NPEs Have No Obligation to Mark Under the Statute—and that Should Extend to an NPE’s Settlement Licensees

One advantage a non-practicing entity (NPE) has for collecting damages through patent infringement litigation is that there is no obligation to mark a product prior to collecting damages, whereas the marking statute (35 U.S.C. §287) requires a patent holder to mark the patent number on a commercial embodiment of its invention (i.e., the product or service it uses, sells or offers to sale) in order to collect damages for infringement. .

However, what happens after an NPE settles a patent infringement case with a defendant that produces a product or service, and that product or service was the accused instrumentality in the patent infringement lawsuit?

What the Federal Circuit Has Said

Caselaw from the U.S. Court of Appeals for the Federal Circuit supports that the recovery of damages is not limited by the absence of marking where there are no products to mark. Tex. Dig. Sys. v. Telegenix, Inc., 308 F.3d 1193, 1220 (Fed. Cir. 2002), overruled in part, 415 F.3d 1303 (Fed. Cir. 2005). Further, the Federal Circuit has held that the marking statute is only a limitation on damages and not an affirmative defense:

“Section 287 is thus a limitation on damages, and not an affirmative defense. Motorola, Inc. v. United States, 729 F.2d 765, 770 (Fed. Cir. 1984). Compliance with § 287 is a question of fact. Maxwell, 86 F.3d at 1111.”

Arctic Cat Inc. v. Bombardier Recreational Prod. Inc., 876 F.3d 1350, 1366 (Fed. Cir. 2017.

Thus, as long as an NPE does not offer a product or service for sale, the NPE’s damages through patent infringement litigation will not be limited by a failure to mark.

However, caselaw also provides that an NPE has an obligation to ensure its licensee marks its products with the patent number in order for the NPE to collect damages if that licensee produces a patented article. . The Artic Cat case concerned an NPE that had previously practiced the patent, but no longer practiced it, and had licensed a third party to produce a patented article under its patent. Arctic Cat Inc., 950 F.3d at 862. The license agreement with the third party specifically discussed the patented articles that were licensed.. The Federal Circuit found that the NPE was required to use reasonable means in requiring the third party to mark its products with the patent number and the NPE could collect no damages from patent infringement litigation until it used reasonable means to require the third party to mark its product.

Other Scenarios

What about the situation where an NPE settles a case with a defendant, but the defendant does not agree that it is producing a patented article for or under the NPE’s patent? Or even a case where the defendant does not acknowledge infringement? At least one district court has commented on this fact scenario and left the burden with the NPE to prove that the identified product did not practice the patent. Finjan, Inc. v. Juniper Networks, Inc., 387 F. Supp. 3d 1004, 1017 (N.D. Cal. 2019), aff’d, 825 F. App’x 922 (Fed. Cir. 2020). However, the Finjan case was at summary judgment where there were allegations that the identified product did practice the patent, and the allegations were later confirmed by a jury.

But what about the case where the settlement is merely a desire to end the litigation? Or a case where a settlement license is drafted between the NPE and the defendant that does not admit infringement and does not specifically identify a patented article to be produced for or under the NPE’s patent? In such a situation, the policies of Section 287 should be balanced with the desire to resolve the case without admitting to infringement. At the very least, courts should encourage a policy that decreases rather than increases the burden to case resolution.

The courts already recognize a settlement license is something different than a license to produce a patented article negotiated at arm’s length. Eidos Display, LLC v. Chi Mei Innolux Corp., No. 6:11-CV-00201-JRG, 2017 WL 1322550, at *4 (E.D. Tex. Apr. 6, 2017 (While settlement licenses have been used to assess damages in patent litigation, their admittance is never obtained without scrutiny because of the inherent risk they pose in skewing a reasonable royalty calculation. See ResQNet, 594 F.3d at 872 (noting that “the hypothetical reasonable royalty calculation occurs before litigation and that litigation itself can skew the results of the hypothetical negotiation”). The courts recognize that license fees negotiated in the face of a threat of high litigation costs may be strongly influenced by a desire to avoid full litigation. Rude v. Westcott, 130 U.S. 152, 164, 9 S.Ct. 463 [468] (1888). Such licenses may therefore have little to do with whether the parties to the settlement agreed there was infringement. In fact, in the past, settlement agreements were generally not relevant in a royalty analysis “because in the usual course they do not provide an accurate reflection of what a willing licensor would do in an arm’s length transaction.” Fenner Invs ., Ltd. v. Hewlett–Packard Co., No. 6:08–CV–273, 2010 WL 1727916, at *1 (E.D.Tex. Apr. 28, 2010). Therefore, settlement licenses are not typically a license to produce a patented article, but rather an end to litigation.

The Purpose of Section 287

The policy of Section 287 “serves three related purposes: (1) helping to avoid innocent infringement; (2) encouraging patentees to give public notice that the article is patented; and (3) aiding the public to identify whether an article is patented.” Arctic Cat Inc., 950 F.3d at 865. When the failure to mark is caused by someone other than the patentee, the courts consider, using the rule of reason analysis, whether the patentee made reasonable efforts to ensure its licensee is compliant with the marking requirements. The rule of reason is consistent with the purpose of the constructive notice provision—to encourage patentees to mark their products in order to provide notice to the public of the existence of the patent and to prevent innocent infringement. Maxwell v. J. Baker, Inc., 86 F.3d 1098, 1111-1112 (Fed. Cir. 1996). Thus, compliance with Section 287 is a question of fact and not a question of law. . Therefore, an NPE should generally be able to plead compliance with Section 287 by asserting that it has never sold a product, that it is a non-practicing entity with no products to mark and has pled all statutory requirements to obtain pre-suit damages, and that all conditions precedent to recovery are met.

Tips for Compliance in Certain Scenarios

• If a defendant identifies a third party’s specific patented article that it alleges must be marked, the NPE should further plead that it has taken reasonable steps to ensure marking by any licensee producing a patented article.
• If a defendant identifies a settlement agreement between the NPE and a defendant that did not admit infringement and wherein the defendant does not agree that it is producing a patented article for or under the NPE’s patent, then the NPE should plead that the NPE and its predecessors-in-interest have entered into settlement licenses with defendant entities, but none of the settlement licenses were to produce a patented article, for or under the Plaintiff’s patents. The NPE should further plead that discovery will show that the NPE and its predecessors-in-interest have substantially complied with Section 287(a). If appropriate, the NPE should further plead that each of the defendant entities in the settlement licenses did not agree that they were infringing the NPE’s patents, including the Patents-in-Suit, and thus were not entering into the settlement license to produce a patented article for the NPE or under its patents. Further, to the extent necessary and possible, the NPE should plead that it will limit its assertions of infringement to method claims and thereby remove any requirement for marking.
• If a defendant identifies an alleged unmarked product produced for the NPE or under the NPE’s patents, the NPE will need to develop evidence in discovery to show that the alleged unmarked product does not practice the Patents-in-Suit and that Plaintiff has substantially complied with the marking statute. The NPE should further plead, if true, that the Defendant has failed to identify specific patented article for which Section 287(a) would apply.
• If a defendant identifies a settlement agreement that it contends is a license agreement triggering a marking requirement, to the extent the settlement agreement was merely to end litigation, the NPE should plead that the NPE understood that (1) the settlement license was the end of litigation between the defendant entity and the NPE and was not a license where the defendant entity was looking to sell a product under any of Plaintiff’s patents; (2) the settlement license was entered into to terminate litigation and prevent future litigation between the NPE and defendant entity for patent infringement; (3) defendant entity did not believe it produced any product that could be considered a patentable article under 35 U.S.C. §287; and, (4) the NPE believes it has taken reasonable steps to ensure compliance with 35 U.S.C. §287 for each prior settlement license.
• If the settlement license was to end litigation with the defendant with no admission of liability, the NPE should plead that each settlement license that was entered into between a defendant entity and the NPE was negotiated in the face of continued litigation and, while the NPE believes there was infringement, the defendant entity did not agree that it was infringing. Thus, each prior settlement license reflected a desire to end litigation and as such the policies of Section 287 are not violated.
• Lastly, the NPE should plead that the policy considerations of Section 287 are advanced when parties are allowed to freely settle cases without admitting infringement and thus not requiring marking. The NPE should plead that all settlement licenses were to end litigation and not to produce a patented article, thus the policies of Section 287 are not violated. The NPE should plead that acknowledging the differences between a settlement license to end litigation and a license to produce a patented article balances 35 U.S.C. §286 which allows for the recovery of damages for six years prior to the filing of the complaint, and 35 U.S.C. §287.

An NPE with existing settlement licenses needs to be wary of Section 287. However, with proper pleading, the risks of dismissal or a limitation on damages can be mitigated.

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Author: Aquir014b
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