False marking repled as consumer protection claim

Sukumar v. Nautilus, Inc., --- F.Supp.2d ----, 2011 WL 6325854 (W.D. Va.)

False marking is the gift that keeps on giving!  The America Invents Act eliminated the patent false marking qui tam provisions and added a competitive injury requirement.  The plaintiffs, who’d sued before the AIA was passed, amended their complaint to allege bad faith and also that they’d suffered a competitive injury as a result of Nautilus’s false marking.  They also added claims for violation of California’s FAL and UCL as well as Washington consumer protection law.  Nautilus moved to dismiss the state law claims on preemption grounds.

The court began by reviewing the elements of the state law causes of action and concluding that they were all very similar in character, and could be treated similarly for the limited purpose of assessing preemption.

There’s a general presumption against preemption.  Consumer protection laws in particular have historically been part of the states’ broad police powers and accorded special deference unless there’s a clear direction from Congress. 

The AIA contained no express preemption provision.  Nautilus argued that Congress’s pervasive regulation of patents created field preemption.  Courts have held that state RICO counterclaims are preempted when identical in scope with an inequitable conduct defense, and that an abuse of process claim based on proceedings before the PTO is also preempted as a collateral intrusion on PTO procedures.

While it’s true that granting patents is exclusively a matter of federal law, the Patent Act “has never been interpreted as wholly upending the ability of the states to regulate anything tangentially related to the issuance of a patent.”  The Federal Circuit has even recognized that a state unfair competition claim is not subject to field preemption.  However, Nautilus argued that the AIA changed things enough to occupy the field.  The court disagreed.  Though the AIA did change false marking law, that wasn’t the “major objective” of the law, which was focused on first-to-file.  The legislative history on false marking focused on eliminating the qui tam remedy.  There was no evidence that Congress “sought to use the law to impose upon the traditional authority of the states to regulate areas of consumer protection.”

The main question of patent law in the case at bar, for preemption purposes, was whether the patent numbers affixed to Nautilus products actually covered those products.  In light of the states’ historical role in consumer protection, the court couldn’t find a clear and manifest purpose to occupy the field of false marking law.

What about conflict preemption?  Nautilus’s direct conflict argument was that, because the state law claims have different elements and provide for different remedies than Section 292, as amended, they must be preempted.  “But this does not preemption make.”  Concurrent regulation is pretty normal, including in consumer protection.  The court analogized to fraud in connection with buying or selling commodities, which is also regulated by both the US and California, albeit with different elements and different remedies.  In other contexts, the Federal Circuit has identified different elements as a reason not to preempt state law, because the state law didn’t involve patent-like protection.

Nautilus argued that bringing forth state law unfair competition claims would serve as an obstacle to Congress's intent in passing the AIA, to wit “eliminat[ing] litigation brought by unrelated, private third parties.”  Congress aimed to address the recent surge in false marking litigation, and thus allowing state law claims would cut against that objective.  But Congress was concerned with the recent surge of qui tam cases brought on the basis of expired patents, which wasn’t the case here.  Moreover, plaintiffs couldn’t be deemed to be “unrelated, private third parties”: they allege that they compete with Nautilus and were deterred from designing certain rehabilitation equipment because of the false marking.  (The court commented that “[i]t may very well be that a suit by a private plaintiff who does not allege competitive injury does not survive the conflict preemption analysis.”)

Past precedent recognized two areas of preemption: (1) “federal patent law bars the imposition of liability for conduct before the PTO unless the plaintiff can show that the patentholder's conduct amounted to fraud or rendered the patent application process a sham,” and (2) “federal patent law bars the imposition of liability for publicizing a patent in the marketplace unless the plaintiff can show that the patentholder acted in bad faith” (quoting earlier decisions).  The second scenario was the most closely analogous to the case before the court.  The allegations were that Nautilus placed patent numbers on its products that didn’t cover those products.  “At its core, Plaintiffs' false marking claim is an attempt to hold Nautilus liable for ‘publicizing a patent in the marketplace.’ Thus, under controlling precedent, the claim is preempted unless Nautilus acted in bad faith.”  Though the state laws at issue didn’t have bad faith as an element, this was implied to escape preemption.  The complaint here adequately alleged bad faith.

Finally, the court found that allowing state law claims here wouldn’t interfere with the objectives of the patent laws (providing incentives to invent, promoting disclosure, and protecting the public domain against state laws propertizing it).

Separately, Nautilus argued that the Washington state law claim should be dismissed because plaintiffs failed to meet that law’s “public interest” requirement.  Under Washington law, an act or practice harms the public interest if it injured or had the capacity to injure other persons.  “It seems obvious that the practice of falsely marking products which are sold to the general public in the stream of commerce has the capacity to injure persons other than [plaintiffs].”  False marking may dissuade potential competitors from entering the market, or deter scientific research.  That satisfied the public interest element of the law.