The decision, which affects enhanced patent infringement damages, restores the statutory discretion of district courts, whose exercise of discretion should be channeled by sound legal principles limiting the award of enhanced damages to egregious cases of misconduct beyond typical infringement.

A unanimous US Supreme Court decision in Halo Electronics, Inc. v. Pulse Electronics, Inc. (No. 14-1513) held today that the Federal Circuit’s two-part Seagate test for increased damages for “willful” infringement is inconsistent with 35 U.S.C. § 284, which provides that courts “may increase the damages up to three times the amount found or assessed.”

Under the now-rejected Seagate test, increased damages required clear and convincing evidence that i) an infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent; and ii) the risk of infringement was either known or so obvious that it should have been known to the accused infringer. Mirroring the Supreme Court’s earlier opinion in Octane Fitness concerning the discretionary award of attorney fees under 35 U.S.C. § 285, today’s Supreme Court opinion rejects Seagate’s “artificial construct” and restores the district courts’ statutory discretion to award enhanced damages for the “full range of culpable behavior,” not just that which is objectively reckless. At the same time, however, the Court cautioned that “discretion is not a whim.” Instead, the history of awards of enhanced damages under the Patent Act establish that they are a punitive sanction for egregious infringement behavior, and not to be meted out in a typical infringement case.

Before analyzing the Federal Circuit’s Seagate test or the pertinent text of § 284, the Supreme Court provided a historical backdrop illustrating how “[e]hanced damages are as old as U.S. patent law.”[1] For example, the Patent Act of 1793 mandated treble damages in any successful infringement suit, and the Patent Act of 1836 made enhanced damages discretionary.[2]The purpose in making this change was to differentiate between a defendant who acted in ignorance or good faith and a “wanton and malicious pirate.”[3] Through and beyond the enactment of § 284 in the 1952 Patent Act, the Supreme Court consistently recognized district courts’ discretion to award such “punitive” enhanced damages in instances of “wanton” or “willful” infringement.[4]

With that background, the Supreme Court reasoned that the Federal Circuit’s Seagate test was inconsistent with§ 284. Beginning with the statutory text, the Court found no explicit limitation or condition to the discretion connoted by the statute, which simply states that “the court may increase damages.”[5] The Court also dismissed Respondents’ arguments that the America Invents Act of 2011 somehow ratified the Seagate test.[6] Nevertheless, the Supreme Court noted that statutory “discretion is not a whim.”[7] And while there is no precise rule or formula for awarding enhanced damages, the district courts must be guided by sound legal principles.[8] Invoking history, and with a view to allay Respondents’ and certain amici’s concerns that enhanced damages can be awarded in “garden-variety cases,” the Court cautioned that

“[a]wards of enhanced damages under the Patent Act over the past 180 years establish that they are not to be meted out in a typical infringement case, but are instead designed as a ‘punitive’ or ‘vindictive’ sanction for egregious infringement behavior.”[9]

The Court further specified that “[t]he sort of conduct warranting enhanced damages has been variously described . . . as willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or—indeed—characteristic of a pirate.”In the Court’s view, “the channel of discretion” has narrowed, so enhanced damages are “generally reserved for egregious cases of culpable behavior.”[10]

Acknowledging that the Federal Circuit’s Seagate test “reflects . . . a sound recognition that enhanced damages are generally appropriate under § 284 only in egregious cases,” the Supreme Court drew parallels to its earlier rejection of the Federal Circuit’s test for § 285 attorney fees to find the Seagate test “is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts.”[11] The principle problem with the Seagate test is that it requires a finding of objective recklessness before a court may award enhanced damages.[12] This threshold requirement improperly excludes “many of the most culpable offenders, such as the ‘wanton and malicious pirate.’”[13] However, the subjective willfulness of an intentional or knowing infringer may warrant enhanced damages.[14] The Court said that the Seagate test “aggravates the problem” by making dispositive the ability of an infringer to devise a reasonable (albeit unsuccessful) defense at trial.[15] This result contradicts the principle that “culpability is generally measured against the knowledge of the actor at the time of the challenged conduct.”[16] Thus, Seagate’s objective recklessness standard runs counter to § 284, which “allows district courts to punish the full range of culpable behavior.”[17]

The Supreme Court also addressed the required standard of proof. It found that Seagate’s requirement of clear and convincing evidence was inconstant with § 284.[18] Finding Octane Fitness instructive again, the Court found no basis in the statute for this heightened standard of proof.[19] Instead, the Court noted that “[P]atent-infringement litigation has always been governed by a preponderance of the evidence standard” and “[e]nhanced damages are no exception.”[20]

Finally, the Supreme Court rejected the Federal Circuit’s tripartite framework for appellate review of enhanced damages, which involved de novo, substantial evidence, and abuse of discretion reviews for various aspects of the Seagate test.[21] Instead, the Court held that a decision whether enhanced damages are appropriate should be reviewed by the Federal Circuit for abuse of discretion.[22]

While the opinion of the Court was authored by Chief Justice Roberts, Justice Breyer wrote a concurrence (joined by Justices Kennedy and Alito) that elaborates on certain limitations on enhanced damages because enhanced damages should have a “limited” role in achieving the objectives of patent law.[23] First, “willful misconduct” does not mean that a court may enhance damages “simply because the evidence shows that the infringer knew about the patent and nothing more.”[24] Second, as codified by the AIA at § 298, the failure of an infringer to obtain the advice of counsel may not be used to prove willful infringement.[25] Third, enhanced damages under § 284 should not be used to compensate patentees for infringement-related costs or litigation expenses, which are separately accounted for under § 285.[26]

In the end, because both Halo and Stryker were decided under the incorrect Seagate framework, the Court vacated both Federal Circuit’s judgments and remanded for proceedings consistent with its opinion.