Supreme Court Adopts More Flexible Standard For Enhanced Damages For Willful Infringement

In Halo Electronics, Inc. v. Pulse Electronics, Inc., the Supreme Court rejected the Federal Circuit’s two-part Seagate test for awarding enhanced damages under 35 USC § 284, finding that both the substantive requirement for “objective recklessness” and the “clear and convincing” burden of proof were inconsistent with the intent of the statute. In particular, the Court criticized the Federal Circuit’s test for letting those who willfully infringed in bad faith escape the sanctions Congress intended “for egregious infringement behavior.” 

The Enhanced Damages Statute

Section 284 provides for enhanced damages as follows:

Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.

When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed.

The Federal Circuit’s Seagate Test

The Federal Circuit adopted a two-part test for awarding enhanced damages under § 284 in In re Seagate Technology, LLC, 497 F. 3d 1360 (2007) (en banc). The Supreme Court summarized the test as follows:

First, “a patentee 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,” without regard to “[t]he state of mind of the accused infringer.” …. This objectively defined risk is to be “determined by the record developed in the infringement proceedings.” …. “Objective recklessness will not be found” at this first step if the accused infringer, during the infringement proceedings, “raise[s] a ‘substantial question’ as to the validity or non-infringement of the patent.” …. That categorical bar applies even if the defendant was unaware of the arguable defense when he acted. ….

Second, after establishing objective recklessness, a patentee must show—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.”….

Only when both steps have been satisfied can the district court proceed to consider whether to exercise its discretion to award enhanced damages.

The Supreme Court’s Guidance On Awarding Enhanced Damages

The Supreme Court decision was authored by Justice Roberts. Justice Breyer wrote a concurring opinion.

The Court summarized the purpose of enhanced damages awards as follows:

Awards of enhanced damages under the Patent Act over the past 180 years establish that they are 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.

The Court acknowledged that the Seagate test was consistent with the principle that enhanced damages should be awarded “only in egregious cases,” but criticized the test as being “unduly rigid” and “impermissibly encumber[ing] the statutory grant of discretion to district courts.” Of greatest concern to the Court was that the Seagate test “can have the effect of insulating some of the worst patent infringers from any liability for enhanced damages.”

Under that standard, someone who plunders a patent—infringing it without any reason to suppose his conduct is arguably defensible—can nevertheless escape any comeuppance under §284 solely on the strength of his attorney’s ingenuity.

The Court therefore decided

The subjective willfulness of a patent infringer, intentional or knowing, may warrant enhanced damages, without regard to whether his infringement was objectively reckless.

While providing this guidance, the Court was careful not to create its own “rigid” test, instead emphasizing the importance of district court discretion:

Section 284 allows district courts to punish the full range of culpable behavior. Yet none of this is to say that enhanced damages must follow a finding of egregious misconduct. As with any exercise of discretion, courts should continue to take into account the particular circumstances of each case in deciding whether to award damages, and in what amount. Section 284 permits district courts to exercise their discretion in a manner free from the inelastic constraints of the Seagate test. Consistent with nearly two centuries of enhanced damages under patent law, however, such punishment should generally be reserved for egregious cases typified by willful misconduct.

Building On Octane Fitness

Much of the Supreme Court decision draws on its 2014 decision Octane Fitness, LLC v. ICON Health & Fitness Inc., where it addressed awards of attorney fees in “exceptional cases” under § 285. As it did in that case, the Court rejected the Federal Circuit’s “clear and convincing” standard, and held that enhanced damages under § 284 should be assessed under the “preponderance of the evidence” standard. The Court also eliminated the Federal Circuit’s “trifurcated appellate review” of awards of enhanced damages, where objective recklessness was reviewed de novo, subjective knowledge was reviewed for substantial evidence, and the ultimate decision whether to award enhanced damages was reviewed for abuse of discretion. Instead, the Court determined that a decision whether to award enhanced damages under § 284 should be reviewed for abuse of discretion.

Justice Breyer’s Concurrence

According to the opening paragraph, Justice Breyer wrote a concurring opinion to express his “understanding” of limitations inherent to § 284 that “help produce uniformity in its application and maintain its consistency with the basic objectives of patent law.” However, he also expresses his concerns that “the risk of treble damages can encourage [a] company to settle, or even abandon any challenged activity” and saw this as a threat to the delicate balance struck by the patent system:

To say this is to point to a risk: The more that businesses, laboratories, hospitals, and individuals adopt this approach, the more often a patent will reach beyond its lawful scope to discourage lawful activity, and the more often patent-related demands will frustrate, rather than “promote,” the “Progress of Science and useful Arts.”

Is he making a case for “efficient infringement”?