Constitutional Attacks on Patent False-Marking Law Gain Traction

May 11, 2011

Constitutional challenges to the statute that lets whistle-blowers sue companies for falsely labeling their products as covered by patents are heating up in the U.S. Court of Appeals for the Federal Circuit and in the district court level. In a significant case this year, a federal court judge in Ohio ruled that the "qui tam provision" of a law allowing lawsuits against manufacturers for labeling products with expired patent numbers is unconstitutional. The decision vindicates some companies producing a wide range of products used by businesses as well as everyday items for the general public.

Under a qui tam provision of a federal statute, an action establishing penalties or fines for certain acts or omissions may be brought by an informer. Then, the whistle-blower can claim a portion of the award available under the law.

The number of lawsuits for false patent marking exploded after an earlier federal court ruled that plaintiffs can recover up to $500 for each erroneously marked product, rather than $500 total. After this ruling, attorneys and companies organized solely for the purpose of targeting manufacturers of products marked with expired patents. Hundreds of false marking claims have been filed nationwide in the past couple of years, and many errant companies have settled out of court.

Key facts of the recent case: Unique Products claimed that Hy-Grade violated the law by marking a series of industrial valve products with U.S. Patent No. 4,605,041, which expired in April, 2005. The company also claimed Hy-Grade used the expired patent number in its advertising.

Because this type of legal action is based on harm suffered by the government, rather than the plaintiff initiating the lawsuit, and the fact that the qui tam provision is essentially a delegation of the government's enforcement power, the judge in the new case analyzed whether the provision gives the government "sufficient control" over the lawsuit as required by the U.S. Constitution.

Judge Dan Aaron Polster, of the Northern District of Ohio, granted the defendant's motion to dismiss with prejudice the lawsuit alleging the misuse of an expired patent in connection with its industrial valve products. "The false marking statute essentially represents a wholesale delegation of criminal law enforcement power to private entities with no control exercised by the U.S. Department of Justice," said Polster. "It allows any private entity that believes someone is using an expired or invalid patent to file suit in the name of the U.S. without getting approval from or even notifying the Department of Justice."

In reaching this determination, Judge Polster agreed with Hy-Grade's assertion that the qui tam provision of the false marking statute is unconstitutional under the "take care provision." This provision requires the President to "take care that the U.S. laws are faithfully executed."

In the Morrison case, the U.S. Supreme Court examined the constitutionality of the Ethics in Government Act of 1978 allowing Congress to appoint an independent counsel to investigate and potentially prosecute high-ranking government officials for violations of federal criminal laws.

Finally, Judge Polster said that decisions about whether to file or settle lawsuits "should be made by government attorneys who have no financial stake in the outcome of the litigation or settlement, not by private parties motivated solely by the prospect of financial gain." Other court cases based on this same issue are currently pending -- including one involving Wham-O, the manufacturer of frisbees. But the Unique Products and other rulings may signal a slowdown for such lawsuits. While all this uncertainty continues, the best approach remains to take appropriate advice to ensure compliance with the patent marking statute in the first place.

For more information, consult with your attorneys.

Read more: http://www.bizactions.com/n.cfm/page/e105/key/166348365G817J1851686P0P10174992T0/#ixzz1M4FHd0sJ

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