Wednesday, February 15, 2012

False marking and consumer deception

Sukumar v. Nautilus, Inc., --- F.Supp.2d ----, 2012 WL 423322 (W.D. Va.)
Sukumar founded a company to create and commercialize an equipment-based protocol for elderly patients in rehab.  He found that machines manufactured by Nautilus came closest to his needs, but nonetheless needed modifications to work with his rehabilitation protocol. “Sukumar, an engineer with a Wharton MBA, believed he could make the required modifications himself, but after learning about Nautilus's extensive patent portfolio and examining the patent labels on certain of Nautilus's products, he was intimidated and deterred from attempting such modifications, instead determining that he would have to rely on Nautilus to acquire the technology needed for his custom machines.” He paid Nautilus more than $150,000 to manufacture customized exercise equipment, and more than once unsuccessfully sought to license technology from Nautilus. He alleged that his belief that he needed a license from Nautilus prevented him from designing and building custom machines.
Sukumar’s false marking complaint was interrupted by the AIA.  He amended his complaint to explicitly allege competitive injury, as now required, and adding California and Washington state law claims.  He then moved for partial summary judgment on several aspects of his claims.
False marking: the court found that there was indeed false marking.  Nine machines manufactured at Nautilus’s Independence plant were unpatented and falsely marked, where unpatented means that “the article in question is not covered by at least one claim of each patent with which the article is marked.” Nautilus admitted the mismarking at oral argument.  Six accused strength-building machines all carried the same label, which was endorsed with the Nautilus name, the words “Manufactured Under U.S. Patent Numbers and Other Patents Pending,” followed by a set of 24 numbers.  “Even a cursory review of the evidence” revealed that none were relevant; for example, one covered a stair-stepping machine and another covered a system that monitors the exerciser’s activity.  Three accused cardio machines were in a similar situation: each carried a patent label (not the same as the one on the strength machines) with the same wording and 16 different patent numbers.  It was “patently obvious to even this lay Court” that the patents didn’t cover the machines; they dealt with, among other things, rope climbing devices, resistance training apparatus, and upper body exercise apparatuses.  There was no genuine issue of material fact as to false marking.
There was, however, a genuine issue on intent to deceive the public, the other required element.  Plaintiffs argued that the blatent extent of the mismarking, plus Nautilus’s knowledge, was enough to meet their burden to win summary judgment, but the court disagreed.  The bar for deceptive intent is high in a false marking case: Nautilus, in falsely marking the accused machines, must have evinced a conscious desire that the public be deceived.
Plaintiffs argued that the fact that Nautilus used different labels on different lines of machines, combined with securities filings highlighting the scope of its patent portfolio and a previous judgment against it for false marking, show that Nautilus had deceptive intent.  In Icon Health & Fitness, Inc. v. Nautilus, Inc. (D. Utah 2006), a jury found that Nautilus had violated Section 292 by falsely marking part of its Bowflex exercise machine. Nautilus has also touted its patent portfolio in various securities filings, and has sought to enforce its patent rights in numerous cases. 
Nautilus submitted declarations in opposition.  Naked assertions of lack of intent to deceive are insufficient, but Nautilus offered more.  First, Nautilus’s witness testified that Nautilus did not receive any specific legal advice regarding its patent marking labels.  Plaintiffs argued that this indicated awareness of Nautilus’s legal obligations, while Nautilus contended that it had no specific knowledge that the accused machines were falsely marked.  Nautilus's Vice President of Engineering when the Accused Machines were manufactured, defended the so-called “uni-label,” declaring that “the use of the single patent label increased the efficiency and ease of the manufacturing process because it allowed one patent label to be affixed to each machine quickly and it could be applied to multiple orders or orders of mixed machines.”  He testified that he considered the affixing of patent labels to be of marginal importance, and that Nautilus did not have any kind of formal system or method of evaluating the labels used or monitoring their use. But he also stated that the labels were updated from time to time with patent numbers being added and removed.  Nautilus also offered the declaration of the man who’d been plant manager during the relevant time.  He said that the patent label was an “afterthought” and that using the uni-label eliminated the need for employees to discern which patent numbers applied to which product. 
Perhaps, the court said, the uni-label defense was a mere lawyer’s creation, and a factfinder might find that defense unconvincing at trial, but it created a genuine issue of material fact.
