Cottage Industry for Patent Suits Closed by Appeals Court

A U.S. appeals court that once acknowledged it was creating a new cottage industry in patent litigation shut down that market today.

Manufacturers won’t have to face lawsuits filed before September 2011 for posting expired patents on their products, the U.S. Court of Appeals for the Federal Circuit in Washington ruled, in a decision posted on its website.

The court said Congress acted within its authority last year by enacting a law limiting those kinds of lawsuits and making the change retroactive, so that it applied to all pending litigation.

About a thousand lawsuits were filed against companies that had posted expired or irrelevant patents on their packaging after a 2009 Federal Circuit ruling created the potential for huge damage awards. The court said companies could be penalized as much as $500 for every item marked with a false patent number.

One case against plastic tableware maker Solo Cup Co. could have resulted in a $5.4 trillion fine -- enough to pay a third of the U.S. national debt.

“The legislative history suggests that Congress was particularly concerned with the perceived abuses and inefficiencies stemming from false marking claims that were initiated,” Judge Sharon Prost wrote for the three-judge panel.

Kenneth Brooks, a California lawyer, filed suit against music-equipment maker Dunlop Manufacturing Inc. in September 2010, claiming that a winder used in replacing guitar strings was marked with a patent that had been invalidated and expired.

Brooks argued that Congress, in limiting the lawsuits, overstepped its authority by eliminating cases that were already under way. Pending cases, he said, should be allowed to proceed.

Misleading Claims

The cases were brought under a statute that let anyone file lawsuits on the theory that the general public had been harmed by misleading information. Under the law, damage awards were split 50-50 with the government. The Justice Department collected $7.56 million in damages from false marking suits in 2011 and $3.4 million in 2010, according to records on the agency’s website.

It was little used before the Federal Circuit’s 2009 ruling raised the prospects for astronomical damages. The court, which specializes in patent law, said at the time it could be creating a “cottage industry of false marking litigation.”

Elimination of the false-marking provision was part of an overhaul of the U.S. patent system signed by President Barack Obama on Sept. 16, 2011. Other parts of the law provide the U.S. Patent and Trademark Office with more control over its finances and made fundamental changes in how patent applications are processed and reviewed.

The case is Brooks v. Dunlop Manufacturing Inc., 12-1164, U.S. Court of Appeals for the Federal Circuit (Washington). The lower court case is Brooks v. Dunlop Manufacturing Inc., 10-4341, U.S. District Court for the Northern District of California (San Francisco).

To contact the reporter on this story: Susan Decker in Washington at sdecker1@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net

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