plaintiff not enough of a competitor to win false marking claim

Sukumar v. Nautilus, Inc., No. 7:11–cv–00218, 2013 WL 6408351 (W.D. Va. Dec. 6, 2013)

Previous discussion.  The court goes through a lot of facts and effort here to confirm that the AIA made false marking claims essentially impossible to win, and I’m not so sure about that adverb.  Sukumar sued Nautilus for false marking of certain exercise machines, and, even despite the court’s ruling that some false marking occurred, the court found that he hadn’t shown enough evidence of “competitive injury,” as required under the AIA.  Coordinate state law claims also failed for lack of evidence of proximate causation.

Sukumar founded plaintiff Southern California Stroke Rehabilitation Associates (SCSRA) with the intention of opening stroke rehabilitation centers.  Based on his experience with his elderly father’s illnesses, he made strength training equipment a central part of his plan. He believed Nautilus machines would need to be modified to serve the senior fitness and rehab market, and developed concepts for such machines.  As part of his research, he bought a number of different exercise machines from Nautilus and others.  In the course of his investigations, he was told several times by Nautilus employees or representatives that Nautilus machines were patented and that Nautilus vigorously protects the machines from patent infringement.  The Nautilus machines also contained patent labels.  “[A]t least some of the patent labels on the machines were false, in that they listed patents that did not apply to that particular machine.”

Sukumar also ordered a number of customized Nautilus machines, but was dissatisfied with the delivered machines and sued the distributor for breach of contract and Nautilus for inducing breach.  He lost those claims.

He testified that he wanted to enter direct competition with Nautilus, but because of the patent statements, he thought he needed a license.  He twice sought a license from Nautilus to modify the machines, at least once in the context of a settlement discussion.  He argued that, had he known those machines were not patented, he would have built his own machines for sale and thus competed directly with Nautilus. However, his testimony was contradicted by terms in the settlement letter, in which he claimed he wanted to license Nautilus technology solely for use in SCSRA centers; at his deposition, he testified that he only formed the intent to make and sell customized machines in early 2012.

Although Sukumar claimed to have been working on his designs since the late 1990s, he and SCRSA are not presently Nautilus competitors.  SCSRA has no other employees; they haven’t created or opened any senior spa centers or stroke rehabilitation centers; they haven’t sold any modified Nautilus equipment or machines of his own design; they hold no patents on fitness equipment; SCRSA has yet to show a profit in any year; and Sukumar’s patient protocol isn’t written, but kept in his mind.  In rebuttal, plaintiffs emphasized their efforts since the early 2012 decision that the machines were falsely marked.  They retained an expert on the senior fitness market and worked to develop a business plan and retain other industry professionals; they were working with a design house and manufacturers to develop prototypes; and they were working to buy land for a manufacturing facility. Thus, they argued, were it not for the false patent labels, they could and would have engaged in such efforts previously.

Plaintiffs’ injuries, they argued, were delay in entry into the fitness equipment market; unnecessary expenses in attempting to license or purchase Nautilus patents/assets and those of another manufacturer; unnecessary expenses in analyzing the validity and enforceability of the falsely marked patents; and unnecessary expenses in storing machines they acquired.

None of this was sufficient.  The AIA requires “competitive injury,” in order to eliminate abusive qui tam actions.  Although plaintiffs relied on the idea that they were competitively injured when they were impeded in their efforts to enter the market and incurred unnecessary costs, citing Forest Group. Inc. v. Bon Tool Co., 590 F.3d 1295 (Fed. Cir. 2009), that case has been superseded by the AIA, and in any event involved parties who were concededly competitors.

“Indeed, some of the precise harms that Plaintiffs claim here, e.g ., unnecessary investment in design around costs, or costs incurred to analyze the validity or enforceability of patents, are described in [another case] as hurting ‘a member of the public [who] desir[es] to participate in the market for the marked article.’ Those harms would not be competitive injuries, therefore, but instead harms suffered by the general public.”  Forest Group didn’t identify the harm of dissuading potential competitors as competitive injury.  The case law to date was ambiguous about potential competitors; analogies to the Lanham Act were also not dispositive.  The court declined to make a blanket ruling on potential competitors. Instead, it held that no reasonable jury could conclude that these plaintiffs suffered a competitive injury.

Assuming that prevention of entry into the market is actionable, “it must mean that the entity was capable or able to compete (or actively trying to do so), but that the false marking impeded those efforts in some concrete way. A competitor must do more than show it had a desire to compete, and that it did not attempt to compete out of a fear of infringing another’s patent.” But that’s all that plaintiffs here could show. “It simply defies common sense to conclude that, for more than ten years, Plaintiffs have not entered the market to compete with Nautilus and that the sole item holding them back was their fear of infringing patents that were falsely listed on the accused machines’ patent labels.”  Plus, a subjective fear of infringing was insufficient to establish competitive injury, because that standard would allow lots of plaintiffs to sue.  Notably, the Federal Circuit has rejected subjective fear of infringement as sufficient injury to convey standing to challenge a patent. 

Sukumar might well have great ideas, and since 2012 he might have begun in earnest trying to make them reality. “But concerted efforts after a lawsuit is filed or a partial decision rendered is not proof a jury can rely on to determine that the reason those efforts were not taken sooner was because of false patent labels.” This was especially true because he repeatedly blamed other, non-false marking actions by Nautilus for years of delay in his business objectives.  His sincere belief didn’t substitute for evidence that “if not for Nautilus’s false marking of its machines, the road to Plaintiffs’ development of competing machines and rehabilitation or spa centers would have been swift and easy and that SCSRA would be competing with Nautilus today.”

In addition, there was insufficient evidence that plaintiffs ever intended to compete with Nautilus in the relevant market—making and selling exercise equipment—before the lawsuit, as opposed to using machines in his own facilities.  In fact, plaintiffs’ changing plans further showed that they weren’t sufficiently established as a business to suffer competitive injury.

The other claimed damages were also insufficient.  Any claimed overpayment for machines based on the false marking, even if it occurred, was injury as a consumer, not competitive injury.  As for the unnecessary expenses in analyzing/attempting to license the patents, etc., they weren’t competitive injuries for the same reasons: “Plaintiffs are neither competitors nor sufficiently close to competing to state a valid claim for ‘competitive injury.’”  Plus, the licensing attempts were part of an effort to settle pending litigation, unrelated to false marking.  There was also no evidence that storage fees and legal fees incurred in analyzing the patents’ validity were caused by the false marking; Sukumar had previously blamed other causes, such as Nautilus’s breach of contract or warranty, on the claimed storage fees.  

Nor is work performed to determine the validity of Nautilus patents inherently a competitive injury, but rather a “generic” type of harm.  Also, the fees weren’t unnecessary because they were the basis for the lawsuit, but attorneys’ fees aren’t recoverable in a California consumer protection claim, so to allow them to count under the AIA would be an unacceptable end-run.  (Comment: what?  That makes no sense to me; the AIA is not a coordinate federal law to the general California consumer protection law, and anyway the feds are entitled to decide what counts as injury to a federal right.)

In any event, the harms alleged were simply too speculative for a jury to find them to have been caused by the false labels.

The state law claims under California and Washington law also failed, even though they didn’t require competitive injury: they required damages caused by the mismarking, and evidence of causation was absent.