FEDERAL CIRCUIT HOLDS THAT HEIGHTENED PLEADING REQUIREMENTS APPLY TO FALSE MARKING ACTIONS

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1 CLIENT MEMORANDUM FEDERAL CIRCUIT HOLDS THAT HEIGHTENED PLEADING REQUIREMENTS APPLY TO FALSE MARKING ACTIONS In a decision that will likely reduce the number of false marking cases, the Federal Circuit took the unusual step of issuing a writ of mandamus last week directing the Northern District of Illinois to dismiss a false marking action filed against BP Lubricants USA Inc. ( BP ). 1 In a case of first impression for the Federal Circuit, the court held that the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) apply to false marking complaints. The court rejected the pleading that BP Lubricants knew or should have known that its patent had expired. The opinion instead requires false marking plaintiffs to plead specific facts from which one can reasonably infer that the defendant intended to deceive the public. Background The false marking statute, 35 U.S.C. 292, imposes a fine on anyone who advertises or marks an unpatented article with the word patent or any word or number importing that the same is patented, for the purpose of deceiving the public. 2 The statute permits any person to sue for false marking violations on behalf of the United States as a qui tam plaintiff. 3 Although previously the statute was rarely asserted, the popularity of false marking claims dramatically increased after the Federal Circuit s decision in The Forest Group, Inc. v. Bon Tool Co. that the maximum $500 fine should be imposed on a per article basis rather than per offense. 4 In just 15 months since the Bon Tool decision, over 850 false marking actions have been filed In re BP Lubricants USA Inc., No. 10-CV-1257, slip op. at 2 (Fed. Cir. Mar. 15, 2011). 35 U.S.C. 292 (2006). 292(b). One line of defense to false marking allegations has been to challenge the constitutionality of the statute. In particular, the defendant in Unique Product Solutions, Ltd. v. Hy-Grade Valve, Inc. succeeded in arguing that the false marking statute s qui tam provision violates the Takings Clause of the U.S. Constitution. No. 10-cv-1912 (N.D. Ohio Feb. 23, 2011), aff d, No. 10-cv-1912 (N.D. Ohio Mar. 14, 2011). In Hy-Grade, the court held that the qui tam provision did not provide the Executive Branch with sufficient control to ensure proper execution of the laws. slip op. at The court was careful to limit its opinion to the qui tam provision of the false marking statute rather than to all qui tam provisions. The Forest Group, Inc. v. Bon Tool Co., 590 F.3d 1295, 1304 (Fed. Cir. 2009). See Gray on Claims, False Marking Case Information, (last visited Mar. 16, 2011). NEW YORK WASHINGTON PARIS LONDON MILAN ROME FRANKFURT BRUSSELS in alliance with Dickson Minto W.S., London and Edinburgh

2 In re BP Lubricants USA Inc. Thomas Simonian, an attorney who has filed about 40 false marking complaints, filed the false marking action against BP in February Simonian alleged that BP had falsely marked the bottles for its CASTROL oil with a design patent that expired in Simonian alleged, upon information and belief, that BP knew or should have known of its patent s expiration, that BP is a sophisticated company with experience in obtaining and enforcing patents, and that BP marked its products with intent to deceive its competitors and the public. 8 BP moved to dismiss the complaint, arguing that the complaint failed to allege any underlying facts upon which a court could reasonably infer that BP knew its patent had expired when it was marking its products. 9 The Northern District of Illinois denied BP s motion, finding that the complaint satisfied the heightened pleading requirements of Rule 9(b). Rule 9(b) requires that allegations of fraud or mistake must state with particularity the circumstances constituting fraud or mistake, although intent may be alleged generally. In concluding that Rule 9(b) was satisfied, the district court relied on the Federal Circuit s 2009 decision in Exergen Corp. v. Wal- Mart Stores, Inc. 10 In Exergen, the Federal Circuit held that to withstand a motion to dismiss, parties must plead inequitable conduct in accordance with Rule 9(b) by setting forth the specific who, what, when, where, and how of the alleged fraud. 11 The district court found that Simonian had properly averred that BP (the who ) had deliberately and falsely marked (the how ) at least one line of its motor oil products (the what ) with an expired patent and continues to falsely mark its products (the when ) throughout the Northern District of Illinois and the rest of the United States (the where ). 12 BP then petitioned the Federal Circuit for a writ of mandamus directing the district court to dismiss the complaint. Before evaluating the merits of the case, the Federal Circuit addressed the predicate question of whether Rule 9(b) applies to false marking actions. 13 Under Rule 9(b) the circumstances constituting fraud or mistake must be pled with particularity. 14 The court explained that the purpose of the rule is to act as a safety valve and prevent discovery fishing expedition[s] by Complaint, Simonian v. BP Lubricants USA, Inc., No. 10-cv (N.D. Ill. Feb. 24, 2010); Gray on Claims, supra note 5. BP Lubricants, slip op. at 3. at 2. at F.3d 1312, 1327 (Fed. Cir. 2009). BP Lubricants, slip op. at 4. at 5. Fed. R. Civ. P. 9(b)

