Exposure And Settlement Value In False Marking Claims
Published on Law360.com
It has been just one year since the Federal Circuit issued its decision in Forest Group Inc. v. Bon Tool Co., 590 F.3d 1295 (Fed. Cir. 2009), holding that the penalty under the false marking statute, 35 U.S.C. § 292, applies to each marked article, as opposed to each decision to mark. As expected, the Forest Group decision unleashed a frenzy of false marking suits filed primarily by small false-marking qui tam plaintiffs apparently controlled by lawyers, many with backgrounds in intellectual property. In 2010 alone, Section 292 qui tam "relators" across the country filed false marking suits against almost 900 defendants.
The scope and application of Section 292 remains unclear. To be sure, the Federal Circuit has provided some answers. Defendants unsuccessfully challenged the standing of qui tam plaintiffs to sue without having suffered an individual injury in Stauffer v. Brooks Brothers Inc., 619 F.3d 1321 (Fed. Cir. 2010). The Federal Circuit also issued Pequignot v. Solo Cup Co., 608 F.3d 1356, 1363 (Fed. Cir. 2010), holding in part that "a purpose of deceit, rather than simply knowledge that a statement is false, is required" to violate Section 292. Defendants now know that allegations of "mere knowledge that a marking is false is insufficient to prove intent," and there can be no violation if a defendant "did not consciously desire the result that the public be deceived." Id.
Yet other questions remain outstanding. Additional challenges are being raised in cases pending before the Federal Circuit, such as In re BP Lubricants USA Inc., 2010-M960 (questioning the pleading standard for a Section 292 claim, specifically whether the particularity required by Rule 9(b) should apply to false marking claims), and USA, ex rel., FLFMC LLC v. Wham-O Inc., 2011-1067 (challenging Section 292 under the "Take Care" clause of the Article II, Section 3, of the U.S. Constitution).
Of practical and immediate significance is the question on all false marking defendants' minds: how to evaluate the potential penalty exposure and determine an appropriate settlement value? In particular, when faced with a false marking lawsuit, companies want information regarding the two factors that govern settlement value: 1) potential exposure in the event of a loss and 2) what other, comparable cases are settling for.
As to exposure, there is little direction yet as to how courts, in the event of finding a violation of Section 292, are to determine the appropriate amount of the penalty. The starting point is the Forest Group decision itself:
"The statute provides a fine of 'not more than $500 for every such offense.' By allowing a range of penalties, the statute provides district courts the discretion to strike a balance between encouraging enforcement of an important public policy and imposing disproportionately large penalties for small, inexpensive items produced in large quantities. 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." 590 F.3d at 1304.
Unfortunately, the Forest Group decision neither provides a practical framework to guide district courts in setting the amount of the penalty nor identifies the factors to be considered in determining the amount.
A few judicial decisions have calculated a penalty under Section 292. On remand from the Federal Circuit, the Forest Group court (U.S. District Court for the Southern District of Texas) assessed a fine of $180 for each of the 38 falsely marked articles, resulting in a total fine of just $6,840. The court arrived at the $180 figure for the fine, based on the "highest point of the price range" for which the falsely marked product was sold. Forest Group Inc. v. Bon Tool Co., 2010 WL 1708433, slip op. at *2-3 (S.D. Tex. April 27, 2010, Memorandum Order).
In Presidio Components Inc. v. American Technical Ceramics Corp., --- F. Supp. 2d ----, 2010 WL 1462757, at *48-49 (S.D. Cal. 2010), another case between direct competitors involving capacitors - some stamped with the wrong patent - and a website and catalog for the capacitors which were falsely marked, the U.S. District Court for the Southern District of California applied a penalty of 32 percent of the overall average sales price of $1.07, or $0.35 per unit for the 651,675 capacitors that were falsely marked and/or advertised, totaling a fine of $228,086.25. The Presidio Components court attempted to "strike an appropriate balance between enforcing the public policy embodied in the statute and not imposing a disproportionately large fine for relatively small violations." Id. at *42.
