Declining for the second time this year to halt the avalanche of false marking claims filed in the wake of its December 29, 2009, decision on false marking damages, in Raymond E. Stauffer v. Brooks Brothers, Inc., decided August 31, 2010, the United States Court of Appeals for the Federal Circuit reversed the United States District Court for the Southern District of New York’s ruling that plaintiff Stauffer lacked standing to sue under 35 U.S.C. § 292. The Federal Circuit found instead that Stauffer had qui tam standing to bring a false marking complaint against Brooks Brothers under § 292, and further that the federal government had a right to intervene in the case.
Section 292(a) of the patent laws provides that anyone who 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” is guilty of false marking, and “shall be fined not more than $500 for every such offense.” Although this is a criminal penalty, section 292(b) provides that “any person” may bring a qui tam action for false marking, and will split any fines levied with the U.S. government.
Factual and Procedural Background
In Stauffer, the products at issue were men’s bow ties that contained an “Adjustolox” mechanism, which was manufactured by a third party, J.M.C. Bow Company, Inc. (“J.M.C. Bow”). The bow ties with the Adjustolox were marked with, inter alia, U.S. Patent Nos. 2,083,106 and 2,123,620. Those patents, however, expired in 1954 and 1955, respectively.
Stauffer is a patent attorney who had purchased some of the marked bow ties. In December 2008, Stauffer brought a qui tam action under § 292 alleging that Brooks Brothers had falsely marked its bow ties. Brooks Brothers moved to dismiss Stauffer’s complaint pursuant to Fed. R. Civ. P. 12(b)(1) for lack of standing and Fed. R. Civ. P. 12(b)(6) for failure to allege an intent to deceive the public with sufficient specificity to meet the heightened pleading requirements for claims of fraud.
The district court granted Brooks Brothers’ motion pursuant to Rule 12(b)(1). The district court held that all plaintiffs, including qui tam plaintiffs (or “relators”), must establish (1) that they have suffered an injury in fact (2) that is causally connected to the defendant, and (3) that is likely to be redressed by the court. The district court further found that the qui tam provision of § 292(b) operates as a statutory “assignment” of the rights of the United States, so Stauffer must prove that the government, rather than he, satisfies the requirements for standing, including that it has suffered an injury in fact.
The district court concluded that Stauffer had not sufficiently alleged that the United States had suffered an injury in fact. According to the district court, Stauffer’s allegations of Brooks Brothers’ conduct wrongfully quelling competition were too conjectural or hypothetical to constitute an injury in fact. The court added that even the hypothetical harm to competitors was lessened by the fact that J.M.C. Bow provided the marked Adjustolox mechanism to many of Brooks Brothers’ competitors, in addition to providing it to Brooks Brothers. Because the court found a lack of standing, it did not reach the merits of Brooks Brothers’ Rule 12(b)(6) motion to dismiss for failure to allege an intent to deceive the public with sufficient specificity.
After the district court’s decision on standing, the government moved to intervene, arguing that the court’s opinion called into question the constitutionality of § 292 and that the government was therefore entitled to defend the statute pursuant to Rule 24(a)(1) and 28 U.S.C. § 2403. The government also argued that its interest in seeing the patent laws enforced gave it a right to intervene pursuant to Rule 24(a)(2) and that it should be permitted to intervene pursuant to Rule 24(b)(1)(B). The district court denied the motion, finding no basis for the government to intervene as of right and finding the showing for permissive intervention insufficient. The district court reasoned that it had not decided any constitutional issue that would give the government the right to intervene pursuant to Rule 24(a)(1). The court further found that the government did not have a sufficient interest in the action to have a right to intervene pursuant to Rule 24(a)(2) because the court had denied standing only to Stauffer, not to the United States itself. Finally, the district court denied permissive intervention pursuant to Rule 24(b)(1)(B), finding that the government’s interest in the outcome of the case was premised on issues and legal questions not actually presented to or decided by the court.
The Federal Circuit reversed the district court’s ruling and held that Stauffer had standing to sue Brooks Brothers. Quoting the Supreme Court’s decision in Lujan v. Defenders of Wildlife, the court held that to have standing, “a plaintiff must show (1) that he has suffered an ‘injury in fact,’ an invasion of a legally protected interest that is ‘(a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical,’ (2) that there is ‘a causal connection between the injury and the conduct complained of,’ and (3) that the injury is likely to be redressed by a favorable decision.”
