United States: High Court Relaxes Standards For Enhanced Damages In District Court Patent Litigation

On June 13, 2016, in a much-anticipated joint holding in Halo/Stryker, 1 the Supreme Court unanimously overturned the Federal Circuit's rigid test for willful infringement under Seagate and conferred discretion on district courts, "narrowed" by nearly 200 years of judicial practice, to award enhanced damages to patent owners under 35 U.S.C. § 284 for "egregious cases of culpable behavior." The High Court's opinion was authored by Chief Justice Roberts, with Justices Breyer, Kennedy and Alito concurring.

Although the possibility of enhanced damages on a theory of willful infringement would strike fear into the heart of any accused infringer, the two-pronged test for willful infringement previously promulgated by the Federal Circuit proved challenging in practice for patent owners. The Seagate standard, as it was applied prior to the Supreme Court's decision in Halo/Stryker, required the patent owner to prove that the accused infringer's conduct was objectively and subjectively culpable, and it needed to do so by a heightened standard of clear and convincing evidence (compared with the preponderance of the evidence standard needed to prove patent infringement). With respect to the objective component, patent owners needed to show that the accused infringer's defenses were objectively unreasonable – meaning that an accused infringer with effective legal counsel could avoid willful infringement by demonstrating, regardless of the defendant's culpable pre-litigation conduct, that its defenses raised during the litigation were objectively reasonable.

With its holding in Halo/Stryker, the Court appears to have dealt a more favorable hand to the patent owners seeking enhanced damages, particularly for willful infringement of their patents. In addition to eliminating the two-part Seagate test, the Court has lowered the burden of proof on patent owners for proving willful infringement from clear and convincing to preponderance of the evidence. Furthermore, the Court has tightened and focused the standard of review on appeal for issues of willful infringement to the abuse of discretion standard, instructing the Federal Circuit to exercise that review in light of the "limits to that discretion" derived from "[n]early two centuries of exercising discretion in awarding enhanced damages in patent cases ." 2

To more thoroughly understand the Halo/Stryker decision, it is instructive to reflect upon the background and history of willful infringement in U.S. patent law.

Background History of Willful Infringement

As written, the language of 35 U.S.C. § 284, first codified into the Patent Act in 1952, provides that upon a finding of patent infringement "...the court may increase the damages up to three times the amount found or assessed." 3 The statute's language has its roots in the origins of U.S. patent law, which gave courts discretion to award enhanced damages for infringement against a defendant who deliberately or willfully infringed a patent. 4 The justification for such an award was recognized not only as a means for compensating the patent owner but also as a "vindictive" means for punishing the culpable defendant (i.e., punitive damages). 5

To address what it later characterized as "widespread disregard of patent rights that was undermining the national innovation incentive," 6 the new Federal Circuit decided the 1983 case Underwater Devices. 7 In Underwater Devices, the Federal Circuit attributed a negligence standard to willful infringement, affirmatively imposing upon would-be infringers (defendants) a duty to avoid patent infringement, the duty running from the date on which they receive actual notice of another's patent rights. Deciding whether or not the defendants acted reasonably in view of this duty was a question of fact for the jury. 8 To discharge that duty, potential infringers must have sought and obtained the competent advice of legal counsel after learning of those patent rights, but prior to the initiation of any possible infringing activity. 9 Understandably, the Underwater Devices decision caused a dramatic uptick in the demand for freedom-to-operate (FTO) opinions from counsel to insulate would-be infringers from willfulness and the much-feared enhanced damages liability it carried. To demonstrate a clear state of mind on the part of the would-be-infringer, the timeliness of these FTO opinions was crucial: they needed to be obtained after becoming aware of the patent(s) in question but before any accusations of infringement. Better yet, they should be obtained prior to engaging in any questionably infringing activity.

The standard set out in Underwater Devices survived for over 20 years before the Federal Circuit decided Knorr-Bremse, where the en banc Federal Circuit eliminated the inference that an unobtained opinion of counsel would have been unfavorable. 10 And shortly after Knorr-Bremse, the Federal Circuit returned to willfulness in In re Seagate. 11 The Knorr-Bremse and Seagate courts attributed a new recklessness standard to willful infringement that the court reasoned was consistent with the well-established meaning of "willfulness" in the civil context. 12 In furtherance of the new standard, the Seagate court imposed a two-pronged test, having both objective and subjective components. In the objective sense, the patent owner needed to demonstrate by clear and convincing evidence "that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent," and in the subjective sense, that the objectively defined risk was either known, or should have been known, to the accused infringer.

