Litigation Alert: Supreme Court Expands Discretion to Award Enhanced Damages for Patent Infringement and Eliminates the Federal Circuit's “Seagate Test”

This week in Halo Electronics, Inc. v. Pulse Electronics, Inc., the United States Supreme Court changed the law regarding when enhanced damages should be awarded in patent infringement cases, by eliminating the two-part test for determining whether a district court may increase damages pursuant to 35 U.S.C. § 284, as required by the 2007 en banc Federal Circuit Court of Appeals decision, In re Seagate Technology.

Brief History of Enhanced Damages

Enacted as part of the 1952 codification of the Patent Act, § 284 provides that, in a case of patent infringement, courts “may increase the damages up to three times the amount found or assessed.” 35 U.S.C. § 284. The Supreme Court described § 284 — consistent with the history of enhanced damages under the Patent Act — as providing that “punitive or ‘increased’ damages” could be recovered “in a case of willful or bad-faith infringement.” Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 508 (1964).

In 2007 the en banc Federal Circuit adopted a two-part test for a plaintiff seeking to show that infringement was “willful” under § 284, justifying enhanced damages. In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc). First, a patent owner was required to “show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.” Id. at 1371. The Federal Circuit later held that this first step in the test is a question of law for the court. See Bard Peripheral Vascular, Inc. v. W. L. Gore & Assoc., Inc., 682 F.3d 1003, 1007-1008 (Fed. Cir. 2012). Second, if the first part of the test was satisfied, the patentee was required to demonstrate, also 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.” Id. Moreover, an award of enhanced damages was to be subjected to trifurcated appellate review. The first step of Seagate — objective recklessness — is reviewed de novo; the second — subjective knowledge — for substantial evidence; and the ultimate decision — whether to award enhanced damages — for abuse of discretion. See Bard, 682 F.3d at 1005-1008.

Factual Background of Halo v. Pulse and Stryker v. Zimmer

The Supreme Court granted certiorari on two cases in determining whether the Seagate test is consistent with § 284. In the first case, Halo had sent Pulse letters offering to license Halo’s patents for electronic packages containing transformers designed to be mounted to the surface of circuit boards. After one of its engineers concluded that Halo’s patents were invalid, Pulse continued to sell the allegedly infringing products. Halo sued Pulse for infringing its patents. The jury found that Pulse had infringed Halo’s patents and had likely done so willfully. However, the district court declined to award enhanced damages under §284, after determining that Pulse had at trial presented a defense that “was not objectively baseless, or a ‘sham.’” Bard, 682 F.3d at 1007. Thus, the court concluded that Halo had failed to show objective recklessness under the first step of Seagate. The Federal Circuit affirmed. 769 F.3d 1371 (Fed. Cir. 2014).

In the other matter, Stryker Corp. and Zimmer, Inc. were competitors in the market for orthopedic pulsed lavage devices. A pulsed lavage device is a combination spray gun and suction tube, used to clean tissue during surgery. In 2010, Stryker sued Zimmer for patent infringement. The jury found that Zimmer had willfully infringed Stryker’s patents and awarded Stryker $70 million in lost profits. The district court added $6.1 million in supple­mental damages and then trebled the total sum under § 284, resulting in an award of over $228 million. The Federal Circuit affirmed the judgment of infringement but vacated the award of treble damages. 782 F.3d 649, 662 (Fed. Cir. 2015). Applying de novo review, the court concluded that enhanced damages were unavailable because Zimmer had asserted “reasonable defenses” at trial.

The Federal Circuit then considered whether to grant rehearing en banc to determine whether the Supreme Court’s earlier decision in Octane Fitness, LLC v. ICON Health & Fitness, Inc. should affect the viability of the Seagate test. The Octane Court had replaced a similar two-part test for the award of attorney fees in “exceptional” patent cases with a more general standard based on the language of 35 U.S.C. § 285. The Federal Circuit declined to consider en banc whether to change the Seagate test, and the Supreme Court granted certiorari.

New Standard for Enhanced Damages Announced in Halo v. Pulse

The Supreme Court held that the test set forth in Seagate for enhanced damages is not consistent with § 284. The Court explained that the pertinent language of § 284 contains “no explicit limit or condition” on when enhanced damages are appropriate, and that the Court has emphasized that the “word ‘may’ clearly connotes discretion.” Halo Elecs., Inc., v. Pulse Elecs., Inc., Nos. 14-1513, 14-1520, Slip Op. at 8 (June 13, 2016), 579 U.S. ___ (2016) (citing Martin v. Franklin Capital Corp., 546 U.S. 132, 136 (2005). The Court further noted that “although there is ‘no precise rule or formula’ for awarding damages under § 284, a district court’s ‘discretion should be exercised in light of the considerations’ underlying the grant of that discretion.” Slip Op. at 8. (citing Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749, 1756 (2014)).

The Court further found the Seagate test to be unduly rigid, impermissibly encumbering the statutory grant of discretion to district courts. Slip Op. at 9 (citing Octane Fitness, 134 S. Ct., at 1755. The principal problem was that the test requires a finding of objective recklessness in every case. By requiring a finding of objective recklessness, the Seagate test excluded from discretionary punishment many of the most culpable offenders, including the “wanton and malicious pirate” who intentionally infringes a patent — with no doubts about its validity or any notion of a defense — for no purpose other than to steal the patentee’s business. Slip Op. at 9. (internal citation omitted).

The Halo Court stated that the Seagate test further aggravates the problem by making dispositive the ability of the infringer to muster a reasonable (even though unsuccessful) defense at the infringement trial. Under the Seagate standard, someone who infringes a patent without any reason to suppose his conduct is arguably defensible – could nevertheless escape any comeuppance under § 284 solely on the strength of the accused infringer’s attorney’s ingenuity in the resulting litigation. Id. The Court reasoned that culpability should instead be measured against the knowledge of the actor at the time of the challenged conduct. Id. at 10-11.

The Court further held that Seagate’s requirement that recklessness be proved by clear and convincing evidence is inconsistent with § 284 since the provision “imposes no specific evidentiary burden, much less such a high one.” Id. at 12. Instead, the Court held that the enhanced damages provisions of § 284 are governed by a “preponderance of the evidence standard” that governs patent litigation unless otherwise noted by Congress. Id.

Finally, after eschewing any rigid formula for awarding enhanced damages under § 284, the Court likewise rejected the Federal Circuit’s tripartite framework for appellate review. Id. The Court held that since § 284 “commits the determination” whether enhanced damages are appropriate to the district court’s discretion, “that decision is to be reviewed on appeal for abuse of discretion.” Id. at 12-13.

In summary, Halo holds that § 284 “gives district courts the discretion to award enhanced damages against those guilty of patent infringement” and that in exercising that discretion, district courts are to be guided by the legal principles “developed over nearly two centuries of application and interpretation of the Patent Act.” Such awards should be limited to “egregious cases of misconduct beyond typical infringement.” Id. at 15.

In light of this opinion, the judgments of the Federal Circuit in both cases were vacated and remanded for proceedings consistent with the opinion.

Enhanced Damages Going Forward

The Halo decision replaces Seagate’s bright-line test with a more generally stated standard. Under that standard, the question of enhanced damages will center on the specific facts of the specific case, as viewed in light of the discretion of the particular court before which the case is heard. The ultimate question is whether the facts of a particular case represent an “egregious” example of “misconduct” that goes “beyond typical infringement.” Because of the breadth of the standard and the wide variety of potential factual scenarios, the law concerning what types of behavior are sufficiently egregious to support an award of enhanced damages will likely develop slowly.