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It’s Patently Unfair!

Posted by lowellyarusso on March 2, 2010

It’s Patently Unfair!

A new cottage industry is likely to spring up in the wake of a recent U.S. Court of Appeals ruling. And your supply chain is at risk. The crux of the matter is an obscure section of the U.S. patent laws that deals with packaging and the patents listed on that packaging. Basically, it is illegal to put an expired patent on a product’s package. The government relies on consumers to monitor those markings. And, to encourage consumers, the government allows individuals to file suit on behalf of the government and receive half of the fine as their reward.

The law has been around for a long time with little consequence. However, in a December 28 ruling, the Court of Appeals decided that the fines weren’t big enough. In the past, the fine was usually $500 for each DECISION to falsely mark a product. Now, the fine will be applied on a PER ARTICLE basis and can range anywhere from a fraction of a penny to $500 per article.

What does that mean? If you should happen to sell a million items at $1.00 per article, the fine for listing an expired patent on the packaging could be a whopping $500 million! And the lucky consumer who files the suit will get $250 million as their “fair share” of the fine. That is more than enough incentive to create an army of consumers who will troll the shelves of every store in America looking for expired patents on your packages. And, with the aid of the internet, be assured that someone will find one if it’s there. And, as has already occurred, some law firms are sure to look on this as a bonanza as they offer their services to help consumers “guard the public interest”.

The good news is that a successful suit requires that the plaintiff establish that the offending company was trying to deceive the public with expired patent claims. While that seems like a difficult hurdle for the public guardians, it does not change the motivation for filing the suits, simple greed. One individual in Chicago, as reported in the Chicago Tribune on March 2, filed 28 suits in a single week. Most are not likely to meet the burden of proof of deceptive intent if they get to trial. However, given both the risks inherent in going to trial and the long-standing economics of cutting losses through out of court settlements, the incentive to file will still be high.

From a supply chain perspective, this adds tremendous risks in an area, packaging, that is not frequently included in the catalog of risk management issues. (The good news is that it could, in the short run, make a significant dent in the unemployment figures. And we didn’t think the government was doing anything about all those people out of work!) Remember, whether you even know that the labeling is wrong is not the issue. It’s whether you want to go to the expense of defending yourself against the suit in a protracted legal battle.

What should you be doing about it? First, don’t expect that you are immune. While, to date, the focus is on “consumer packaging”, a little creative work by one of those “legal beagles” sniffing around for fees will almost certainly seek to expand the application to any patent listing that is included with a product. In other words, those patents stamped onto the sides of earth movers could come under scrutiny. And, while it may be a stretch in your mind, there’s always a chance that a sympathetic judge somewhere will agree that such a suit has sufficient merit to allow it to proceed to trial.

Second, it’s probably a good idea to take make some short-term and long-term changes to your risk management procedures. In the short-term, put together a team to review any and all patent claims that get associated with your products, either on the packaging or on the product itself. If there are expired patents in the mix, remove them.

In the long-term, put procedures in place to monitor expiration dates of patents. The key will be to identify an expiring patent and get it removed BEFORE the expiration date. How much notice will be required is obviously a function of where it is listed and the length of your supply chain. Once established, such procedures need not be burdensome. Dealing with the issue when it is flagged may, obviously, be another matter.

Third, start working with your suppliers to help them help you. Some key issues are:
• Can your packaging suppliers change the fine print quickly and efficiently?
• Can your component suppliers quickly adapt the patents listed on THEIR products?
• How can you work together to help protect each other from legal action?
• What will it take to establish “lack of intent” if suit is filed?
• What is each company’s policy concerning defending such suits?
• Can you address the issue BEFORE the consultants come calling?

The bottom line is that the courts have created a massive opportunity for “consumer advocates” while also creating a potentially significant new cost concern for virtually every manufacturer in the U.S. (What impact there will be on foreign goods has yet to be explored. The good news is that, at present, only U.S. patents are eligible. The bad news is that, at least in the Western world, patents are considered effective across borders so there’s plenty of legal wiggle room.) At least you’ve been warned.

Will this become the Sarbanes-Oxley of 2010?
Where is your greatest exposure? How will you protect yourself?
What are your thoughts?


One Response to “It’s Patently Unfair!”

  1. Marie said

    Will this create more products with longer “Patent Pending” labels?

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