“Supreme Court Makes Enhanced Damages Easier to Recover in Patent Cases”

June 13, 2016
Marshall Gerstein Alert

On June 13, 2016, the Supreme Court ruled that the Federal Circuit’s test for awarding enhanced damages for “willful infringement” is not consistent with the statutory language governing such an award. The Court decided that enhanced damages are within the discretion of the district court and may be awarded when it has been shown by a preponderance of the evidence that a case involves egregious misconduct beyond typical infringement. On appeal, a district court’s decision on the issue will now be reviewed for abuse of discretion. The Supreme Court’s decision applies a more discretionary test for determining whether to award enhanced damages, a lower burden of proof, and a less rigorous appellate review standard, making it easier for patent owners to recover enhanced damages. The Court’s decision, linked here, was issued in cases it consolidated for review, captioned Halo Electronics, Inc. v. Pulse Electronics, Inc. (Dkt. No. 14-1513) and Stryker Corporation v. Zimmer, Inc. (Dkt. No. 14-1520).

The relevant statute, 35 U.S.C. § 284, provides that a court “may increase damages awarded in a patent case by up to three times the amount found or assessed.” To receive these enhanced damages under the Federal Circuit’s test (established in In re Seagate Technology, LLC, 497 F.3d 1360, 1371 (Fed. Cir. 2007)), a patentee had to prove by clear and convincing evidence that infringement was “willful,” which required a showing that (1) there was an objectively high likelihood that the infringer’s actions constituted infringement, and (2) the accused infringer either knew or should have known of the infringement. On appeal, the district court’s determination of objective recklessness was reviewed de novo, its determination of subjective knowledge was reviewed for substantial evidence, and its decision on the question of awarding enhanced damages was reviewed for abuse of discretion.

In Stryker and Halo, patent owners argued that the Federal Circuit standard for awarding enhanced damages to patent owners was too rigid and stringent. The patent owners alleged that the infringers deliberately copied the patented inventions, which they argued should be sufficient to support an award of enhanced damages. In Stryker, both the jury and the district court found the infringement willful by clear and convincing evidence. However, the Federal Circuit reversed and vacated the enhanced damages award because it found that, although the infringer’s arguments were unsuccessful, it had presented a reasonable defense to each of the patents-in-suit. In Halo, the jury found the infringement willful but the district court set aside the willfulness finding on the grounds that the defendant presented an invalidity defense at trial that “was not objectively baseless, or a sham.” On appeal in Halo, while the Federal Circuit affirmed that there could be no willfulness finding because the objective prong of the test had not been met since the obviousness defense presented was not objectively baseless, Judges O’Malley and Hughes issued a concurrence encouraging the full court to consider en banc whether the current Federal Circuit test was inconsistent with the Supreme Court’s Octane decision. See Octane Fitness LLC v. ICON Health & Fitness, Inc., 134 S.Ct. 1749 (2014); Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S.Ct. 1744 (2014). The Federal Circuit declined to do so.

To reach its decision, the Supreme Court looked to the statutory language at issue and prior cases awarding enhanced damages. From those cases, the Court determined that enhanced damages are not to be awarded in a typical infringement case, but are instead designed to punish egregious infringement behavior, which it variously has described as “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or – indeed – characteristic of a pirate.” Slip Opinion at 8.

The Federal Circuit’s Seagate test required a showing of objective recklessness, preventing an award of enhanced damages if the accused infringer was able to raise a substantial question as to the validity or infringement of the patents during infringement proceedings, even when the defendant was unaware of the arguable defense when the infringement occurred. The Court rejected this test because it excludes from discretionary punishment many of the most culpable offenders.

The Court repeatedly cited its 2014 rejection of a similar standard that the Federal Circuit had imposed on the award of attorneys’ fees in patent cases under 35 U.S.C. § 285. Octane, 134 S.Ct. at 1756. There, the Supreme Court overturned the standard used by the Federal Circuit to determine if a case was “exceptional” which required proof that the litigation was both brought in subjective bad faith and objectively baseless. Instead, the Supreme Court ruled that an “exceptional” case under the statute is “simply one that stands out from others with respect to the substantive strength of a party’s litigating position…or the unreasonable manner in which the case was litigated.” Id. The Court also determined at that time that § 285 imposes no specific evidentiary burden and that patent-infringement litigation has always been governed by a preponderance of the evidence standard. It applies this same reasoning to enhanced damages in the Halo/Stryker decision.

Similarly, the Court rejected the Federal Circuit’s three-part appellate review standard. Because the award of enhanced damages is discretionary under the statute, the decision is reviewed for abuse of discretion.

Although the Court reiterated that there is no affirmative duty to obtain an opinion of counsel to avoid a finding of willfulness, its focus on the intent of the accused infringer and the culpability of that individual at the time of the infringement may encourage those designing new products to consider consulting with counsel early in the design process about freedom-to-operate considerations.

Because both cases were decided by the district courts and Federal Circuit under the Seagate test, the Federal Circuit opinions were vacated and the cases were remanded for further proceedings consistent with the Supreme Court opinion.

If you have questions or concerns relating to this development, please contact the author or any attorney at Marshall, Gerstein & Borun.

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