On June 13, 2016, the U. S. Supreme Court, in Halo Electronics, Inc. v. Pulse Electronics, Inc., unanimously reversed the Federal Circuit’s rigid two-part framework used to determine whether to enhance patent infringement damages under Section 284 of the Patent Act.
Under 35 U.S.C. § 284, courts have the discretionary power to enhance damages in patent infringement cases up to three times the amount of actual damages. The statute, however, provides no explicit guidance regarding how and when a court should exercise its discretion. In 2007, the Federal Circuit in In re Seagate adopted a two-part test for determining when such enhancement is appropriate. Under the Seagate test, a patent holder could obtain enhanced damages only if it could prove, by clear and convincing evidence, that a defendant’s infringement was “willful.” A finding of willfulness required the patentee to prove, by clear and convincing evidence, that: (1) the defendant’s legal position was “objectively reckless” as evaluated at the time of trial; and (2) that the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.”
In Halo, the Supreme Court rejected the two-part Seagate test and adopted a more flexible standard that vests district courts with the discretion to enhance damages under § 284. The primary problem with Seagate, according to the Court, is that the “objectively reckless” prong often insulated the most culpable infringers from punishment because the existence of a reasonable trial defense—regardless of whether the infringer acted upon the defense or was even aware of it at the time of infringement—precluded enhancement. (Slip Op. at 8). For example, under Seagate, an infringer who knew of the patent and thought it to be valid at the time of infringement could escape liability for enhanced damages through an invalidity defense crafted by its trial attorneys years after the first infringement. The Court noted the anomalous nature of this analysis in tort law, where culpability is “generally measured against the knowledge of the actor at the time of the challenged conduct.” Echoing sentiments found in the Court’s prior decision regarding the award of attorneys’ fees under Section 285 of the Patent Act, the Court noted that the plain language of 35 U.S.C. § 284 lacks anything like the Seagate requirements. (Id.)
The Court did not replace the Seagate test with a specific standard for enhancing damages, stating there was no precise rule or formula. Instead, district courts are to exercise their discretion guided by nearly two centuries of precedent interpreting the Patent Act to limit the award of enhanced damages to egregious cases of culpable conduct—colorfully described as willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or “characteristic of a pirate.” (Id. at 7). Even then, the Court held that “none of this is to say that enhanced damages must follow a finding of egregious misconduct.” (Id. at 11).
In addition to eliminating the rigid two-part framework from Seagate, the Court reversed the Federal Circuit on two additional issues. First, the Court disposed of the Federal Circuit’s “clear and convincing” evidentiary burden and replaced it with the lower preponderance of the evidence standard—again citing lack of support in 35 U.S.C. § 284. Second, because all aspects of enhancing damages are returned to the discretion of the trial court, the Court eliminated Seagate’s tripartite framework for appellate review and replaced it with an overall abuse of discretion standard.
The impact of the Court’s decision remains to be seen. For example, it is unclear whether the jury should have any role in the determination of willfulness or egregiousness. It is also unclear whether Halo will cause the courts to treat claims for enhanced damages differently at the summary judgment stage. A few issues, however, appear to follow inexorably from the Court’s ruling:
- At least in the near term, patentees will pursue enhanced damages more aggressively than under the restrictive Seagate standard.
- District courts will be presented with increasingly varied and creative attempts by patentees to prove that the alleged infringer’s conduct was “egregious.”
- The elimination of the Seagate standard will increase uncertainty and risk when evaluating settlement and increase leverage for patentees with colorable enhanced damages claims.
- A decision by the PTAB to initiate a concurrent IPR proceeding will not preclude a patentee from recovering enhanced damages.
- Parties will need to refocus discovery efforts on the state of mind of the accused infringer at the time of first infringement.
- Companies should consider the importance of opinion letters and whether to waive privilege and assert an advice of counsel defense.
- We all need to batten down the hatches for the oncoming onslaught of pirate-themed arguments and opinions in enhanced damages cases in the years ahead.