Earlier today, the U.S. Supreme Court ruled unanimously that “there is no precise rule or formula” for awarding enhanced patent damages under 35 U.S.C. § 284. Halo Electronics, Inc. v. Pulse Electronics, Inc., No. 14-1513, slip op. 579 U.S. ____ (June 13, 2016). And, determining that discretion is explicitly permitted under 35 U.S.C. § 284, the Supreme Court found that the U.S. Court of Appeals for the Federal Circuit’s two-part test in In re Seagate Technology, LLC, 497 F. 3d 1360, 1371 (2007) (en banc) was “unduly rigid” and could have the effect of “insulating some of the worst patent infringers from any liability for enhanced damages.” Halo Electronics, slip op. at 9.

The Supreme Court’s framework for enhanced damages recognizes that “district courts [have] the discretion to award enhanced damages,” which discretion should be exercised to “limit[] the award of enhanced damages to egregious cases of misconduct beyond typical infringement” as demonstrated by a preponderance of the evidence. The application and implementation of this test, by both district courts and the Federal Circuit, may substantially impact litigants and their strategies.

Halo Electronics and Pulse Electronics are suppliers are electronic components. In 2007, Halo sued Pulse and alleged infringement of patent claims for electronic packages containing transformers. A jury verdict awarded Halo $1.5 million for infringement that, on “a high probability,” was willful. However, the District Court denied Halo’s request for enhanced damages under 35 U.S.C. § 284 because “Pulse had at trial presented a defense that ‘was not objectively baseless, or a ‘sham’’” and, therefore was not objectively reckless under the first step of the Federal Circuit’s Seagate test.

In Seagate, the Federal Circuit adopted a two-part test for patentees seeking enhanced, or increased, damages under Section 284 of the Patent Act. First, a patent owner must show “that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.” In re Seagate, 497 F. 3d at 1371. Second, the patentee must demonstrate that the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.” Id. And, each step required clear and convincing evidence. Id. Appellate review further required that each of the first step, the second step, and the ultimate decision be considered under different standards of review.

In considering Halo’s appeal and the Seagate framework for enhanced damages, the Supreme Court looked to the statutory language in 35 U.S.C. § 284: “the court may increase the damages up to three time the amount found or assessed.” The Supreme Court found not only that the “language contains no explicit limit or condition,” but also recognized that the term “‘may’ clearly connotes discretion.”

In an attempt to discern the permitted scope of “discretion” for enhanced damages, the Supreme Court noted that “although there is no precise rule or formula for awarding damages under § 284, a district’s courts discretion should be exercised in light of the considerations underlying the grant of that discretion.” Those considerations, in the Supreme Court’s view, are informed by the type of conduct warranting enhanced damages, conduct described as “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or – indeed – characteristic of a pirate.” The Supreme Court further noted that, based on “nearly two centuries of discretionary awards and review by appellate tribunals…[enhanced] damages are generally reserved for egregious cases of culpable behavior.”

The Supreme Court did recognize that the two-part Seagate test reflects “that enhanced damages are generally appropriate under § 284 only in egregious cases.” However, it refused to endorse continued use of the test because “[t]he principal problem with Seagate’s two-part test is that it requires a finding of objective recklessness in every case before district courts may award enhanced damages.” The Supreme Court explained that this imposes a threshold that improperly results in barring awards for enhanced damages against, for example, “pirate” offenders who intentionally infringe “for no purpose other than to steal the patentee’s business.” The Supreme Court therefore rejected Seagate’s two-part test because it set an “unduly rigid” prerequisite to the award of enhanced damages, even “[i]n the context of…deliberate wrongdoing,” and “impermissibly encumber[ed] the statutory grant of discretion to district courts.”

Not surprisingly, the Supreme Court analogized its rejection of the inelastic constraints of the Seagate test to its prior rejection of the Federal Circuit’s rigid test for attorney’s fees in “exceptional cases” under 35 U.S.C. §285 (Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. ____ (2014)). In both cases, the Supreme Court found “the subjective willfulness of a patent infringer, intentional or knowing” to be relevant.

The Supreme Court also found commonality between Halo Electronics and Octane Fitness in that the Federal Circuit’s tests adopted a clear and convincing standard of proof. However, neither 35 U.S.C. § 284 (Halo Electronics) nor 35 U.S.C. § 285 (Octane Fitness) demand a “specific evidentiary burden, much less a high one.” Under Halo Electronics,the burden is the “preponderance of the evidence standard.” Likewise, decisions to award enhanced damages are properly reviewed on appeal under the abuse of discretion standard.

Because Halo Electronics was decided under the now-rejected Seagate framework, the Supreme Court vacated the judgment and remanded the case for further determination consistent with the “discretion” noted in today’s opinion. Also vacated and remanded was the judgment in Stryker Corporation v. Zimmer, Inc. (No. 14-1520), which also concerned the interpretation and application of 35 U.S.C. § 284 and was consolidated with Halo Electronics before the Supreme Court.

Justice Breyer filed a concurring opinion, with Justices Kennedy and Alito joining.