Enhanced Damages in Patent Cases to Depend on All Relevant Circumstances for "Egregious" Behavior

Halo Electronics, Inc. v. Pulse Electronics, Inc.,__ U.S. __ (June 13, 2016) (Roberts, C.J.; concurrence by Breyer with Kennedy and Alito)

The Supreme Court yesterday unanimously reversed the Federal Circuit’s decisions on enhanced damages involving patentees Halo and Stryker (in consolidated appeals). Under the Federal Circuit’s Seagate test, a patentee could obtain enhanced damages only if it could prove, by clear and convincing evidence, that a defendant’s infringement was “willful.” A willfulness finding in turn required proof of two separate points: (1) that the defendant’s legal position was “objectively reckless” as measured by the time of trial, and (2) that the risk of infringement was known or so obvious it should have been known to the defendant.

The Supreme Court eliminated the two-part Seagate test and adopted a more flexible standard that provides district courts with greater discretion to enhance damages. The Court first noted that the language of 35 U.S.C. 284 lacks anything like the Seagate requirements. Slip Op. at 8 (internal quotations omitted). The Court next focused on 180 years of precedent to show that enhanced damages are “punitive” or “vindictive” sanctions reserved for “egregious cases of culpable behavior,” which have historically been characterized as “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or-indeed-characteristic of a pirate.” Id. at 8-9. While the Court felt the Seagate test recognizes, in many respects, the concern to limit enhancement to egregious cases, the test is “unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts.” Id. at 9. Seagate ‘s primary problem, according to the Court, is that the “objective recklessness” prong can exclude the most culpable infringers from punishment by allowing the existence of a trial defense to insulate the infringer from enhanced damages, even where the infringer did not act on the basis of the defense or was not even aware of it. Id. at 10. The Court noted that culpability is generally measured against the knowledge of the actor at the time of the challenged conduct.

The Court did not provide a specific standard for enhanced damages, stating that there was no precise rule or formula. Instead, district courts are to be guided by the legal principles developed over nearly two centuries of application and interpretation of the Patent Act that limit the award of enhanced damages to egregious cases of misconduct beyond typical infringement. Id. at 15. But even then, the Court noted, “none of this is to say that enhanced damages must follow a finding of egregious misconduct.” Id. at 11.

The Court also reversed the Federal Circuit on two subsidiary points. First, the Court wiped out the Federal Circuit’s “clear and convincing” evidentiary burden and replaced it with a normal preponderance burden (citing Octane Fitness from last term). Second, the Court eliminated the Federal Circuit’s tripartite framework for appellate review and replaced it with an overall “abuse of discretion” standard (again citing Octane Fitness).

In closing, the Court addressed concerns about so-called patent trolls (though neither plaintiff here was a troll). The Court stated that “[policy] balance can indeed be disrupted if enhanced damages are awarded in garden-variety cases. As we have explained, however, they should not be. The seriousness of respondents’ policy concerns cannot justify imposing an artificial construct such as the Seagate test on the discretion conferred under §284.”

Justice Breyer concurred, and Justices Kennedy and Alito joined him. He raised three points of clarification: (1) a defendant cannot face enhanced damages merely because it knew about the patent; (2) recklessness cannot be proven from the absence of an opinion of counsel (citing 35 U.S.C. 298); and (3) enhanced damages cannot be used to compensate a patentee for infringement costs or litigation expenses, because 35 U.S.C. 284 has that covered. Justice Breyer also noted that growing companies should not feel forced into taking on unnecessary costs in dealing with infringement letters from patentees. He closed by noting that the Federal Circuit can apply its own expertise even under an abuse of discretion standard of review, e.g., to recognize meritorious patent defenses that would prevent an award of enhancement.

As is common with short Supreme Court decisions, many subsidiary issues relating to enhanced damages were not addressed. For example, the Court did identify any factors that a district court should consider when deciding whether to enhance, or discuss which historical factors should be most important. In addition, the Court did not provide any examples of conduct that would not be considered egregious when faced with an accusation of infringement. The Court also did not discuss the role, if any, of juries in the process.

To learn more, register for our webinar on Thursday, June 23 which will feature Fish appellate attorneys and explore this decision, as well as what happens when the Supreme Court changes a legal standard decided by a district court.