Is the Sun About to Set on False Marking Trolls?
April 11, 2011
In response to a Federal Circuit ruling that raised the specter of enormous fines based on products marked with expired patents, a cottage industry has arisen to take advantage of this potential windfall. In little over a year after the court’s ruling in Forest Group, Inc. v. Bon Tool, Co., approximately 800 cases have been filed against over 1000 businesses by so-called qui tam relators whose sole business is to prosecute these cases. Because of the Forest Group court’s ruling that the statutory fine of up to $500 must be assessed on a per article basis, the potential liability for mass produced products can be staggering. In the first of these cases, Pequignot v. Solo Cup Co., the plaintiff sought a $500 fine on nearly 22 billion plastic cup lids that had been marked with expired patents. The total potential liability came to approximately $10.8 trillion, almost enough to pay off the national debt. Most commonly, false marking relators have sought to use the threat of this liability to enter into early settlements. To date, nearly two hundred of these cases have settled, producing payments totaling about $10 million.
The happy days for the false marking trolls, however, may be coming to a close. Both the Federal Circuit and Congress are poised to make changes in the law that would bar these claims, and the Federal Circuit recently issued a ruling that will make these claims more difficult to allege.
In a false marking case brought against BP Lubricants, the Federal Circuit held that false marking complaints must satisfy the more demanding pleading requirements for fraud. After this decision it is clear that false marking plaintiffs must allege specific facts from which an intent to deceive the public can be reasonably inferred. Allegations that a defendant is a sophisticated company and knew or should have known that the patents at issue had expired will no longer be sufficient.
While the BP Lubricants decision will make it more difficult for false marking plaintiffs to state a claim, a more fundamental issue — the constitutionality of the false marking statute itself – is at stake in another case pending in the Federal Circuit, FLFMC, LLC v. Wham-O, Inc. The statute on which the false marking litigation is based provides that "any person" may sue for the false marking penalty, and that half of any recovery will go to the person suing and the other half to the United States. Statutes that permit private citizens to pursue public claims for a share of the recovery are called "qui tam" statutes, from a Latin phrase that describes these statutes. But unlike other qui tam statutes, such as the False Claims Act, the false patent marking statute has no provision for the government to control the litigation. These actions can be initiated, prosecuted, and settled without any input from the government. Article II of the Constitution, however, requires that the Executive "take Care that the Laws be faithfully executed". Because the false marking statute imposes a criminal fine without providing for any oversight by the Executive branch, Wham-O and several "Friends of the Court", such as the United States Chamber of Commerce, argue that it violates the "Take Care" clause. The district courts have issued conflicting decisions on this issue. If the Federal Circuit finds the statute unconstitutional, all pending false marking actions would fall.
Finally, the Patent Reform legislation which recently passed the Senate by a 95-5 vote includes a provision intended to eliminate the recent rash of false marking litigation. Under that legislation, only the United States government could sue for the statutory fine, and private citizens would be allowed to sue only for compensatory damages caused by the false marking. Moreover, the legislation specifically provides that these provisions apply to all cases pending on or after the date it becomes law. Thus, if this legislation is passed by the House and signed by the President, it would shut down virtually all of the current false marking cases.