Wham-O! America Invents Act Slams Door on False-Marking Cases

Since 2009, so-called “false-marking trolls” have been suing manufacturers of everything from lip balm and bowties to superballs and Solo cups under a federal law that had been previously infrequently used – the False Marking Statute.  However, consumer product manufacturers can breathe a sigh of relief now that President Obama has signed the Leahy-Smith America Invents Act (AIA) into law.  While most of the commentary surrounding passage of the AIA revolves around its changes from a “first-to-invent” to a “first-to-file” patent system, the AIA also includes substantive changes to the False Marking Statute that represent a major victory for manufacturers and retailers.

The original False Marking Statute, 35 U.S.C. 292, made it illegal for manufacturers to label their products with false or expired patent numbers “for the purpose of deceiving the public.”  If guilty, manufacturers could be fined up to $500.  The statute also created a private right of action through a qui tam provision that allowed any private individual to sue for the penalty, regardless of whether or not they had suffered any harm.  If the plaintiff won the lawsuit, he would split the penalty or settlement proceeds with the Feds.

While the statute was passed in 1950, plaintiffs rarely filed false-marking claims because courts interpreted the $500 penalty to apply only on a per-offense basis.  Regardless of whether or not a company placed false patents on one item or one million items, plaintiffs could only collect up to $500.  However, in the 2009 case of Forest Group Inc. v. Bon Tool Co., the U.S. Court of Appeals for the Federal Circuit held that the statute’s penalty applied on a per-item basis.  In other words, companies could be liable for every individual item marked with a false or expired patent.  Thus, if a company placed a false patent on one million items, the plaintiff could potentially collect up to $500 million in damages.  Not surprisingly, after Forest Group Inc., the number of false-marking lawsuits skyrocketed.  Over 1,000 suits have been filed in the two years following that decision.  Of these, more than 475 have settled, with over $21.5 million being split between the government and various plaintiffs.

One prominent false-marking case involves Wham-O, purveyor of everything from pool noodles to Frisbees, or as John Stewart calls it, “cheap plastic crap.”  While many false-marking cases settle, Wham-O’s attorney came up with a novel challenge to the statute itself, claiming that the qui tam provision violated the “Take Care” clause in Article II, Section 3 of the U.S. Constitution.  Essentially, Wham-O’s argument was that the statute represented an abdication of the President’s duty to enforce the laws, and a delegation of too much power to private parties.  This argument had already been accepted by the U.S. District Court in Unique Product Solutions v. Hy-Grade Valve, and while other federal courts might not have been willing to invalidate the law on these grounds, many had sought other ways to curtail the number of false-marking suits clogging their dockets.

The AIA, however, has made many of these issues moot by amending the False Marking Statute.  Under Section 16(b) of the AIA, the U.S. is the only party that can sue for the $500 penalty.  Private individuals seeking to take advantage of the qui tam provision must now demonstrate “competitive injury” in order to file a false-marking claim, and their damages are limited to an amount “adequate to compensate for the injury.”  Since the statute does not define “competitive injury,” or provide guidance on what sort of damages would be “adequate,” the federal courts will have to flesh out these concepts.  False-marking has also been redefined so that expired patents no longer constitute a violation of the statute.  Finally, the amendments in Section 16 apply to all cases that are currently pending, as well as those commenced on or after the AIA’s date of enactment.

Many commentators believe the AIA’s changes signal the “death knell” of false marking lawsuits, as most will be dismissed for failure to state a claim of competitive injury.  Others warn manufacturers and retailers to remain on alert since competitors can still file suit under the AIA.  Given the healthy $1.85 million fine doled out in King Tuna, Inc. v. Anova Food, a false-marking lawsuit between industry competitors, this is pretty good advice.  Either way, two things are for certain: the sudden surge in false-marking cases is over and the majority of false-marking trolls must return to their caves.

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* Jason Weber is a second-year law student at Wake Forest University School of Law and a staff member on the Journal of Business and Intellectual Property Law.  He holds a Bachelor of Arts in Political Science from Hope College and served with Teach for America prior to entering law school. Upon graduation in May 2013, Mr. Weber intends to practice in the areas of education law or community and economic development law.