the entire production run of a product–amounts to a single offense. The decision in London interpreted the predecessor of the current false marking statute, but later courts basically adhered to that interpretation of “offense.” As a result, violators of the false marking statute faced minimal penalties, and for decades few parties bothered to bring claims.

The Federal Circuit’s ruling in Forest Group has overturned this longstanding interpretation of “offense.” The unanimous three-judge panel held in December 2009, “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.”

The judges “really and truly believed that the other opinions on this got it wrong,” says Richard Cauley, a partner at Wang, Hartmann, Gibbs & Cauley. “They felt compelled by what the statute said, despite a bad public policy aspect to it: the danger of patent marking trolls.”

Pricey Penalties

The Federal Circuit in Forest Group tried to limit the danger posed by trolls. The court noted that violators of the statute need not be hit with a $500 fine for every single falsely marked item. Five hundred dollars was the maximum fine per offense, and district courts could impose far less. “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,” the Federal Circuit stated.

But even a fraction of a penny on popular items could result in daunting penalties, some experts warn. When a company is hit with a false marking suit, it can’t know for sure whether its potential fine per item will be 0.001 cent or $500.

Thus, when companies are hit with false marking suits, they should be wary of giving in too easily, despite inevitable pressure to settle. Many relators will simply bring strike suits, and paying them off will only encourage more suits. “Qui tam lawyers will be looking for soft targets to go after,” warns Mark Waddell, a partner at Loeb & Loeb.

Prudent businesses will now establish programs to verify their products have proper patent marks. “They need to ensure they are not marking products before they are entitled to … [and that the marks don't] remain after a patent has expired or been ruled not valid,” Cauley says.

It’s important for companies to document this verification process, according to experts. If something slips through the cracks, the company can then show the false marking was accidental and not caused by an intent to deceive.

Finally, patent owners should double-check their patent marks before filing any infringement suits.

“This [claim of false marking] is going to come up when you’re suing someone, and they are looking for something to use against you,” Waddell says. “In-house counsel need to factor this into their checklist when deciding if they want to threaten or file an infringement suit.”