S.Ct. revamps enhanced damages for patent infringement

Summary of Halo case

In Halo Electronics, Inc. v. Pulse Electronics, Inc. (S.Ct. June 13, 2016), the Supreme Court recently redefined the standard for determining when enhanced damages under 35 U.S.C. §284 is appropriate and when the Federal Circuit during appellate review can reverse the decision of the district court to award or withhold enhanced damages.

Halo directly overruled Seagate which was the current standard for determining when enhanced damages for patent infringement was appropriate.  Thus, we will discuss Seagate and how Halo changed the law of enhanced damages.

Summary of Seagate two-part test for enhanced damages and the problem

In In re: Seagate Technologies, LLC, the Federal Circuit previously adopted a two-part test for determining when a district court may increase damages for patent infringement pursuant to §284. First, the patent owner 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. Second, the patentee must demonstrate, again 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.

In the instant case, two enhanced damages cases were reviewed by the Supreme Court. At the district court in Halo v. Pulse, the jury found that Pulse had infringed Halo’s patents and that there was a high probability it had done so willfully. Nevertheless, the district court declined to award enhanced damages under §284 because Pulse had at trial presented a defense that was neither objectively baseless, nor a sham. Regardless of the subjective intent of the infringer at the time of the infringing conduct, because the alleged infringer had presented a reasonable defense at trial, the objective part of the Seagate test did not permit the district court to award enhanced damages to the patent owner.

In Stryker v. Zimmer, the jury heard testimony that Zimmer had “all – but instructed its design team to copy Stryker’s products … while opting to worry about potential legal consequences later.” Nevertheless, the district court concluded that enhanced damages were unavailable because Zimmer had asserted reasonable defenses at trial.

In both instances, the objective prong of the two-part test focused on the reasonable defenses presented at trial regardless of the infringer’s state of mind at the time of the infringing conduct.

Holding of S.Ct. Halo case

In the Seagate test, the objective prong is a threshold question, meaning that the subjective intent of the infringer is ignored unless there is no reasonable defense regardless of when the accused infringer knew of the reasonable defense.  The Supreme Court felt that this was unfair to prohibit the district court from awarding enhanced damages even in cases of willful infringement.  The rigidity of the Seagate test did not allow the district court to exercise its discretion in punishing culpable offenders.

The Supreme Court stated that:

“the principal problem with Seagate‘s two-part test is that it requires a finding of objective recklessness in every case before district courts can award enhanced damages. Such a threshold requirement excludes from discretionary punishment many of the culpable offenders, such as the ’wanton and malicious pirate’ who intentionally infringes another’s patent – with no doubts about its validity or any notion of a defense – for no purpose other than to steal the patentee’s business.”

A narrow reading of the Supreme Court’s Halo v. Pulse opinion is that the Seagate two-part test was not completely thrown out but needs an overhaul to address the concerns identified by the Supreme Court. To retain the Seagate two-part test, the first and second parts of the Seagate test must be decoupled. The objective recklessness part of the test cannot be a threshold issue but only a factor in determining whether the district court can award enhanced damages.

More likely, in my reading of the case, the Supreme Court is requiring the Federal Circuit to create a loose framework so that the district court may exercise its discretion in awarding enhanced damages if the situation warrants such punitive action by the court. The Supreme Court repeatedly stated that enhanced damages are for egregious cases only and that egregious cases can be described as “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or – indeed – characteristic of a pirate.” As for which cases or circumstances are egregious, the Supreme Court repeatedly referred to 200 years of case law that provide guidance as to which cases are egregious and which are not.

The Supreme Court recognized that the rigid rules of the Seagate case set forth by the Federal Circuit come from a genuine concern that the district courts might award enhanced damages too readily. But, the Supreme Court reiterated that the long history of the courts in deciding egregious conduct provide sufficient limits on the district court in determining which conduct is egregious and which is not.

The Supreme Court also struck down the clear and convincing evidence standard for establishing eligibility for enhanced damages and stated that the proper standard is preponderance of the evidence which is easier to meet. Moreover, the Supreme Court struck down the standard for appellate review and held that the standard for appellate review shall be an abuse of discretion standard.    The abuse of discretion standard all but guarantees that any enhanced damages award will be upheld by the Federal Circuit.

The Halo case gives district courts more power over defendants since they have greater discretion in awarding enhanced damages when the district court feels that actions of the infringer are egregious.

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