Two later decisions by the Federal Circuit in Powell 13 and Bard 14 further clarified the objective prong of the Seagate test for willful infringement. In Powell, the court considered whether the objective prong was a fact question for the jury or a legal question for the judge. 15 The court set out the pertinent inquiry for the objective prong to be whether the accused infringer reasonably relied on a defense to patent infringement. The Powell court determined that the reasonableness of the defense depended on whether the defense itself, as presented by counsel for the accused infringer, was based on matters of fact (e.g., noninfringement) or matters of law (e.g., claim construction or inequitable conduct). The Bard court, considering Powell, further held that the objective prong of Seagate is best decided by the judge as a matter of law, subject to de novo review on appeal. 16 Informing its decision in Bard was the determination that "the court is in the best position for making the determination of reasonableness."

Holistically, the Federal Circuit's holdings in Seagate, Powell and Bard set a very high bar for patent owners to prove (and maintain) a finding of willful infringement, and thus to secure an enhanced damages award. Not only did a patent owner need to prove satisfaction of the two rigid Seagate prongs, including under the objective prong the unreasonableness of the accused's defense to the charge of infringement, but it also had to do so by a clear and convincing evidence standard – a very high bar for any litigant. Moreover, and even upon a successful finding of willful infringement, satisfaction of the objective prong needed to survive a de novo standard of review on appeal, a standard that by its nature accords no deference to the district court, leading to increased reversals and vacated awards.

The Supreme Court's Decision in Halo/Stryker

Halo v. Pulse and Stryker v. Zimmer were two unrelated cases that both ended up in a similar position at the cert. petition stage – the plaintiffs in both had prevailed at trial on issues of patent infringement, but both had ultimately failed the Seagate test for willful infringement (particularly the objective prong), whether initially at trial or on appeal under the de novo standard of review:

Halo proved at trial that Pulse infringed its patents. However, the District Court declined to award enhanced damages under 35 U.S.C. § 284, despite a jury finding that there was a high probability of willfulness, because as a matter of law Halo failed the first prong of Seagate by not proving by clear and convincing evidence that Pulse's litigation defenses were unreasonable. The Federal Circuit affirmed. 17

Stryker proved at trial that Zimmer infringed its patents. The District Court made a finding of law that Zimmer infringed Stryker's patents willfully and awarded treble damages, holding that Zimmer had "all-but instructed its design team to copy Stryker's products." The District Court justified the appropriateness of its enhanced damages award "[g]iven the one-sidedness of the case and the flagrancy and scope of Zimmer's infringement." The Federal Circuit affirmed the judgment of infringement, but vacated the award of treble damages. Operating under the de novo standard of review, the Federal Circuit concluded that Stryker had failed the first prong of Seagate because Zimmer had asserted "reasonable defenses" at trial. 18

In vacating both holdings, the Supreme Court overruled Seagate and its two-pronged test for willful infringement. Emphasizing the plain language of 35 U.S.C. § 284, the Court noted that the statute permits discretionary awards of enhanced damages, and that the Seagate test was "unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts." 19 Thus, the Supreme Court grants "limited" discretion to the district court. In a second holding, the Court vacates the heightened clear and convincing standard of proof for recklessness as being "inconsistent with § 284," providing that the requisite level of proof is a preponderance of the evidence in conformity with the governing standard of patent infringement litigation. 20 In a third and final holding, the Court changed the appellate standard of review for willful infringement to abuse of discretion.

