Intent and Action: Defining “Competitive Injury” in False Marking Actions

  • Jul 21 2015
  • |
  • Category: News

By Rakesh Roy

On May 4, 2015, in a case of first impression, the U.S. Court of Appeals for the Federal Circuit in Sukumar v. Nautilus, Inc., 785 F.3d 1396 (Fed. Cir. 2015), defined “competitive injury” as recited in the amended standing requirement under 35 U.S.C. § 292(b) of the America Invents Act (AIA) for bringing a false patent marking claim to include not just “market participants,” but also potential competitors.  According to 35 U.S.C. § 292(b), “[a] person who has suffered a competitive injury as a result of a violation of this section may file a civil action in a district court of the United States for recovery of damages adequate to compensate for the injury.” (Emphasis added).

In Sukumar, the Federal Circuit affirmed the district court’s grant of summary judgment for Nautilus on Sukumar’s false marking claim, holding that Sukumar failed to establish a “competitive injury,” and therefore lacked standing under § 292(b) of the AIA.  Id. at 1405.

In finding its holding, the Federal Circuit analyzed the issue of “whether (or to what extent) an entity that has not entered the relevant market can suffer ‘competitive injury.'”  Id. at 1400.  The Federal Circuit rejected Nautilus’ argument that “an entity cannot suffer competitive injury unless it actively sells products in the market,” and instead, held that even “a potential competitor may suffer competitive injury if it has attempted to enter the market.  An attempt [being] made up of two components: (1) intent to enter the market with a reasonable possibility of success, and (2) an action to enter the market.”  Id.

The present action stems from a long history of legal dispute between Sukumar and Nautilus that dates back to the late 1990s.  While caring for his ailing father, Ponani Sukumar recognized the need for rehabilitation fitness machines for frail seniors.  In 1998 and 1999, Sukumar contracted with Nautilus for fitness machines modified to cater to the needs of elderly users.  When the fitness machines were delivered, Sukumar was dissatisfied and filed a breach of contract action against Nautilus.  Id. at 1398.

In 2004, Sukumar founded the Southern California Stroke Rehabilitation Associates (SCSRA) to run rehabilitation facilities using modified fitness equipment from Nautilus.  According to Sukumar’s deposition testimony, SCSRA had twice tried to negotiate a patent license agreement from Nautilus.

After SCSRA’s failed attempts to negotiate a patent license agreement from Nautilus, in October 21, 2010, Sukumar and SCSRA (collectively, Sukumar) filed a lawsuit against Nautilus for false marking.

On February 20, 2012, Sukumar moved for partial summary judgment on the issue of whether the Nautilus fitness machines were falsely marked.  The district court found for Sukumar.  Id. at 1398-99.  In particular, the district court found that eight of the twenty-four patents marked on six Nautilus fitness machines and eight of the sixteen patents marked on an additional three Nautilus fitness machines did not cover the machines.  Id. at 1399.

Following the district court’s holding, Sukumar created a business plan for selling fitness equipment, created initial designs for a fitness machine by consulting with a design firm and engineers in the industry, and sought to acquire land for offices and a manufacturing facility.  Id.

During this time period, on September 16, 2011, the AIA was signed and 35 U.S.C. § 292(b) was amended to require “competitive injury” as a precursor for bringing an action for false marking.  After the AIA was signed, the district court allowed a second round of motions and cross-motions for summary judgment.  This time, on December 6, 2013, the district court granted Nautilus’ motion for summary judgment as it found that Sukumar did not suffer a competitive injury.  Id.

  • On appeal, the Federal Circuit looked to the plain meaning of the term “competitive injury,” the legislative history and policy concerns behind 35 U.S.C. § 292, as well as similar terms in analogous areas of the law.  Id. at 1400-01.  The Federal Circuit found that “competitive injury” was not limited to only “market participants” as proffered by Nautilus, but could be suffered by a potential competitor if the potential competitor had intent to enter the market and took action to enter the market.  Id. at 1400.
  • In applying this standard for “competitive injury” to the facts presented, the Federal Circuit found that the evidence strongly suggested that Sukumar never intended to sell fitness machines in competition with Nautilus.  See id. at 1402-03. In considering the evidence, the Federal Circuit agreed with the district court in its decision to put minimal weight on Sukumar’s actions following the start of the suit.  Id. at 1403.  The Federal Circuit feared that crediting Sukumar for its actions following the start of the suit would lead to manufacturing evidence.  Id. At most, the evidence suggested that Sukumar intended to operate rehabilitation centers using modified Nautilus fitness equipment, which would make Sukumar a customer and not a competitor of Nautilus.

Moreover, the Federal Circuit held that even if Sukumar subjectively intended to enter the market to sell fitness machines, insufficient actions were taken to pursue the intent.  Id.  Aside from purchasing Nautilus fitness equipment, the Federal Circuit found that Sukumar did not attempt to compete with Nautilus.  Id. at 1404.

The decision highlighted a list of basic steps that Sukumar failed to take in the decade between the time Sukumar allegedly developed the intent to compete with Nautilus and when Sukumar filed this case, the list of actions not taken include:

  • Developing a business plan;
  • Attempting to design a prototype;
  • Hiring employees;
  • Gaining engineering knowledge; and
  • Investigating manufacturing capacity.

Id. at 1404.

Ultimately, though the Federal Circuit provided a sufficiently broad definition of “competitive injury,” Sukumar’s failure to prove that he had actually suffered an injury by taking one or more of these actions proved dispositive, resulting in the same outcome as in the district court.  Though the outcome was the same, the Federal Circuit’s clarification of who may suffer the competitive injury places the inquiry in these cases properly on the evidence of the injury and not on the entry of a product to the market.