In concluding that Stauffer met the test set forth in Lujan, the court clarified how courts should determine standing under the false marking statute, which is a qui tam statute (i.e., “a statute that authorizes someone to pursue an action on behalf of the government as well as himself.”). Relying on the Supreme Court’s decision in Vermont Agency of Natural Resources v. United States ex rel. Stevens, the court held that under § 292(b) “a qui tam plaintiff, or relator, can establish standing based on the United States’ implicit partial assignment of its damages claim…to ‘any person.’” Thus, the court reasoned that, in order to have standing, Stauffer must allege only that the United States has suffered an injury in fact, and that that injury was causally connected to Brooks Brothers’ conduct that is likely to be redressed by the court.
The court held that a violation of § 292 inherently constitutes an injury to the United States. In passing the statute prohibiting deceptive patent mismarking, Congress determined that such conduct is harmful and should be prohibited. “Because the government would have standing to enforce its own law, Stauffer, as the government’s assignee, also has standing to enforce section 292.”
The court further clarified that, contrary to the district court’s decision and Brooks Brothers’ argument, Stauffer’s standing as the United States’ assignee does not depend upon the alleged injury to the United States being proprietary, as opposed to sovereign. The court expressed no view as to whether § 292 addresses a proprietary or a sovereign injury of the United States, or both. However, the court reasoned that from the government’s perspective, a harm arises from an “injury to its sovereignty arising from violation of its laws.” Thus, under Vermont Agency, the United States’ sovereign injury is sufficient to confer standing upon it and therefore upon Stauffer, its implicit partial assignee.
Accordingly, the court concluded that Stauffer sufficiently alleged (1) an injury in fact to the United States that (2) was caused by Brooks Brothers’ alleged conduct, attaching the markings to its bow ties, and (3) was likely to be redressed, with a statutory fine, by a favorable decision. The court therefore reversed the district court’s decision on standing.
The Government’s Intervention
The Federal Circuit also held that the district court erred in denying the government’s motion to intervene under Rule 24(a)(2). The court found that the government has an interest in enforcement of its laws and in one half the fine that Stauffer claims, that disposing of the action would “as a practical matter impair or impede the [government’s] ability to protect its interest,” and that Stauffer may not adequately represent that interest. The court reasoned that the government would not be able to recover a fine from Brooks Brothers if Stauffer loses, as res judicata would attach to claims against Brooks Brothers for the particular markings at issue. Thus, even though “the issue of the government’s ability to bring an action pursuant to section 292” in general was not presented, the United States’ ability to protect its interest in this particular case would be impaired by disposing of the action without the government’s intervention. The Federal Circuit therefore reversed the district court’s decision denying the government’s motion to intervene.
Having clarified earlier this year in Pequinot v. Solo Cup that products marked with expired patents are “unpatented articles” under the § 292, and now that “any person” has standing to bring a false marking suit based solely on the government’s sovereign interest in seeing that the patent laws are enforced, the new trend of qui tam cases against companies for products marked with expired patents will no doubt continue. However, while the Stauffer decision will certainly make it easier for a plaintiff to meet the standing requirement, two statements made by the court could have a significant impact on future false marking cases.
First, upon reversing the district court’s decision on standing, the Federal Circuit remanded the case for the district court to address the merits, including Brooks Brothers’ motion to dismiss pursuant to Rule 12(b)(6). In doing so, the Federal Circuit directed that the district court address the merits of the Rule 12(b)(6) motion “‘on the grounds that the complaint fails to state a plausible claim to relief because it fails to allege an ‘intent to deceive’ the public — a critical element of a section 292 claim — with sufficient specificity to meet the heightened pleading requirements for claims of fraud imposed by’ Rule 9(b).” Thus, it appears that the Federal Circuit has clarified that the heightened pleading requirement under Fed. R. Civ. P. 9(b) applies to false marking suits brought under § 292. It is likely that many false marking suits based on continued marking with expired patent numbers will be unable to meet the pleading standard under Rule 9(b).
Further, the Federal Circuit left unanswered the arguments raised by amicus curiae Ciba Vision Corporation (“Ciba”), which had argued that the statute violated the “Take Care” clause of Article II, § 3 of the Constitution by allowing the government to assign its claim under § 292 without retaining control over the relator’s actions. According to Ciba, in enacting section 292(b), Congress stripped the executive branch of its duty to “take Care that the Laws be faithfully executed” by giving such power to the public. Stating that Ciba “raises relevant points,” the Federal Circuit declined to decide the constitutionality of the government’s assignment of its claim because the issue was not raised or argued by the parties. Until that issue is formally briefed, argued and decided, one can expect that defendants in future false marking suits will continue to make this argument.
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This article was originally published by Bingham McCutchen LLP.