On June 13, the U.S. Supreme Court unanimously rejected the Federal Circuit’s rigid two-part test for awarding enhanced damages in patent cases. In two cases decided together, Halo Elecs., Inc. v. Pulse Elecs., Inc., and Stryker Corp. v. Zimmer, Inc., the Court found that the Federal Circuit’s test in In re Seagate was inconsistent with the statutory grant of discretion afforded to district courts under section 284 of the Patent Act. The unduly rigid Seagate test, according to the Court, had the effect of “insulating some of the worst patent infringers from any liability for enhanced damages.”

Going forward, district courts may award enhanced damages “as a sanction for egregious infringement behavior,” but should not award enhanced damages in “garden-variety cases.” Proof of “egregious infringement” is to be governed by a preponderance of the evidence standard and to be reviewed on appeal for an abuse of discretion.

In this new landscape, defendants can improve chances of avoiding liability for egregious misconduct by making good faith, commercially reasonable efforts to avoid infringement, both before and after they are accused of a specific act of infringement. These efforts include freedom-to-operate opinions as part of product clearance policies, non-infringement or invalidity opinions after accusations of infringement are received, and defensible design-around strategies.

I. Background

The Supreme Court’s opinion addressed two cases involving enhanced damages. In Halo v. Pulse, a jury in 2007 found that Pulse infringed Halo’s patents, and that there was a high probability that Pulse had infringed the patents willfully. The district court, however, did not award enhanced damages under 35 U.S.C. § 284, finding that Pulse had presented a defense that “was not objectively baseless.” The Federal Circuit affirmed. 769 F.3d 1371 (2014).

In a different suit in 2010, Stryker sued Zimmer, resulting in a verdict of willful infringement and an award of treble damages by the court. The Federal Circuit affirmed the infringement verdict but vacated the enhanced damages, reasoning that Zimmer had asserted “reasonable defenses” at trial. 782 F.3d 649, 661 (2014).

Both decisions relied on the two-part test set forth in Seagate to reject an award of enhanced damages.

In its 2007 ruling, the Federal Circuit in Seagate found that enhanced damages could only be awarded upon a finding of willful infringement after applying a two-part test. The first part of the test required that the patent owner show, by clear and convincing evidence, that the infringer “acted despite an objectively high likelihood that its actions constituted infringement.” Seagate at 1371. The second part of the test required clear and convincing evidence that the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.” Id. On appeal, the first part of the test was to be reviewed de novo, and the second part of the test reviewed the case for abuse of discretion. Halo, slip op. at 6 (citations omitted).

II. The Supreme Court’s Decision

In its decision, the Supreme Court rejected the Seagate test as unduly rigid and impermissibly encumbering the statutory grant of discretion given by the courts in 35 U.S.C. § 284, which provides that, upon a finding of infringement, courts “may increase the damages up to three times the amount found or assessed.” Under Seagate, the Federal Circuit had improperly adopted a tripartite appellate review framework of willful infringement findings, which was not supported by the statute.

The Court rejected Seagate based on the language of section 284, which contains no express limits or conditions on when enhanced damages may be awarded. As referenced multiple times in the opinion, this holding is consistent with the Court’s 2014 decision in Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749 (2014), which also rejected a rigid two-part test adopted by the Federal Circuit for determining when a case qualified as “exceptional,” and therefore eligible for an award of attorneys’ fees under 35 U.S.C. § 285. In Octane Fitness, the Supreme Court found that a test requiring both “objectively baseless” and “subjective bad faith” was too rigid and superimposing an inflexible framework onto statutory text that is inherently flexible. Id. at 1756. Likewise, the Court held that, under section 284, a finding of enhanced damages “may” be found by the trial court, which connotes discretion. Halo, slip op., at 7-8).

However, the Court cautioned, “‘[d]iscretion is not whim,’” and a district court’s “discretion should be exercised in light of the considerations underlying the grant of that discretion.” (Slip op., at 8, citing Martin v. Franklin Capital Corp., 546 U.S. 132, 139 (2005) and Octane Fitness. In applying that discretion, the Court noted, “district courts are ‘to be guided by [the] sound legal principles’ developed over nearly two centuries of application and interpretation of the Patent Act.” But what does that mean? In short, the Court said: “Those principles channel the exercise of discretion, limiting the award of enhanced damages to egregious cases of misconduct beyond typical infringement.” Halo, slip op. at 15. A finding of an “egregious case of misconduct,” like patent infringement, is to be “governed by a preponderance of the evidence standard.”

III. Impact of Decision

This decision expressly notes that section 284 permits courts to exercise discretion free of any constraints imposed by the Seagate test, but clarifies that courts should take into account the particular circumstances of each case and generally limit awarding enhanced damages to egregious cases typified by willful misconduct.

The decision also expressly rejected the burden of proof imposed by Seagate, and noted that patent infringement litigation has always been governed by a preponderance of the evidence standard, and that enhanced damages are no exception.

IV. Practical Advice

Going forward, plaintiffs are likely to focus discovery efforts on uncovering sufficient evidence for the trier of fact to conclude that the case is an “egregious” one. In this new landscape, defendants can improve chances of avoiding such liability for egregious misconduct by making good faith, commercially reasonable efforts to avoid infringement, both before and after they are accused of a specific act of infringement. These efforts include obtaining freedom-to-operate opinions as part of the product planning process. After accusations of infringement are made, legal opinions of non-infringement or invalidity, and defensible design-around strategies, also should receive serious consideration.

Obtaining formal legal non-infringement opinions lost some urgency after In re Seagate declared it was no longer necessary to obtain a formal legal opinion to avoid a willfulness finding, and when section 298 of the Patent Act was adopted, making the failure to obtain the advice of counsel with respect to any allegedly infringed patent inadmissible to prove willfulness. But in the post-Halo world, appropriate legal advice and opinions, as well as efforts to design around asserted patents, bear serious consideration. Both measures can provide affirmative evidence that the accused infringer’s behavior, although ultimately deemed infringing, was not egregious.