2100 Pennsylvania Avenue, NW Washington, DC 20037-3213 T 202.293.7060 F 202.293.7860 www.sughrue.com Washington, DC ~ Tokyo Enhancing Damages for Willful Infringement I. Introduction On October 19, 2015, the Supreme Court granted certiorari in two cases to review the standard for willful infringement. The two cases, Halo Electronics, Inc. v. Pulse Electronics, Inc., et al., No. 14-1513, and Stryker Corp. et al. v. Zimmer, Inc., et al., No. 14-1520, are consolidated for review. In the Halo case, the grant was limited to Question 1 presented in the Petition. Question 1 recites the following: “[w]hether the Federal Circuit erred by applying a rigid, two-part test for enhancing patent infringement damages under 35 U.S.C. § 284, that is the same as the rigid, twopart test this Court rejected last term in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014) for imposing attorney fees under the similarly-worded 35 U.S.C. § 285.” Petition for Writ of Certiorari, Halo Electronics, Inc. v. Pulse Electronics, Inc., 2015 WL 3878398 (U.S.). In the Stryker case, the grant was limited to the following Question 1 presented in the Petition: “[h]as the Federal Circuit improperly abrogated the plain meaning of 35 U.S.C. § 284 by forbidding any award of enhanced damages unless there is a finding of willfulness under a rigid, two-part test, when this Court recently rejected an analogous framework imposed on 35 U.S.C. § 285, the statute providing for attorneys' fee awards in exceptional cases?” Petition for Writ of Certiorari, Stryker Corp. v. Zimmer, Inc., 2015 WL 3898662 (U.S.). II. Background 2 The “rigid, two-part test” that the petitioners in Halo and Stryker complain of primarily comes from In re Seagate Tech., LLC, 497 F.3d 1360 (Fed. Cir. 2007). The standard set forth in Seagate for enhanced damages under 35 U.S.C. § 284 is as follows: “to establish willful infringement, a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent… If this threshold objective standard is satisfied, the patentee must also demonstrate that this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer.” 497 F.3d at 1371. The petitioners in both Halo and Stryker compare the Federal Circuit’s treatment of enhanced damages under §284 to the test for awarding attorney’s fees under § 285 set forth in Brooks Furniture Mfg., Inc. v. Dutailier Int'l, Inc., 393 F.3d 1378, 1382 (Fed. Cir. 2005), which was abrogated by Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014). Both petitioners assert that the Federal Circuit’s rigid treatment of enhanced damages under § 284 should be overturned as it was in Brooks Furniture. In Brooks Furniture, the Federal Circuit stated that a case is “exceptional” only if a district court either finds litigation-related misconduct of an independently sanctionable magnitude or determines that the litigation was both “brought in subjective bad faith” and “objectively baseless.” 393 F.3d at 1381. The Court further stated that the showing of improper conduct must be established by clear and convincing evidence, and even if the case is deemed exceptional, the award of attorney fees and amount thereof are still within the district court’s discretion. Id. at 1382. 3 In Octane, the Supreme Court held that the standard set forth in Brooks Furniture is “unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts.” 134 S. Ct. at 1755. In arriving at this decision, the Supreme Court found that the Federal Circuit’s formulation improperly imported the dual requirement of “subjective bad faith” and “objective baselessness” from PRE1 . Id. at 1756-58. Additionally, the Court noted that the Federal Circuit’s interpretation would render § 285 superfluous due to the existence of the long recognized common-law exception to the general “American rule” against fee-shifting. Id. at 1758. Lastly, the Supreme Court overruled the “clear and convincing evidence” standard set forth in Brooks Furniture, noting that nothing in § 285 would impose a specific evidentiary burden, much less such a high one. Id. In the companion case to Octane, the Supreme Court affirmed the rule in Octane and further noted that determinations under § 285 should only be reviewed for abuse of discretion. Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S. Ct. 1744 (2014). The Court explained that, “as a matter of the sound administration of justice, the district court is better positioned to decide whether a case is exceptional because it lives with the case over a prolonged period of time,” especially because “the [exceptionality] question is ‘multifarious and novel, not susceptible to useful generalization of the sort that de novo review provides.” Id. at 1748-49 (internal citations and quotation marks omitted). III. Cases on Review (A) Halo v. Pulse 1 Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49 (1993) 4 In district court, the jury sided with Halo, finding inducement under 35 U.S.C. § 271(b) and awarding $1.5 million in damages. The jury also found clear and convincing evidence that Pulse’s infringement of Halo’s patent was willful, however the district court set aside this finding because the invalidity defense brought at trial was not objectively baseless (the first prong of the Seagate test). The Federal Circuit affirmed the district court’s conclusion of no willful infringement. A concurrence from Judges O’Malley and Hughes explained that the existing Federal Circuit precedent (i.e., Seagate) compelled the decision, but that the precedent conflicted with the decisions in Octane and Highmark as well as the text of § 284. The judges noted that the Seagate test for enhanced damages under § 284 is analogous to the now-rejected test for attorney fees under § 285. The judges also urged that the Federal Circuit review the case en banc, but the Federal Circuit refused. Halo’s Petition for a Writ of Certiorari generally mirrored the above concerns of Judges O’Malley and Hughes. Halo also highlighted the seemingly absurd result of the Seagate framework where “district courts are now unable to impose enhanced