On June 13, 2016 in Halo Electronics, Inc. v Pulse Electronics, Inc., the US Supreme Court decided unanimously that the Seagate test for enhanced damages in patent infringement cases, was not correct.
The Seagate test originated as a response by the US Court of Appeal for the Federal Circuit to the law of enhanced damages for wilful patent infringement. Prior to Seagate, a potential infringer had “an affirmative duty to exercise due care to determine whether or not he is infringing."1 Such a duty included “seeking competent legal advice before the initiation of any possible infringing activity."2 As such, not obtaining legal advice would warrant willful infringement, which could then lead to an award of treble damages. The Court in Seagate found that the willfulness standard was too low, and led to too many enhanced damages awards, and restricted the willfulness standard significantly.
Under Seagate the test for enhanced or trebled damages had two parts. Under the first part, “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"3 (“objective recklessness”). Under the second part, the patentee had to demonstrate, also by 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"4 (“subjective knowledge”).
In Halo Electronics, Inc. v Pulse Electronics, Inc. the Supreme Court found the Seagate test to be unduly restrictive of the discretion found in 35 USC 284, which indicates that in patent infringement cases, courts “may increase the damages up to three times the amount found or assessed.”5 In looking at the historical intention of 35 USC 284, the Court found that the word “may” was intentionally retained in s. 284 to give the courts ultimate discretion, given the punitive nature of an award of enhanced damages.
Seagate provided an overly mechanical approach to enhanced damages. By requiring a finding of objective recklessness, Seagate was therefore “unduly rigid, and it impermissibly encumbers the statutory grant of discretion to the district courts."6 The objective recklessness standard allowed an infringer to muster a defense of reasonableness, that, successful or not, protected against enhanced damages. An infringer otherwise meriting an enhanced damages penalty might avoid punishment merely through successful attorney creativity. To the extent that it might prevent the Court from awarding enhanced damages when they otherwise would have, Seagate was inconsistent with s. 284.
At first, Halo v. Pulse may appear to be inventor-friendly by facilitating enhanced damages awards against deserving infringers. In his concurring opinion Breyer J., discussed the fear of inhibiting innovation:
“How is a growing business to react to the arrival of such a [demand for settlement or licencing] letter, particularly if that letter carries with it a serious risk of treble damages? Does the letter put the company “on notice” of the patent? Will a jury find that the company behaved “recklessly,” simply for failing to spend considerable time, effort, and money obtaining expert views about whether some or all of the patents described in the letter apply to its activities (and whether those patents are even valid)? These investigative activities can be costly. Hence, the risk of treble damages can encourage the company to settle, or even abandon any challenged activity."7
This concern paralleled the respondent’s argument that the decision may be inconsistent with the purpose of patent law – to balance “the need to promote innovation through patent protection” and the importance of facilitating the “imitation and refinement through imitation that are necessary to invention itself and the very lifeboat of a competitive economy."8 A decision that lowers the bar to enhanced damages would appear to tip the scale towards favouring patent protection and deter innovation.
Breyer J., addressed this issue: “failure of an infringer to obtain the advice of counsel… may not be used to prove that the accused infringer willfully infringed”, the provision of such opinions having been a cottage industry for lawyers prior to Seagate. He also stressed that “enhanced damages are generally appropriate…only in egregious cases."9
Both Breyer, J., and Roberts, C.J., (writing for the majority) pointed out that enhanced damages have the potential to disrupt the balance within patent law as previously discussed – and as had been the case pre-Seagate. However, the Court cautions that a return to the intentional “may” is intended to promote reasoned, balanced analyses. The Court’s emphasised that “intentional or knowing” infringement “may” warrant a punitive sanction – the word being may not must.10 Enhanced damages should only be awarded when, on careful review of all of the circumstances, the infringer’s conduct merits approbation.
Future case law will show if the return to greater discretion risks re-starting the pre-Seagate abuses. While it is helpful for the court to remind litigants that only “egregious” conduct merits punitive sanctions, it is, of course, not uncommon for plaintiffs consider every infringement to be “egregious”. Plaintiffs will no doubt expect their counsel to advance such views no less energetically, and indignantly, than before Seagate.