On June 13, 2016, a unanimous United States Supreme Court held that (1) an award of enhanced patent damages should be left to the discretion of the district courts, (2) entitlement to enhanced damages need only be proven by a preponderance of the evidence, and (3) an appellate court should review an enhanced patent damages award for abuse of discretion. Halo Electronics, Inc. v. Pulse Electronics, Inc., No. 14-1513 (June 13, 2016). The Court rejected the Federal Circuit’s Seagate framework as unduly rigid, which had required a showing of both objective and subjective recklessness by clear and convincing evidence and provided for a trifurcated appellate review process using the de novo, substantial evidence, and abuse of discretion standards.

Background

Halo Electronics, Inc. v. Pulse Electronics, Inc.

The jury found Halo’s asserted patent claims valid, infringed, and that there was a high probability that the infringement was willful. The district court declined to award enhanced damages because it found Pulse’s obviousness defense during litigation was not objectively baseless. A panel of the Federal Circuit affirmed because Pulse raised a substantial question as to the obviousness of the patents. Petitions for rehearing en banc by both parties were denied.

Stryker Corp. v. Zimmer, Inc.

The district court entered judgment on the jury verdict of willful infringement, awarding treble damages and attorney fees for exceptional case to Stryker. A panel of the Federal Circuit affirmed findings of infringement and validity, but reversed the district court’s determination of willful infringement on de novo review because Zimmer presented reasonable defenses. Stryker’s petition for rehearing en banc was denied.

Supreme Court Decision

In a decision delivered by Chief Justice Roberts, the Court first determined that the Federal Circuit’s enhanced damages framework as set forth in Seagate is inconsistent with the statutory text of § 284. The language of the statute simply provides that “the court may increase the damages up to three times the amount found or assessed,” without explicit limitations. The Court noted that use of “may” connotes discretion. The Court traced the history of enhanced damages, noting that since the Patent Act of 1836, enhanced damages had been reserved for aggravated circumstances to punish the infringer. Therefore the discretion permitted under § 284 is generally limited to “egregious cases of culpable behavior.”

The High Court found the principal problem with the Seagate test to be the requirement of objective recklessness, which could “insulate[] the infringer from enhanced damages” even where “he did not act on the basis of the defense or was even aware of it.” The Court was concerned that the Federal Circuit’s standard allowed a bad-faith infringer to “plunder[] a patent,” yet escape enhanced damages “solely on the strength of his attorney’s ingenuity” during litigation. Thus, the Court found subjective willfulness sufficient to warrant enhanced damages, noting that culpability is generally measured at the time of the challenged conduct.

The clear and convincing evidence standard from Seagate was also rejected because Congress expressly included a higher standard of proof elsewhere in the 1952 Patent Act, but not in § 284. Finally, the Court held that because an award of enhanced damages is committed to the district court’s discretion, abuse of discretion is the appropriate standard for appellate review.

The Court relied on its previous decisions in Octane Fitness, LLC v. Icon Fitness, Inc., 134 S. Ct. 1749 (2014) and Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S. Ct. 1744 (2014), which overturned a similar Federal Circuit test to determine when an award of attorneys’ fees is available pursuant to 35 U.S.C. § 285. The Octane Fitness and Highmark opinions similarly committed the award to the discretion of the district court, set the burden of proof to a preponderance of the evidence, and applied abuse of discretion for appellate review.

Because the Halo and Stryker cases had been decided under the Seagate framework, the judgements of the Federal Circuit were vacated and the cases remanded.

Justice Breyer wrote a concurrence joined by Justice Kennedy and Justice Alito to express his understanding of the limits to the application of enhanced damages. The concurrence noted that the majority opinion still reserves enhanced damages for egregious cases, not merely where an infringer is shown to have known of the patent. The concurrence further noted that 35 U.S.C. § 298 allows an accused infringer to determine whether or not to obtain an expensive opinion of counsel without being subject to enhanced damages. In applying an abuse of discretion review, the concurrence noted that it may be appropriate for the Federal Circuit to take advantage of its experience and consider the reasonableness of a defense.