damages if a defendant presents a non-frivolous defense, even if it acted in bad faith before the suit by copying the patentee's product, ignoring offers to license, and failing to investigate or develop any pre-suit defense.” (B) Stryker v. Zimmer In district court, Stryker won its summary judgment motion of infringement by Zimmer. The district court also awarded treble damages under § 284 (triple the $70 million jury award). In analyzing Stryker's motion for enhanced damages, the district court considered the totality of 5 the circumstances, including Zimmer's admitted copying, its failure to investigate the scope of Stryker's patents, and the long duration of its infringement. The district court noted that it was not a close case, given that every major decision, from claim construction through post-verdict motions, went against Zimmer. The district court separately granted Stryker's motion for a finding of exceptional case under 35 U.S.C. § 285 and awarded Stryker its reasonable attorneys' fees. On appeal, Zimmer did not challenge subjective willfulness but emphasized the objective reasonableness of some of its noninfringement and invalidity defenses. The Federal Circuit affirmed the district court's grant of summary judgment of infringement, the jury's rejection of all 22 of Zimmer's invalidity defenses, and the jury's award of lost-profits damages. However, the Federal Circuit reversed on willfulness, determining de novo that, although all of Zimmer's defenses were unsuccessful, Zimmer had presented a reasonable defense as to each of the three patents-in-suit. Accordingly, the Federal Circuit summarily vacated the district court's treble damages award and vacated and remanded the district court's finding of exceptional case and award of attorneys' fees. In their Petition for a Writ of Certiorari, Stryker asserted that “prior to considering whether enhanced damages may be awarded under 35 U.S.C. § 284, the Federal Circuit now requires a finding of willfulness based on a two-part objective/subjective test requiring clear and convincing evidence, where the objective prong is reviewed de novo and cannot be met barring a complete absence of plausible defenses on appeal.” Stryker also asserted that the Seagate framework is inconsistent with both the plain language of § 284 and with parallel Supreme Court rulings in Octane and Highmark. In this 6 regard, Stryker noted that § 284 does not limit the award of enhanced damages to “exceptional cases” as does § 285. However, as discussed above, the Supreme Court has held that the award of attorney fees under § 285 is at the discretion of the district court, considering the totality of the circumstances. As such, Stryker insisted that the district courts must have at least the same discretion under the less restrictive § 284. IV. What’s Next (A) Timeline for a Final Decision Certiorari was granted on October 19, 2015. Once certiorari is granted, the petitioner generally has forty-five days to file his opening brief, known as the petitioner's brief. Thirty days after the petitioner’s brief is filed, the respondent’s brief is due. Approximately thirty days from the respondent’s brief, but at least seven days before the case is argued, the petitioner may file a reply brief to respond to the arguments made in the respondent’s brief. SCOTUSblog reports that oral arguments for the combined cases is likely to take place in January or early February of 2016. The lag time between oral arguments and a final decision typically varies between about 2 months and about 5 months. As such, we expect a final written decision sometime around May of 2016. (B) Thoughts and Predictions It is difficult to say how the Supreme Court will decide these cases. On the one hand, the petitioner’s arguments appear to be sound. That is, enhanced damages appear to be effectively blocked where an accused infringer can set forth any plausible (i.e., not “objectively baseless”) defense during trial. This looks to be a very difficult hurdle for a patent owner to overcome. 7 Additionally, the inclusion of the term “exceptional cases” in § 285 seems to suggest that the test for awarding attorney fees would be more stringent than that for enhanced damages under § 284, which does not include such language. As such, the petitioners’ comparisons to Octane and Highmark appear to be fair. On the other hand, there is Supreme Court precedent supporting the somewhat strict Seagate test requiring willfulness for enhanced damages under § 284. See, e.g., Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 508 (1964) (enhanced damages under 35 U.S.C. § 284 were available for willful or bad-faith infringement); Dowling v. United States, 473 U.S. 207, 227 n.19 (1985) (enhanced damages under 35 U.S.C. §284 are available for “willful infringement”); Seymour v. McCormick, 57 U.S. 480, 488-89 (1853). In this regard, respondents Pulse and Zimmer rightfully emphasize the difference between § 284 and § 285, wherein the former is punitive and the latter is compensatory. Additionally, attorney fees awards under § 285 typically relate to litigation conduct whereas treble damages under § 284 usually relates to conduct before, and possibly after, litigation has commenced. Accordingly, having distinct tests for § 284 and § 285 would appear to be logical. Overall, it seems that the Supreme Court will likely require more flexibility in the application of § 284 for awarding treble damages. However, it is unclear how much flexibility will be required for § 284 and whether the standards will be similar to those for § 285 set forth in Octane and Highmark. 8 APPENDIX Relevant Statutes 35 U.S.C. § 284: Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court. When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed. Increased damages under this paragraph shall not apply to provisional rights under section 154(d). The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances. 35 U.S.C. § 285: The court in exceptional cases may award reasonable attorney fees to the prevailing party.