WLF Legal Backgrounder
"False Patent Marking" Qui Tam Lawsuits Are Constitutionally Suspect
By Adam H. Charnes and Chad D. Hansen
December 19, 2010 (Vol. 25 No. 38)
Consider this hypothetical: Widget Co. designs and patents a new garden widget--a low-cost, short life-span consumer product. As part of its manufacturing process, Widget Co. utilizes a cast iron mold that imprints the handle of the garden widget with a utility patent number covering the product. Over the next 30 years, the market for garden widgets explodes and by present day the garden widget is found in virtually every lawn and garden store in the United States. Although the garden widget is not very expensive, Widget Co. keeps its overhead low and has made a handsome profit over the last 30 years selling tens of millions of garden widgets to consumers across the country.
One day, a patent attorney is browsing the aisles of a local retail store and is attracted to the garden widget's well-designed packaging. Examining the packaging and product, the attorney notices that Widget Co.'s utility patent begins with the number 4. Because patents are numbered chronologically, the attorney knows that Widget Co.'s utility patent has likely expired. After 15 minutes of research in a United States Trademark and Patent Office ("USPTO") database confirms the expiration, the attorney brings a lawsuit in his own name against Widget Co. in the local federal court asserting false patent marking under 35 U.S.C. sec. 292 ("Section 292").
What is Widget Co.'s exposure? Widget Co. could get dinged up to $500 per garden widget sold over the prior five years--upwards of a billion dollars--if the plaintiff can prove that Widget Co. mismarked the product with the intent to deceive the public. Even if the plaintiff cannot prove this mens rea element, he may be able to exact a substantial settlement from Widget Co., which the plaintiff will split with the United States government. Regardless, Widget Co.'s carefully controlled overhead is out the window thanks to substantial defense costs.
Sound incredible? Twenty years ago it was, but not anymore. The U.S. patent laws provide for a penalty of up to $500 for mismarking a product with a patent for the purpose of deceiving the public. Since 1842, the statute has permitted "any person," whether or not they suffer any personal injury, to sue for the penalty, and it requires that any recovery be split evenly between the plaintiff and the Government. For more than 150 years, the false marking statute was virtually dormant, with only a handful of decisions addressing the claim. In those legacy cases, a false marking claim was often brought by an alleged infringer as a counterclaim in conjunction with a claim of invalidity. In the last five years, however, the number of stand-alone suits alleging false marking have skyrocketed and defense costs have soared. By the end of October 2010, the number of false marking suits filed in 2010 exceeded 500.
Over the last several years, the Federal Circuit has acted to clarify many issues surrounding claims of false marking, including what constitutes an "unpatented article," how the penalties are to be derived, and what evidence satisfies the mens rea element of the offense. In most cases, false marking claims have been reigned in. But a significant issue--the constitutionality of the false marking statute--has yet to be addressed by the Federal Circuit. Several defendants have challenged Section 292 as unconstitutional under Article II of the Constitution because it permits an uninjured citizen to act as a private attorney general to vindicate the sovereign interests of the United States without sufficient Executive Branch oversight. It is only a matter of time before the Federal Circuit addresses the issue. When it does, and if it applies the traditional doctrine of separation of powers, it may find the qui tam provision in Section 292(b) unconstitutional.
Qui Tam Actions and Section 292.
A qui tam action is one brought under a statute that allows a private person to sue for a penalty, part of which the Government will receive. Qui tam actions were very common in England before the Revolution. Such statutes, however, have never been prevalent in this country. Six qui tam statutes, restricted to narrow enforcement areas, were enacted during the first four Congresses in the United States. Later Congresses enacted only seven qui tam statutes; not one was passed after 1871. Qui tam statutes became disfavored in the late nineteenth century, and all but three have been repealed: (1) the popular False Claims Act (the "FCA"), 31 U.S.C. secs. 3729-3733; (2) a qui tam statute passed in 1834 to protect various commercial and property rights of Native Americans, 25 U.S.C. sec. 201; and (3) the false patent marking statute, Section 292(b).
Section 292(a) prohibits marking "unpatented articles" with a patent, or falsely indicating that a patent is pending, with the intent to deceive the public:
Whoever marks upon, or affixes to, or uses in advertising any unpatented article, the word ‘patent' or any word or number importing the same is patented, for the purpose of deceiving the public . . . shall be fined not more than $500 for every such offense.
The qui tam provision provides that "[a]ny person may sue for the penalty, in which event one-half shall go to the person suing and the other to the use of the United States." 35 U.S.C. sec. 292(b).
The Tension Between the Constitution and Qui Tam Actions.
