False-Marking Suits Head for a Showdown

Mary Alice Robbins / law.com / 08-03-2010; A decision by the U.S. Court of Appeals for the Federal Circuit in a case set for argument Aug. 3 could put the brakes on suits that accuse companies of falsely marking their products as covered by patents. Federal judges in Texas are seeing a substantial number of such cases filed in their courts.At issue in Stauffer v. Brooks Brothers Inc., et al. is whether a pro se attorney lacked standing to sue Brooks Brothers because he failed to show that the alleged false marking of the clothier’s adjustable bow ties as covered by a patent caused injury to a competitor, to the U.S. economy or to the public. In May 2009, the U.S. District Court for the Southern District of New York granted the defendants‘ motion to dismiss the suit, concluding that attorney Raymond Stauffer lacked standing to pursue monetary penalties on the government’s behalf.

Under 35 U.S.C. §292, „any person“ may sue anyone who falsely marks an unpatented article as patented for up to $500 per offense. The law creates a qui tam cause of action, with the monetary penalty to be split 50-50 between the person suing and the government.

False-marking suits have surged in the courts since the Federal Circuit’s December 2009 ruling in The Forest Group Inc. v. Bon Tool Co., in which the court held that the $500 penalty applies to each falsely marked product.

The possibility that the Federal Circuit could issue a ruling in Brooks Brothers that would make it tougher for plaintiffs to prevent dismissal of their suits has some Texas attorneys keeping a close watch on the case.

Ken Good, a shareholder in Kent, Good, Anderson & Bush in Tyler, says the Federal Circuit could hold that a plaintiff has to be the defendants‘ competitor and „that will be severe damage to the cause of action.“

But Good, who represents plaintiff Patent Group LLC in 23 false-marking suits it has filed in the Eastern District of Texas since mid-April, says he’s doubtful the Federal Circuit will do that, because the law says any person can sue for the penalty.

Howrey partner Jason White of Chicago, who represents several defendants in false-marking suits filed in Texas, thinks the Federal Circuit could affirm the U.S. District Court in Brooks Brothers.

„I think the district court opinion was well reasoned,“ White says. „I think there are very good reasons they [the district court] could be affirmed.“

Justin Gray, a San Diego, Calif., associate with Foley & Lardner who tracks false-marking litigation on his blog Gray on Claims, says, „Texas is a popular forum for these cases.“

Gray says if he were to hazard a guess what has made Texas so popular as a forum for false-marking cases, it’s probably for the same reason so many patent cases are filed here.

Good says the Eastern District has developed rules and procedures that keep patent cases moving through the system with relatively few problems.

And false-marking suits are just another type of patent case.

Of the 290 false-marking cases filed from Jan. 1 through July 23, more than half were filed in three forums, including two Texas districts, Gray says: The Eastern District of Texas, with 68 cases, barely beats out the Northern District of Illinois, with 63 cases, as of July 23. The third most popular forum, according to Gray’s statistics, is the Northern District of Texas, with 18 cases.

In more than 60 of the Texas false-marking suits, the plaintiff is an entity — either a corporation or limited liability company — created to file such litigation. Attorneys or firms own a number of those entities.

F&B LLP, an intellectual property boutique in Austin, created its own limited liability company, which is the plaintiff in Americans for Fair Patent Use LLC v. Sprint Nextel Corp., et al., filed July 14 in the U.S. District Court for the Eastern District in Marshall. According to the corporate disclosure statement that Americans for Fair Patent Use filed July 15 with the U.S. District Court, F&B is the sole member of and owns 100 percent of the company. As alleged in the original complaint, F&B established AFPU „to encourage fair use of the patent system and deter abuse of the patent system, which harms the public welfare and stifles competition.“

Adam Floyd, a founding partner of F&B, says one reason to create a separate entity to be the plaintiff in false-marking suits is to limit the firm’s liability in case a countersuit is filed. Another issue, Floyd says, is whether an attorney who acts as the plaintiff becomes a material witness in the case.

Michael C. Zweber of Zweber PC in Dallas created a corporation that he represents as a plaintiff in false-marking suits. According to the Secretary of State’s Office, Zweber is the sole director and registered agent for Patent Compliance Group Inc., which filed 12 suits in the Northern District of Texas in February and March. The district court has dismissed seven of those suits, including two for which Patent Compliance obtained voluntarily dismissals. Zweber declines comment.

