There are two very different views of Raymond Stauffer. He asserts he’s a public-spirited citizen who went to court to stop corporate misconduct. The company he sued, Brooks Brothers, claims Stauffer is a busybody, butting into something that isn’t his concern. In legal terms, the company claims Stauffer lacks standing to sue.
A federal district court in New York agreed with Brooks Brothers, and threw out Stauffer’s false patent marking lawsuit.
The ruling attracted a great deal of attention because false marking suits have proliferated wildly, becoming a new and growing worry for businesses around the nation. Since Jan. 1, plaintiffs have filed more than 475 false marking suits against companies in a wide variety of industries. Procter & Gamble, Monsanto, Facebook, Target, Nestle, Pfizer, Crayola, Timex, Hallmark and Clorox are among those being sued because they allegedly marked their products with incorrect or expired patent numbers. If found guilty, a defendant potentially could be slapped with millions or even billions of dollars in fines.
Moreover, the tsunami of false marking litigation shows no signs of abating. “We are seeing more and more cases filed every day,” says Lynn Alstadt, a shareholder at Buchanan Ingersoll & Rooney.
Many businesses thus rejoiced when the district court handed down its ruling against Stauffer. The court held a party has standing to bring a false patent marking suit only if the false mark harmed competition. That erected a huge obstacle to most, if not all, of the current false marking suits. The flood of lawsuits promised to recede rapidly.
Then, on Aug. 31, the Federal Circuit reversed. The three judge panel reopened the floodgates, holding that anyone has standing to file a false marking suit–regardless of whether the false marks caused economic harm.
The Federal Circuit’s decision in Stauffer v. Brooks Brothers, however, isn’t all bad for businesses concerned about being sued. For while the court rejected one defense against false marking suits, it boosted another.
Protecting the Public
The case began when Stauffer went shopping at a New Jersey mall, and he noticed something odd about the Brooks Brothers bowties on sale. Each bowtie had a label stating it was covered by patent numbers 2,083,106 and 2,123,620.
Most people wouldn’t think twice about that, but Stauffer isn’t your average consumer. “I’m a patent attorney,” he says. “When I saw that mark, I knew those patents had expired decades ago.”
The patents expired in 1954 and 1955, respectively. For more than 50 years, therefore, Brooks Brothers has falsely indicated its bowties were patented.
Such false patent marking can have serious consequences. It can discourage competition, scaring off potential rivals who fear infringing the patent. It can impose unnecessary design-around costs on those who wish to compete with the falsely marked products. It thus can drive up costs for consumers.
So in December 2008, Stauffer stepped forward, he says, to protect the public. He sued Brooks Brothers for violating the false marking statute. That statute imposes monetary penalties on anyone who intends to deceive the public by falsely marking an item as patented. The fines are up to $500 per wrongly marked item. In the case of mass market consumer items, that can add up to a lot of money — with half of it going to the government and half to the party that prosecuted the lawsuit. That’s a big incentive for people to sue violators–especially if anyone can sue.
The language of the false marking statute seems clear. It states that “any person may sue” violators of the statute.
However, anyone seeking to sue under this statute still needs to prove he has standing to sue. “Every plaintiff must demonstrate standing, a jurisdictional prerequisite under Article III’s case-or-controversy requirement,” the Federal Circuit stated in Stauffer.
That ordinarily requires a plaintiff to show he has suffered personally from the defendant’s wrongful actions. But a different standard applies for those suing under the false marking statute. It’s a qui tam statute, which encourages private parties to sue in order to protect the government’s interests. Such a statute gives the party bringing suit–the relator–a statutory assignment of the government’s rights, so the relator has standing if the government does.
“[I]n order to have standing [in this case], Stauffer must allege that the United States has suffered an injury in fact,” the Federal Circuit held.
Any violation of federal law hurts the government’s sovereign rights, so the government has standing to enforce its laws. In this case, the Federal Circuit concluded, Brooks Brothers allegedly violated the false marking statute, and “because the government would have standing to enforce its own law, Stauffer, as the government’s assignee, also has standing.”
Although the Federal Circuit reinstated Stauffer’s lawsuit, the case may never get to trial. The Federal Circuit ordered the trial court to rule on another Brooks Brothers’ motion, which seeks to dismiss the case under Rule 12(b)(6) for failing to state a plausible claim to relief.
The issue, as described by the Federal Circuit, is whether Stauffer’s complaint alleges an “intent to deceive the public … with sufficient specificity to meet the heightened pleading requirements for claims of fraud.”
“It’s the first time the Federal Circuit said that false marking complaints must meet the heightened pleading standard for fraud,” says David Leichtman, a partner in Robins, Kaplan, Miller & Ciresi. “It’s dicta, but the judges went out of their way to state it when they didn’t have to. So it’s a signal of how they would rule on that issue.”
Currently, the lower courts disagree on how to handle such
Rule 12(b)(6) motions. “The courts are all over the place,” Alstadt says. “Some have a strict standard, requiring relators to allege specific facts indicating the defendant intended to deceive the public. Other courts say if you just allege an intent to deceive, that’s sufficient.”
If the courts adopt a strict standard, it will be significantly harder for parties to bring false marking suits. “At the pleading stage, it is always difficult to demonstrate intent,” says Scott Bornstein, a Greenberg Traurig shareholder.
Thus, businesses will closely monitor Stauffer and other false marking cases to see how the courts deal with
Rule 12(b)(6). It is a critical issue for those concerned about these suits, according to Ethan Horwitz, a King & Spalding partner. “This is an area where there is a lot more to be litigated,” he says.