As an alternative to summary judgment, plaintiffs asked the court to find that they were entitled to an inference of false marking plus knowledge of false marking creates a rebuttable presumption of deceptive intent.  To show knowledge, plaintiffs needed to show that Nautilus lacked a reasonable belief that the accused machines were properly marked.  The court was also unwilling to go that far.  “To be sure, in light of the Icon Fitness case, no reasonable jury could find that Nautilus was not aware that the Power Rods in its Bowflex line were falsely marked. However, there is nothing in the record to indicate that the accused machines were the subject of any prior false marking suit.”  Plaintiffs needed direct evidence that Nautilus Nautilus knew or did not have a reasonable belief that the accused machines were falsely marked.  Perhaps hinting that the parties should think about settlement, the court concluded that, “[a]s persuasive as these arguments may prove to be at trial, they are, in the end, insufficient to meet the high bar for summary judgment.”
The court did grant summary judgment on the California FAL element that Nautilus intended to dispose of real or personal property, but (for the reasons given above) not on the element that Nautilus publicly disseminated untrue or misleading statements about that property which it knew, or in the exercise of reasonable care should have known, was untrue or misleading. The parties disagreed about whether the patent labels were “advertising,” but there’s actually nothing in the FAL requiring the false statement to be in an “advertisement.”  “Thus, the appropriate inquiry is whether Nautilus publicly disseminated untrue or misleading statements; the Court need pay no attention to whether those statements are advertising in the traditional, commercial sense of the word.” 
The court found that Nautilus disseminated untrue statements about the machines.  (Note the potential Dastar/preemption issue here, at least as Dastar has been widely interpreted.)  But there was still a question of whether Nautilus knew or by the exercise of reasonable care should have known the statements were untrue. Precedent imposes a duty of investigation, and the failure to verify breaches the defendant’s duty of care when the facts would put a reasonable person on notice of possible misrepresentations.  Moreover, California recognizes a duty of communication between corporate departments: “a large corporation such as Nautilus may not escape liability just because no one employee or officer has all the information necessary to use reasonable care to avoid disseminating false statements.”  Still, reasonable care was an issue for the trier of fact.
Sukumar also brought Washington Consumer Protection Act claims.  The WCPA requires an unfair or deceptive act or practice; deceptiveness requires misleadingness, or a misrepresentation of something of material importance.  The court found that “the practice of placing patent numbers on a product that do not cover that product is misleading.”  No intent to deceive is required by statute, but, to avoid preemption, in this particular instance such a showing would be required.  More saliently at this point, Sukumar also had to show that the false marking had the capacity to deceive a substantial portion of the public.
This was a question of fact.  The Ninth Circuit held, in a different context, that a tax shelter scheme marketed to people with millions of dollars in capital gains lacked such a capacity.  The accused machines were sold only to commercial entities: gyms and other industrial users.  The labels were placed in inconspicuous locations.  Thus, drawing all inferences in Nautilus’s favor, summary judgment for Sukumar on this element was inappropriate.
The WCPA also requires a showing of impact on the public interest, which can be satisfied by showing that an act or practice injured people other than the plaintiffs or had/has the capacity to injure them.  Sukumar argued that the false marking was widespread and harmed consumers by causing them to pay more than the machines were worth.  Though there were no cases construing the current statute, the court considered five factors relevant (quoting an older case): “(1) Were the alleged acts committed in the course of defendant's business? (2) Are the acts part of a pattern or generalized course of conduct? (3) Were repeated acts committed prior to the act involving plaintiff? (4) Is there a real and substantial potential for repetition of defendant's conduct after the act involving plaintiff? (5) If the act complained of involved a single transaction, were many consumers affected or likely to be affected by it?”  Nautilus’s mismarking wasn’t limited to its dealings with Sukumar, but covered all its machines made at its Independence plant, which were then sold across the country.  The Federal Circuit has noted that false marking deters innovation and research and stifles competition.  Though those harms were speculative at this point, and Sukumar would still have to show harm to itself at trial, the conduct clearly had the capacity to injure other people.  Thus, Sukumar won summary judgment on this element.

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