The Supreme Court recently lowered the standard for awarding enhanced damages due to willful patent infringement in Halo Electronics v. Pulse Electronics.1 In the first appellate decision on the issue since Halo, the Federal Circuit affirmed a district court’s grant of enhanced damages in WBIP v. Kohler.2 The Federal Circuit’s decision raises the risk of enhanced damages in patent infringement cases between competitors.

The Pre-Halo Standard

The Federal Circuit’s standard for willful infringement, as defined in Seagate, was a two-part test with an objective and subjective prong.3 Each of part of the test required the patent owner to meet its burden by clear and convincing evidence. Under the objective prong, a patent owner had to show that the alleged infringer acted in spite of an objectively high likelihood that such actions constituted patent infringement. The objective determination of recklessness was a question of law, reviewed de novo on appeal. Under the subjective prong, a patent owner had to show that the risk of infringement was known or so obvious that it should have been known to the alleged infringer. Subjective willfulness was a question of fact, reviewed for substantial evidence on appeal. Finally, the district court’s exercise of discretion to award enhanced damages was reviewed for abuse of discretion on appeal.

Halo: Subjective Willfulness Alone May Support Enhanced Damages

The Supreme Court in Halo rejected Seagate holding that the Federal Circuit’s standard for willful infringement was inconsistent with 35 U.S.C. § 284, which provides that “the [district] court may increase the damages up to three times the amount found or assessed.” Thus, subjective willfulness of an alleged patent infringer―whether intentional or knowing―may warrant an award of enhanced damages, “without regard to whether his infringement was objectively reckless.”4 The Court further held that a patent owner need only prove willful infringement by a preponderance of the evidence, and that a district court’s decision to award enhanced damages is reviewable on appeal for abuse of discretion. The Court’s decision also addressed appellate review under an abuse of discretion standard and how it may guide district courts in light of longstanding considerations, which include whether the egregious conduct at issue is “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or—indeed—characteristic of a pirate.”5

Underlying the Court’s decision was a concern that the prior standard tended to insulate the worst patent infringers from liability for enhanced damages based on the assertion of a reasonable defense at trial.6 And yet, the Court also recognized that patent assertion entities often exact licensing fees based on the threat of litigation.7 To balance these concerns, the Court emphasized that enhanced damages need not follow a finding of egregious misconduct, but rather is “generally reserved for egregious cases of culpable behavior,” measured at the time of infringement.8

Applying Halo

On July 19, 2016, the Federal Circuit in WBIP v. Kohler affirmed a district court’s enhancement of damages under Halo. After a jury found that the defendant had willfully infringed, the district court enhanced damages by 50%. The plaintiff and defendant in WBIP manufacture and sell competing low-carbon monoxide marine generators. The district court reasoned that an enhanced award was appropriate based on several factors, including the defendant’s knowledge of the plaintiff’s product and the defendant’s significantly larger resources.9 In the district court’s discretion, the defendant’s conduct was egregious, but not so much as to merit the maximum award of treble damages.

On appeal, the defendant argued that the jury verdict lacked substantial evidence showing knowledge of the patent at the time of infringement. The appellate panel disagreed, holding that substantial evidence supported the jury’s finding that the defendant had knowledge of the patents. According to the panel, the jury may have inferred knowledge of the patents from evidence of the defendant receiving the plaintiff’s demand letter, the plaintiff marking its competing products, and the defendant intending to develop a similar type of product as the plaintiff.10 Based on this evidence, the Federal Circuit affirmed the district court’s award of enhanced damages.

Questions and Considerations after WBIP

The Federal Circuit’s WBIP opinion raises several questions and important considerations for alleged willful patent infringement between competitors. While future cases may provide further guidance, WBIP cautions companies in markets with relatively few competitors to operate more prudently than before. To that end, knowledge of a competitor’s patent may warrant an investigation into whether one’s competing product infringes the patent and whether the patent is invalid.

Against the backdrop of the Supreme Court’s opinion in Halo, which emphasized that enhanced damages need not follow a finding of egregious misconduct, the Federal Circuit’s decision in WBIP provides district courts with significant discretion whether to award enhanced damages. This discretion, however, fosters uncertainty as to what behavior rises to a level of egregious misconduct and which cases rise beyond typical infringement to a level of egregiousness that warrants enhanced damages. In WBIP, for example, the district court’s enhancement of damages by 50% suggests that evidence of actual knowledge, such as a demand letter, or constructive knowledge, such as patent markings on competing products, may be sufficient to support a jury’s finding of willful patent infringement. The district court’s enhancement also suggests that culpable behavior may be measured at or before the time of actual or constructive knowledge of the patent.11 As such, genuine competition may evolve into willful infringement upon notice of a competitor’s patent.

Despite district courts and juries receiving broad discretion, Justice Breyer’s concurrence in Halo called on the Federal Circuit to draw on its own experience and expertise in patent law to define the metes and bounds of district court discretion.12 It remains to be seen whether the Federal Circuit will accept Justice Breyer’s invitation.