In disposing of the Seagate test, the Court recognizes the goal of Seagate as being to punish truly egregious conduct among infringers, but finds that the strict nature of the test unfairly lets the most culpable infringers pass through unscathed on the strength of any reasonable, albeit unsuccessful, defense at trial. Citing general tort law and related principles, the Supreme Court reset the metric for assessing culpability in willfulness cases to focus on the mental state of the actor at the time of the challenged conduct. 21 Unlike Underwater Devices, however, the Court did not mandate an exculpatory opinion of counsel. The concurring justices, citing 35 U.S.C. § 298, observed that a potential infringer could "reasonably determine that its product does not infringe a particular patent, or that that patent is probably invalid," and that "Congress has thus left it to the potential infringer to decide whether to consult counsel – without the threat of treble damages influencing that decision." 22 Acknowledging that "a lawyer's informed opinion" could be helpful, the concurring justices noted, "Congress has determined that where both 'advice of counsel' and 'increased damages' are at issue, insisting upon the legal game is not worth the candle." 23

The Halo/Stryker decision comes as a win for patent owners, as district courts can now "punish the full range of culpable behavior" while being accorded "limited" deference on appeal. Although the Court didn't specify (or otherwise limit) exactly what "range of culpable behavior" would satisfy the reincarnated standard, it referenced and reflected upon "two centuries" of case law giving district courts discretion to make such awards in the face of "egregious" conduct by accused infringers. In those cases, the Court noted that punishable conduct warranting enhanced fees was described as "willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or – indeed – characteristic of a pirate." 24 In at least the view of the concurring justices, this egregious conduct must include more than simple knowledge of the patent. 25

The concurring opinion notes that, in spite of the deferential abuse of discretion standard of appellate review, the Federal Circuit still may, from time to time, need to assess the reasonableness of an infringer's state of mind, calling upon its expertise in patent law. The concurring justices, and apparently the entire Court, also note that enhanced damages awards should never be used to compensate patentees for infringement related costs or litigation expenses – 35 U.S.C. § 285 exists separately for that specific purpose.

Conclusion

In sum, the Court's decision in Halo/Stryker largely parallels the Court's recent holding in Octane/Highmark, where the Court similarly granted to district courts discretion to award attorney's fees pursuant to 35 U.S.C. § 285. The decision upsets the conventional wisdom for enhanced damages – even leaving open to question the assumption that the usual concept of "willful infringement" is a precondition for enhanced damages. What precisely the district courts will do with that discretion remains to be seen, but there are some important and immediate implications for both patent owners and defendants.

From the patent owner's standpoint, the Court's holding will threaten those whom the Court called "pirates" and other similarly situated culpable infringers with the risk of treble damages. Thus, in some patent infringement cases – those with allegedly culpable pre-complaint conduct – the Court's decision stands to increase the leverage held by the patent holders. The Court's decision also stands to increase judge-to-judge and district-to-district variability in enhancement, which may motivate patent owners to focus litigation in what they perceive to be favorable districts even more than they already do.

From a defendant's standpoint, the Court's holding drives risk upward in any situation where there is pre-suit knowledge of the patent. The Court did not put clear boundaries on evidentiary requirements for enhancement, and although the concurrence was clearly looking for more than knowledge of the patent alone, it remains to be seen what will constitute "egregious" conduct. This uncertainty reinforces the value of timely opinions of legal counsel, which may provide invaluable proof of that defendant's good state of mind during the key time period so as to rebut a case for enhanced damages.

1 579 U.S. ____ (2016), Nos. 14-1513, 14-1520, slip op. (S. Ct. Jun. 13, 2016). The Supreme Court decided Halo Elecs., Inc. v. Pulse Elecs. Inc. (No. 14-1513) and Stryker Corp. V. Zimmer, Inc. (No. 14-1520) in a joint opinion.

2 Id. at 13 (Roberts, C.J.).

3 35 U.S.C. § 284.

4 Tilghman v. Proctor, 125 U.S. 136, 143-144 (1888); Topliff v. Topliff, 145 U.S. 156, 174 (1892) (infringer knowingly copied technology of former his employer).

5 See Clark v. Wooster, 119 U.S. 322 (1886).

6 In re Seagate Tech., 497 F.3d 1360, 1369 (Fed. Cir. 2007) (en banc).

7 Underwater Devices Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed. Cir. 1983).

8 Id. at 1390.

9 Id.

10 Knorr-Bremse Systeme Fuer Nutzfahrzuege Gmbh v. Dana Corp., 383 F3d 1337 (Fed. Cir. 2004).

11 Seagate, 497 F.3d at 1360.

12 Id. at 1370.

13 Powell v. Home Depot U.S.A. