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WATCH OUT! SUPREME COURT OPENS DOOR TO TREBLE DAMAGES IN PATENT CASES!

June 30 2016

By: Audrey Millemann

Up until now, it has been nearly impossible for a plaintiff to recover enhanced (up to treble) damages in patent infringement cases.  The current test for enhanced damages, set forth by the Federal Circuit Court of Appeals in 2007 in In Re Seagate Technology, LLC, 497 F.3d 1360 (2007), was so rigid that it essentially slammed the door on plaintiffs seeking enhanced damages.  On June 13, 2016, however, the Supreme Court decision changed all that, in a unanimous decision in Halo Electronics v. Pulse Electronics, 2016 U.S. LEXIS 3776 (June 13, 2016).  The Court opened the door for plaintiffs to recover enhanced damages – no one is sure yet how far – but it is clear that plaintiffs have been given a boost and would-be infringers a cause for anxiety.

In Halo, the Court made three rulings that affect patent infringement suits.  First, the Court changed the test for recovery of enhanced damages from a rigid test to a flexible one.  Second, the Court lowered the plaintiff’s burden of proof for enhanced damages.  Third, the Court eased the standard of appellate review of district courts’ decisions on enhanced damages, leaving the district courts with more discretion and making it more difficult for defendants to overturn awards of enhanced damages.

The patent laws permit a trial court, in its discretion, to award enhanced damages to a plaintiff who prevails in a patent infringement suit.  35 U.S.C. § 284.  In Seagate, the Federal Circuit held that in order to obtain enhanced damages under § 284, a plaintiff had to prove willful infringement.  The court established a two-part test for willfulness.  The first part is objective – the plaintiff must show that there was an objectively high likelihood that the defendant’s actions were infringing.  This part of the test, referred to as “objective recklessness,” is determined by the judge based on the record, and cannot be found if the defendant raises a substantial question during the litigation as to noninfringement or invalidity.  The second part of the Seagate test is subjective – the plaintiff must show that the defendant knew or should have known that its actions were risking infringement.  The Seagate court held that a plaintiff must prove both parts of the test by clear and convincing evidence.  In Seagate, the court also established three different standards for appellate review: de novo for objective recklessness, substantial evidence for subjective knowledge, and abuse of discretion for the decision to award enhanced damages.

The Supreme Court’s Halo decision is a single decision issued in two cases:  Halo Electronics v. Pulse Electronics and Stryker Corp v. Zimmer, Inc.  In the Halo case, plaintiff Halo and defendant Pulse competed in electronic components.  Halo owned patents for electronic packages with transformers used to attach to circuit boards.  Halo offered Pulse the opportunity to license the patents.  Pulse declined and continued to sell the accused products, after deciding that the patents were not valid.  Halo sued Pulse.  The jury found that Pulse had infringed the patents and that the infringement was likely willful.  Halo sought enhanced damages, but the district court denied the request on the grounds that Pulse had asserted a defense at trial that was not baseless, such that the first part of the Seagate test could not be met.  On appeal, the Federal Circuit affirmed.

In Stryker, Stryker and Zimmer competed in the sale of an orthopedic surgical device.  Stryker sued Zimmer for patent infringement, and won a jury verdict of $70 million for willful infringement.  The willfulness was based on evidence that Zimmer had flagrantly decided to copy Stryker’s products.  The district court awarded an additional $6.1 million in damages and trebled the award, for a total of over $228 million.  On appeal, the Federal Circuit affirmed the finding of infringement, but reversed the award of treble damages, relying on the same rationale as in the Halo case, that the defendant had presented reasonable defenses at trial, such that the first part of the Seagate test could not be met.

The Supreme Court explained that § 284 provides a district court with discretion to award enhanced damages and does not specifically limit that discretion.  Halo, at *14.  However, the Court emphasized that the district court’s discretion should only be exercised in “egregious” cases.  Id. at *15.  Egregious cases are those in which the defendant’s conduct is “wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or . . . characteristic of a pirate.”  Id. 

In tossing out the Seagate test, the Court said that the first part of the Seagate test – objective recklessness – is wrong because it excludes defendants who wantonly infringe a patent, but later, during litigation, assert a defense that they may not even have known existed at the time of the infringement.  Id. at *16-17.  According to the Court, “someone who plunders a patent – infringing it without any reason to suppose his conduct is arguably defensible – can nevertheless escape any comeuppance under §284 solely on the strength of his attorney’s ingenuity.”  Id. at *17.  The Court found no basis under §284 for a threshold requirement of objective recklessness, holding that a defendant’s culpability should be “measured against the knowledge of the actor at the time of the challenged conduct.”  Id.  The Court further found that the high burden of proof of clear and convincing evidence was inappropriate and not consistent with § 284.  Id. at *20.

The Court set forth the proper test for enhanced damages, at *19:

“[C]ourts should continue to take into account the particular circumstances of each case in deciding whether to award damages, and in what amount.  Section 284 permits district courts to exercise their discretion in a manner free from the inelastic constraints of the Seagate test.  Consistent with nearly two centuries of enhanced damages under patent law, however, such punishment should generally be reserved for egregious cases typified by willful misconduct.”

Thus, in discarding the Seagate test, the Court did not replace it with a new test.  Instead, the Court simply held that the Seagate test is “unduly confining” and that district courts should “be guided by sound legal principles developed over nearly two centuries of application and interpretation of the Patent Act . . . [and limit] the award of enhanced damages to egregious cases of misconduct beyond typical infringement.”  Id. at *24.

Lastly, the Court changed the standard of review of a district court’s decision on enhanced damages.  The Court held that because the district court has full discretion to award enhanced damages, its discretion should be subject to a single standard of review, abuse of discretion.

Halo has significant ramifications for patent owners and potential infringers, and for patent litigation itself.  Among them are:

  • Because the test is now more flexible and because the plaintiff’s burden of proof is lower, there may be more patent infringement cases filed.
  • Because the accused infringer may face allegations of willfulness that will likely survive to trial, cease and desist letters from patent owners to accused infringers may carry more weight.
  • Because the test is now determined by the defendant’s conduct at the time of the infringing acts, plaintiffs may conduct more extensive discovery into the defendant’s knowledge and when the defendant had that knowledge.
  • Without the benefit of the objective recklessness part of the Seagate test, defendants will have a more difficult time obtaining summary judgment of no willfulness; thus, the issue of willfulness and the plaintiff’s supporting evidence of the defendants willfulness will be presented at trial.
  • Because defendants will not want to risk evidence of willfulness at trial and an award of enhanced damages, settlement discussions will become more important, and more cases may settle before trial.
  • Because the “new” test is more flexible and because the burden of proof on the plaintiff is lower than under Seagate, plaintiffs may be more likely to recover enhanced damages at trial.
  • Because the test is now determined by the defendant’s conduct at the time of the infringing acts, companies developing new technology may become more diligent in conducting early infringement and invalidity analyses of key patents in their industry.
  • For the same reason, defendants may become more cautious in how they conduct themselves during the development of new technology, and in the written records of their conduct.

While most view Halo as very favorable to patent owners, its effect will not be known until the district courts start applying the test and the Federal Circuit rules on their decisions.  Until that time, potential infringers may not really know what type of conduct will result in enhanced damages, and should act accordingly.