Sherman intellectual property attorney Clyde Siebman says lawyers and others may create separate entities to be plaintiffs in false-marking cases for tax reasons. They may want to keep costs and income stemming from such litigation separate from their personal tax liability, says Siebman, a founder and senior partner in Siebman, Burg, Phillips & Smith. Siebman was scheduled to speak on false-marking litigation July 31 at the State Bar of Texas Advanced Patent Seminar in San Antonio.

Paul Janicke, a University of Houston Law Center professor who teaches IP law, says he has no way of knowing for sure why people are setting up corporations or limited liability companies to file false-marking suits. They might want any income to be taxed at corporate rates, or they might not want to „go public“ with the fact they are involved in the litigation, he says.

Michael C. Smith, a Siebman, Burg partner in Marshall, defends companies sued for alleged false patent marking but says he has no problem with attorneys or others setting up entities to file such suits.

„The courts appear to have created a lucrative cause of action here; the market is responding to it,“ Smith says.

INTENT TO DECEIVE?

Most of the false-marking suits reviewed by Texas Lawyer involve allegations that companies have labeled products as covered by patents, although the patents have expired.

Good says companies are taking advantage of a right that the government granted them for a limited period of time but that right has expired.

„What these people complain about is they get caught,“ he says.

Bracewell & Giuliani associate Jason Wietjes of Dallas says his firm represents several companies named as defendants in false-marking suits. „It’s a real threat,“ Wietjes says of such litigation.

Wietjes says that to avoid being sued, most sophisticated companies with a lot of patents are performing audits to make sure their patents are valid and actually cover the machine, device or other article labeled as covered.

„In the event you get sued, that will go a long way toward putting up a defense,“ he says.

In its recently filed suit against Sprint Nextel Corp., Samsung Telecommunications America and three other high-tech companies, AFPU alleges the defendants „have repeatedly violated 35 U.S.C. 292(a) by falsely marking numerous products with expired patents or patents that do not cover the marked products with the intent to deceive the public about the patent coverage for their products.“ AFPU, on behalf of itself and the United States, seeks an award of $500 for each violation, according to the original complaint.

Sprint Nextel spokesman Jason Gertzen writes in an e-mail that his company is still reviewing the suit. „We have no comment to offer at this time,“ Gertzen writes.

Kim Titus, spokesman for Samsung, says his company does not comment on pending litigation.

Although the Bon Tool decision — that the up-to-$500 penalty applies per article — provided the incentive for filing false-marking suits, Siebman says he thinks the Federal Circuit is setting some parameters and boundaries around these types of cases.

On June 10 , the Federal Circuit affirmed the U.S. District Court for the Eastern District of Virginia’s decision that the Solo Cup Co. had no intent to deceive when it falsely marked its products and thus did not violate the law. According to the Federal Circuit’s opinion in Pequignot v. Solo Cup Co., the company manufactures disposable cups, plates, bowls and utensils.

As noted in the opinion, „based on outside counsel’s advice,“ Solo Cup developed a policy under which, when mold cavities needed to be replaced due to wear or damage, the new molds did not include the expired patent marking. The opinion noted that, also on the advice of „outside counsel,“ Solo Cup included some products that are not patented in packaging labeled with the following language: „This product may be covered by one or more U.S. or foreign pending or issued patents. For details, contact www.solo.com.“

The Federal Circuit’s opinion noted that the „outside attorneys gave that advice because they were concerned that Solo was not giving adequate notice to potential infringers pursuant to the marking statute.“

The Federal Circuit found that the plaintiff could not show that Solo Cup had the requisite intent to falsely mark its products.

Good says the Solo Cup decision is good for plaintiffs, in that it creates a presumption that a defendant has violated the statute, which the defendant can rebut with evidence that it acted on advice from an attorney.

„Most companies are not going to have evidence to that level to overcome the presumption that they violated the statute,“ Good says.

Siebman says the Federal Circuit held in Solo Cup that the plaintiff has to prove the defendant falsely marked the product for the purpose of deceiving the public.

Notes Siebman, „I think that’s the takeaway from Solo Cup .“

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