Some courts have also considered the five-year statute of limitations for false marking in evaluating the scope of potential liability and penalty exposure. See Seirus Innovative Accessories Inc. v. Cabela's Inc., Case No. 09-cv-00102, Dkt. No. 77, at *3 (S.D. Cal. Apr. 20, 2010) ("False marking claims under 35 U.S.C. § 292 are subject to the five-year limitations period prescribed by 28 U.S.C. § 2462."). In Cabela's, which began as a patent infringement case, the defendant filed a counterclaim on Feb. 18, 2010, asserting that the plaintiff had falsely marked its products with expired patents from at least as early as June 1, 1993. Id. The court found that the defendant's counterclaims that were based on false markings that occurred prior to the five years before the defendant filed its counterclaims were barred by the statute of limitations, significantly limiting the plaintiff's potential exposure for false marking. Id.
It is unclear whether Section 292's penalty provisions are applied differently where claims are asserted by competitors as opposed to qui tam plaintiffs. To date, however, there has not been a reported instance of a litigated judgment in favor of a noncompetitor false marking plaintiff. On this issue, defendants may certainly argue that unlike the direct competitors in Forest Group and Presidio Components, noncompetitor plaintiffs have suffered no direct harm as a result of any alleged false marking and should not receive a windfall. But there is nothing in the statute suggesting that the amount of the penalty should depend on status of the "any person" named as the relator. Noncompetitor plaintiffs will likely urge courts to focus on the impact of false marking on the consumer and argue that, applying Section 292's policy considerations to the product at issue, the sale prices, margins and volume of the products should be factors to be taken into account.
Noncompetitor plaintiffs bringing the majority of these cases undoubtedly are interested in quick settlements. But what is the going price? Aren't there some hard numbers? It appears, based on the numerous requests for voluntary dismissals, that there have been quite a number of settlements involving noncompetitor plaintiffs. Of course information regarding privately negotiated litigation settlements is typically not publicly available.
Ironically, the qui tam nature of Section 292 provides an opportunity to shed some light on this piece of the puzzle - how much are false marking cases settling for? Because any recovery under Section 292 must be shared 50/50 between the qui tam relator and the U.S., information relating to the amounts, dates and cases producing a settlement payment to the government is public information accessible by any member of the public through a Freedom of Information Act request.
Farella Braun & Martel LLP obtained a list from the U.S. Department of Justice, setting out the amount of payments received by the government for Section 292 cases from May 2010 up to the date of the response to the FOIA request (Nov. 9, 2010). In this time period alone, the government reports having received $1,703,237.11 as its one-half share of false marking settlements, meaning that the total amount of settlements paid is $3,406,474.22. (Doubling the dollar amount of each individual payment listed reveals the total amount that was paid to settle the corresponding false marking case(s)). Using this analysis, the average amount of the 57 settlements on the list (some involving multiple cases) is $59,762.71, with a high of $350,000 and a low of $2,500.
This information, and subsequent updates reflecting payments received by the government obtained through FOIA requests, will undoubtedly be helpful in gauging the settlement value of false marking suits brought by noncompetitor plaintiffs. Different noncompetitor plaintiffs, it appears, are willing to accept payment amounts lower than others. And it is not unusual for a defendant to face multiple lawsuits alleging the same false marking claims involving the same patents and products, often in different district courts.
There is still much to be answered. The list contains no indication that the government requested, was provided with or considered in any way information regarding sales volumes or even the types of products allegedly marked. While noncompetitor false marking plaintiffs may suggest that this type of information is required to "justify" settlement amounts in negotiations, there is no indication from the FOIA response that the government makes any review as to the adequacy of a settlement payment. Moreover, questions remain regarding whether a settlement will be binding or valid if later attacked as inadequate. For example, one recent voluntary dismissal attempts to settle the false marking claims asserted by the noncompetitor plaintiff - as well as all potential future false marking claims relating to any of the defendant's existing products or the asserted patent in the immediate suit. See Patent Group LLC v. P.F. Harris Mfg. Co. LLC, 6-10-cv-00141 (E.D. Tex. Aug. 10, 2010, Order). In short, unanswered questions still abound.