3 qui tam plaintiffs. 15 The court concluded that [p]ermitting a false marking complaint to proceed without meeting the particularity requirement of Rule 9(b) would sanction discovery and adjudication for claims that do little more than speculate that the defendant engaged in more than negligent action. 16 The court thus agreed with the district court that Rule 9(b) must be satisfied to properly allege violation of the false marking statute. 17 The Federal Circuit turned its analysis to whether the pleadings satisfied Rule 9(b). Reiterating its holding in Exergen, the court explained that although intent may be averred generally and upon information and belief, 18 the pleadings must allege sufficient underlying facts from which a court may reasonably infer that a party acted with the requisite state of mind. 19 Here, although the patent was BP s own patent, the court concluded that the complaint did not aver facts sufficient to infer that BP was aware of the patent s expiration. 20 Instead, the complaint provided only generalized allegations and therefore failed to meet the requirements of Rule 9(b). 21 The court rejected Simonian s argument that BP s status as a sophisticated company, with experience applying for, obtaining, and litigating patents, sufficed to establish its knowledge of the patent s expiration (an allegation that many false marking plaintiffs have made over the past year), characterizing this assertion as nothing other than a [c]onclusory allegation[]. 22 The court also debunked Simonian s argument that false marking inherently establishes scienter, explaining that the connection between false marking and state of mind requires more than a mere statement. 23 Simonian also argued that he did not need to name specific individual BP employees to satisfy the who portion of the Exergen standard. The court maintained, however, that Simonian could have offered other evidence from which intent could reasonably be inferred, referencing a United States amicus brief that provided examples of appropriate fact patterns for example, a defendant suing for patent infringement or changing the marking after patent expiration BP Lubricants, slip op. at 5. at 6. at 6-7. at 7 (quoting Exergen, 575 F.3d at 1327) (internal quotation marks omitted). at 8. at 9. Such instances would be unusual, given that due diligence would likely prevent a would-be false marking defendant from suing on an expired patent or amending a marking without noting the applicable patent s expiration date

4 Finally, Simonian argued that under the Federal Circuit s recent decision in Pequinot v. Solo Cup, 25 another false marking decision, a rebuttable presumption of intent to deceive is created when a false statement is combined with knowledge of falsity. 26 Simonian, however, did not reach a rebuttable presumption here because he failed to set forth sufficient facts to infer that BP knew that its patent had expired. 27 Simonian simply averred that BP knew or should have known that its patent had expired. As the court explained, pleading the facts necessary to activate the Pequinot presumption is simply a factor in determining whether Rule 9(b) is satisfied; it does not, standing alone, satisfy Rule 9(b) s particularity requirement. 28 After acknowledging that the writ of mandamus is an extraordinary remedy, the court reasoned that such a resolution was warranted in this case because this was an issue of first impression for the Federal Circuit and because the district courts have reached differing views of the appropriate pleadings standard to apply to false marking cases and thus have been reaching inconsistent results. 29 The court then granted BP s writ of mandamus and remanded the case to the district court to dismiss the complaint with leave for Simonian to amend his complaint. 30 Legislation To stem the flood of false marking cases, Congress has proposed several revisions to the false marking statute, in part as it looks to reform the United States patent laws. Most recently, the new patent reform bill passed by the Senate on March 8, 2011, S. 23, requires false marking plaintiffs to show competitive injury to file suits under In addition, Representative Issa introduced H.R last week. That bill would prohibit false marking fines against individuals or entities that have not changed their manufacturing or production processes after expiration of the patent marking the product or that place the word expired before the word patent or the patent number. 32 The bill has been referred to the House Committee on the Judiciary. Conclusion Under the pleading requirements defined by BP Lubricants, general averments implying knowledge to a company of when its own patents expired will no longer suffice to withstand a motion to dismiss. Instead, future false marking plaintiffs will need to compile sufficient facts to reasonably infer an intent to deceive under 292. In addition, if the proposed legislation F.3d 1356, (Fed. Cir. 2010) ( [T]he combination of a false statement and knowledge that the statement was false creates a rebuttable presumption of intent to deceive the public.... ). BP Lubricants, slip op. at at at 10. at 11. S. 23, 112th Cong. (2011). H.R. 1056, 112th Cong. (2011)

5 requiring plaintiffs to demonstrate competitive injury is enacted, many of the pending false marking cases initiated by non-practicing entities will likely be dismissed. Nonetheless, patent holders would be well advised to continue to monitor the accuracy of their patent marking. * * * * * * * * * * * * * * * If you have any questions regarding this memorandum, please contact Kelsey I. Nix ( , knix@willkie.com), Laurie N. Stempler ( , lstempler@willkie.com), or the attorney with whom you regularly work. Willkie Farr & Gallagher LLP is headquartered at 787 Seventh Avenue, New York, NY Our telephone number is (212) and our facsimile number is (212) Our website is located at March 21, 2011 Copyright 2011 by Willkie Farr & Gallagher LLP. All Rights Reserved. This memorandum may not be reproduced or disseminated in any form without the express permission of Willkie Farr & Gallagher LLP. This memorandum is provided for news and information purposes only and does not constitute legal advice or an invitation to an attorney-client relationship. While every effort has been made to ensure the accuracy of the information contained herein, Willkie Farr & Gallagher LLP does not guarantee such accuracy and cannot be held liable for any errors in or any reliance upon this information. Under New York s Code of Professional Responsibility, this material may constitute attorney advertising. Prior results do not guarantee a similar outcome