IP Law Advisory

June 13, 2016

Supreme Court Enhances Likelihood of Obtaining Enhanced Patent Damages

By: Thomas P. McNulty 

The Supreme Court today issued its unanimous decision in Halo Electronics v. Pulse Electronics and Stryker Corp. v. Zimmer, Inc., two consolidated cases dealing with enhanced damages resulting from willful patent infringement. Under 35 U.S.C. § 284 of the Patent Act, a court “may increase the damages up to three times the amount found or assessed.”

In its 2007 Seagate decision, the Federal Circuit established a two-step test for awarding enhanced damages, under which the patentee had to prove, by clear and convincing evidence: (1) that the infringer acted despite an objectively high likelihood that its actions constituted infringement, and (2) that the risk of infringement was either known or so obvious that it should have been known to the infringer (i.e., that the infringer acted despite a subjective belief that its actions constituted infringement). Under this framework, the Federal Circuit reviewed the first, objective step de novo, the second, subjective step for substantial evidence, and the ultimate decision for abuse of discretion.

The Supreme Court struck this framework down, noting that nothing in §284 requires either the two-step analysis or the multiple-layered standard of review. The Court declined to provide a precise rule or formula for making the determination, instead leaving the determination of enhanced damages to the discretion of the district court, with such determinations to be reviewed under the abuse of discretion standard. Enhanced damages were identified as a “sanction for egregious infringement behavior” and inappropriate in “garden-variety cases.” Instead, courts are instructed to be guided in the application of their discretion by the nearly two centuries of application and interpretation of the Patent Act that limit such an award to misconduct beyond that of typical infringement. Of particular note, the Court emphasized that subjective willfulness, standing alone, can suffice – so in a case, for example, where a party knowingly infringed a patent that they subjectively believed to be valid, willfulness can be found even if, after commencement of litigation, they develop an invalidity theory that would previously have served to make their infringement non-willful under the objective standard.

In a concurring opinion, Justice Breyer (joined by Justices Kennedy and Alito) strove to identify some limits to the discretion of the district court to award enhanced damages. Justice Breyer reiterated the history of enhanced damages having been limited to cases involving egregious conduct, and noted that such conduct must involve more than the infringer merely knowing about the patent at the time of infringement. He pointed out that the Court was not requiring an accused infringer obtain advice of counsel to avoid a finding of willfulness, and that in some circumstances, the opinion of infringement or validity of the infringer itself may suffice to escape enhancement. He noted that enhanced damages must not be awarded to compensate the patentee for infringement-related costs or litigation fees, as these are addressed elsewhere in the Patent Act. Finally, while eschewing the overly-restrictive test laid out by the Federal Circuit in Seagate, Justice Breyer suggests that the Federal Circuit may nevertheless take advantage of its own experience and expertise in patent law in determining whether a district court abused its discretion.

In light of this decision, clients are advised to take a closer look at their activities before introducing a new product or service and particularly upon being notified of a potential infringement. Defenses arising during litigation, that might previously have sufficed to avoid a finding of willfulness, will now have to be prepared early on, as any such defense that arises only during litigation may not serve to prevent the enhancement of damages. While opinions of counsel are not obligatory, defendants will have to show some pre-suit basis that its infringement was not willful, and a competent opinion, obtained in a timely fashion, should continue to defeat willfulness allegations. Where a party intends to rely on its own subjective opinions as to validity or infringement, it is advised that these be documented at the time they are formed, to demonstrate the good faith of the party in any subsequent litigation.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. This material may be considered advertising under certain rules of professional conduct.