The qui tam aspect of Section 292(b) is in tension with the Constitution's separation of powers doctrine. In a qui tam case, the plaintiff (known as a "relator")--who himself suffered no injury--initiates a suit in the name of, and on behalf of, the United States, and the Government remains the real party in interest in any such action. The injury, by definition, is suffered by the Government. Thus, it is the Government's injury that confers standing upon the private person. According to the Supreme Court in Vermont Agency Natural Resources v. United States ex rel. Stevens (2000), the qui tam plaintiff has standing because he is a partial assignee of the United States's claims against a defendant.
The constitutional difficulty posed by Section 292(b) arises from the Constitution's designation in Article II of who has the power and responsibility to vindicate the Government's interests. As the Supreme Court pointed out in Printz v. United States (1997), the Constitution does not leave to speculation who is to administer the laws enacted by Congress. Article II of the Constitution vests "executive Power" in the President and charges him with the obligation to "take Care that the Laws be faithfully executed. . . ." The Vesting and Take Care Clauses give the President the power and responsibility to enforce the laws, including, as the Court observed long ago in Springer v. Government of Philippine Islands (1928), the power to investigate and litigate offenses against the sovereign interests of the United States. The cornerstone of this responsibility is the Executive's power to exercise prosecutorial discretion--the power to decide when and how the Government should enforce the law. Prosecutorial discretion, according to a long line of Supreme Court cases dating back to the Confiscation Cases (1868), is an inherent element of executive power and belongs exclusively to the Executive Branch. As the Court held in Bowsher v. Synar (1986), the separation of powers doctrine prevents Congress from taking this prosecutorial power from the Executive and placing it in the hands of an agent of Congress. Thus, according to Buckley v. Valeo (1976), a statute that vests primary responsibility for conducting civil litigation in the courts of the United States for vindicating public rights in anyone but a member of the Executive Branch violates Article II of the Constitution. The Court recently and emphatically re-emphasized the muscular nature of the Vesting and Take Care Clauses in the civil context in Free Enterprise Fund v. Public Company Accounting Oversight Board (2010).
The FCA and the Applicable Article II Standard.
In Vermont Agency, the Court observed that the Article II constitutionality of the FCA, the most frequently litigated qui tam statute, remains an open question. The U.S. Courts of Appeals, however, have unanimously concluded that the FCA passes constitutional muster. In so ruling, the Courts of Appeals have relied heavily on an Executive "control" test applied by the Supreme Court in Morrison v. Olson (1988).
In Morrison, the Court considered whether the independent counsel provisions of the Ethics in Government Act of 1978 usurped the role of the Executive Branch by granting an independent counsel the power to conduct grand jury proceedings and other investigations, initiate civil and criminal litigation, and appeal decisions in which independent counsel participated. The Court held that the independent counsel provisions did not usurp functions given to the Executive under Article II of the Constitution because the Act gave "the Executive Branch sufficient control over the independent counsel to ensure that the President is able to perform his constitutionally assigned duties." Specifically, the Morrison Court found that four key attributes of the independent counsel law provided the Executive with sufficient control: (1) the attorney general controlled the appointment of the independent counsel; (2) the attorney general defined the scope of the independent counsel's jurisdiction; (3) the attorney general could remove the independent counsel for good cause; and (4) the independent counsel was required to comply with DOJ policies.
Applying the Morrison rationale, the Courts of Appeals considering the constitutionality of the FCA have found sufficient safeguards in that statute to ensure that the Executive may "take care" that the laws are faithfully executed. These safeguards include, among other things, that: (1) the action "be brought in the name of the Government"; (2) the action be dismissed only with the Attorney General's written consent; (3) a copy of the complaint and all evidence be served on the Attorney General and the local U.S. Attorney; (4) the Government can intervene and take control of the action; (5) the Government can dismiss the action over the relator's objection; (6) the Government can veto a settlement by the relator and can settle the case over the relator's objections; (7) the Government can limit the private relator's participation in the litigation; (8) the Government retains the right to continue to be served with all papers, to limit discovery, and limit recovery even if it chooses not to intervene; (9) the Government can obtain a stay of discovery if it would interfere with the Government's criminal or civil investigations; and (10) the Government can pursue alternative remedies even if they are preclusive of the qui tam action. The FCA and the cases upholding its constitutionality provide a stark contrast to the false marking statute and show why Section 292(b) is unconstitutional.
