Supreme Court Relaxes Standard for Willful Infringement – Higher Risk of Enhanced Damage Awards May Require Clients to Reassess Strategies

Thursday, June 16, 2016

In a unanimous opinion, the U.S. Supreme Court rejected the prevailing Seagate test for finding willful infringement in patent cases – a finding for which a “court may increase the damages up to three times the amount found or assessed” pursuant to 35 U.S.C. §284. The Court found the Seagate test to be “unduly rigid” and “insulating some of the worst patent infringers from any liability for enhanced damages.” In its place, the Court left the questions of willfulness and enhancement of damages largely to the discretion of the district court “in egregious cases.” The decision is likely to make willfulness findings and enhanced damage awards more prevalent, and may have far-reaching implications for both patent owners and companies accused of patent infringement. Halo Electronics, Inc. v. Pulse Electronics, Inc., No. 14-1513 (U.S. June 13, 2016) (decided with Stryker Corp. v. Zimmer, Inc., No. 14–1520).

 Background

Although direct patent infringement is a strict liability claim, patent owners frequently seek to establish that the infringement was “willful” in order to qualify for enhanced damage awards. In such cases, under 35 U.S.C. § 284, a “court may increase the damages up to three times the amount found or assessed.”

In In re Seagate Technology, LLC, 497 F. 3d 1360 (Fed. Cir. 2007) (en banc), the U.S. Court of Appeals for the Federal Circuit raised the standard for determining whether patent infringement was willful by establishing an “objective recklessness” test. Under Seagate, a patent owner was required to prove by clear and convincing evidence both (1) that the defendant “acted despite an objectively high likelihood that its actions constituted infringement of a valid patent,” without taking into consideration the defendant’s actual state of mind; and (2) that the defendant either knew of the high likelihood of infringement or it was so obvious that the defendant should have known the risk. In applying this standard, district courts frequently looked to whether the defendant was able to muster a plausible litigation defense, even if the defense only emerged during litigation. The Seagate standard resulted in a significant decrease in willful infringement findings, with courts often granting partial summary judgment on the issue.

Seagate Standard Too “Rigid”

In the Halo decision written by Chief Justice John G. Roberts, Jr., the Supreme Court ruled that the Patent Act affords courts discretion to find willful conduct, without using the restrictive Seagate test. Section 284 states only that a court “may” award enhanced damages, using a word that “clearly connotes discretion.” Slip op. at 8 (citation omitted).

The Court noted that although enhanced damage awards are discretionary, they must be consistent with a pattern laid out in over 180 years of case law under the Patent Act and earlier statutes. Based on that precedent, enhanced damages:

[A]re not to be meted out in a typical infringement case, but are instead designed as a “punitive” or “vindictive” sanction for egregious infringement behavior. The sort of conduct warranting enhanced damages has been variously described in our cases as willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or—indeed—characteristic of a pirate.

Slip op. at 8. The Court cautioned that such awards “are generally reserved for egregious cases of culpable behavior.” Id. at 9

The Court identified several flaws in the Seagate standard. First, the standard required courts to assess willfulness based on the plausibility of defenses unknown to a defendant at the time it made the decision to begin its infringing conduct. This ran afoul of the basic concept that willfulness should be related to the defendant’s intent. In fact, the Court noted that under Seagate, an infringer could contrive a defense at trial that "insulates the infringer from enhanced damages, even if he did not act on the basis of the defense or was even aware of it" at the time infringement began. Slip op. at 10. In other words, “[u]nder that standard, someone who plunders a patent—infringing it without any reason to suppose his conduct is arguably defensible—can nevertheless escape any come-uppance under §284 solely on the strength of his attorney’s ingenuity.” Id.

In addition, the Court found no basis for Seagate’s requirement that a patent owner prove willfulness by the heightened clear and convincing evidence standard of proof. As in last term’s decision in Octane Fitness, LLC v. ICON Health & Fitness Inc., 572 U. S. ___ (2014) (considering the award of attorney fees in “exceptional” cases under 35 U.S.C. § 285), the Court concluded that the issue required only proof by a preponderance of the evidence – the same standard as for patent infringement determinations.

Finally, the Court followed Octane’s companion case, Highmark Inc. v. Allcare Health Management System, Inc., 572 U. S. ___ (2014), in affording broad deference to a district court’s decision whether to award enhanced damages. The Federal Circuit may upset an award under Section 284 only for an abuse of discretion.

The Court noted that the Patent Act requires a balance between the patent owner’s ability to obtain redress for infringement, on the one hand, and the Act’s promotion of innovation by imitation and refinement of technologies disclosed in patents, on the other. It rejected arguments that more enhanced damages awards would tilt the balance to disfavor innovation, concluding:

That 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.

Slip op. at 15.

Practical Significance: Patent Owners and Defendants Must Reassess Strategies

Patent owners and companies facing potential patent infringement claims alike should carefully consider how the Halo decision affects their pre-litigation strategies. The decision rejects outright Seagate’s restrictive two-prong test for willfulness. Less clear, however, is the standard that will replace it. The decision notes that enhanced damages are available only for “egregious infringement behavior,” “egregious cases of culpable behavior,” or “egregious cases typified by willful misconduct.” However, the decision leaves unresolved many important issues: What is the correct standard for determining if a defendant’s conduct was sufficiently “egregious”? Is willfulness a jury issue, or is it to be determined by the judge? How do other factors, such as litigation misconduct, affect damage enhancement? See Read Corp. v. Portec, Inc., 970 F. 2d 816 (Fed. Cir. 1992) (listing factors to be considered in assessing enhanced damages for patent infringement). What considerations affect whether the district court should award treble damages, or some lesser enhancement?

However, because enhanced damages based on willful infringement will now be more likely than under the Seagate standard, clients should consider a number of practical issues.

First, the Halo Court explained that its decision did not contradict 35 U.S.C. §298, which provides that “[t]he failure of an infringer to obtain the advice of counsel” or “the failure of the infringer to present such advice to the court or jury, may not be used to prove that the accused infringer willfully infringed.” However, given that willful infringement and enhanced damages findings should be more frequent under Halo, and in view of the Court’s disapproval of defenses concocted at the time of trial, companies should revisit their policies regarding written non-infringement opinions of counsel. Companies may now seek to obtain such opinions more often, especially early on in the development or commercialization of a new technology.

Second, given the increased chances of willful infringement and enhanced damages findings, the settlement value of a patent infringement case may increase, especially where the accused infringer’s behavior can be characterized as “egregious.” This change may affect the timing of settlement discussions and the parties’ negotiation strategies.

Third, the Halo decision will cause many patent owners to consider another factor when evaluating where to file an infringement lawsuit. More specifically, whether or not a particular forum is perceived to be more sympathetic to enhanced damage awards will now be a factor to be considered.