Section 292(B) Is Constitutionally Defective. Unlike the FCA, Section 292 contains no safeguards to ensure that the Executive Branch may control false marking litigation. Section 292 does not require a plaintiff to notify the Government that the action has been filed. The statute gives the Government no right to control or approve of the initiation or prosecution of the action, no right to intervene in the action, and no right to limit discovery. The United States has no redress under Section 292 to challenge any settlement or judicial decision that the Government may feel is improper. Because any settlement or resolution is res judicata on subsequent actions, a relator is entitled to compromise a claim of the United States without any oversight whatsoever, and to settle a meritorious claim for pennies on the dollar merely to line the relator's own pockets. Thus, applying the Morrison control test, Section 292 cannot be constitutional where a private entity or individual seeks to proceed as a qui tam representative of the United States because it contains no safeguards permitting even the most tangential Executive involvement or oversight.
In the few district court actions addressing the matter, the Government and, to a lesser degree, relators have raised three basic arguments in an effort to defend the constitutionality of Section 292(b). First, relying on choice language from Vermont Agency's FCA analysis finding history "well nigh conclusive" as to Article III standing, the Government has argued that because qui tam actions were well established in England before and after the Revolution and were present in this country before and after the establishment of the Constitution, Section 292(b) must be constitutional. But while history is often illuminating, it rarely is dispositive of constitutional arguments. The Supreme Court in Walz v. Tax Commission (1970) has warned against grandfathering a right to violate the Constitution.
Second, the Government has also argued that Section 292(b) provides a civil remedy and Article II imposes less of a restriction on Congress in the civil, as opposed to the criminal, context. Thus, according to the Government, the Morrison standard does not apply with any force to Section 292(b) claims. But the Federal Circuit in Pequignot v. Solo Cup (2010) recently held that "the false marking statute is a criminal one, despite being punishable only with a civil fine." More fundamentally, there is no support whatsoever for the notion that the President's Take Care Clause responsibilities are reduced in the context of civil law enforcement. The Supreme Court has applied Article II fulsomely in civil contexts in a line of cases from Buckley to Free Enterprise.
Third, relying on the circuit court cases upholding the qui tam provisions of the FCA, the Government has relied on a hodge-podge of general procedural rules in claiming that the Executive has sufficient control to meet the Morrison standard. Here the Government's argument ignores the substantial difference between the FCA and Section 292(b): whereas the FCA gives the Executive absolute rights that it may exercise in its sole discretion, in the Section 292(b) context the courts must approve the Government's exercise of the general procedural rules on which it relies. This magnifies the separation of powers problem. Under Article II, the Executive's right to execute the laws cannot be subject to prior approval by the courts. Additionally, even if the Government were correct about the authority granted by the rules, those powers are only useful if the Government receives notice of the pendency of Section 292(b) actions. Unlike the notice to the DOJ required by the FCA, however, Section 292(b) does not require any notice to the Executive. To be sure, 35 U.S.C. sec. 290 requires that a district court provide the Director of the USPTO with notice of all patent cases. But the notice does not specify that the case includes a Section 292(b) claim, and there is no evidence that the USPTO ever reviews the notices to determine whether a case involves Section 292(b) or ever forwards information about Section 292(b) cases to the DOJ. Thus, when there is no actual notice to the Executive Branch, the President cannot take care that the laws are faithfully executed.
While the parameters of false patent marking claims brought under Section 292 have recently been clarified, the constitutionality of Section 292(b) under Article II of the Constitution remains unresolved. To date, district court judges in two cases--Harrington v. Ciba Vision (W.D.N.C. 2009) and Pequignot v. Solo Cup (E.D.Va. 2009)--have upheld the constitutionality of Section 292(b) on incomplete records, but neither decision was appealed. Several other courts faced with the issue have disposed of the underlying cases without reaching the constitutional issues. Nevertheless, it is only a matter of time before the constitutionality of Section 292(b) reaches the Federal Circuit--and ultimately the Supreme Court. Applying traditional separation of powers principles and the control test from Morrison, Section 292(b) fails rigorous Article II scrutiny. Article II of the Constitution unquestionably requires that a law that allows a private person to litigate the Government's sovereign interest, whether criminal or civil, provide the Executive with the authority to control the case and ensure that its prosecution is not inconsistent with the Government's sovereign interests. Given the Supreme Court's recent reinvigoration of separation of powers principles in Free Enterprise Fund, it seems likely that the Court would have considerable constitutional difficulty with Section 292(b).
Adam H. Charnes is a partner in the Winston-Salem, North Carolina, office of Kilpatrick Stockton LLP, where he practices appellate, constitutional, and complex business litigation. Chad D. Hansen is an associate at the firm. Both authors represented defendant Pioneer Hi-Bred International, Inc., in North Carolina Farmers' Assistance Fund, Inc. v. Monsanto Co., No. 1:08-cv-409 (M.D.N.C.), which involved issues addressed herein.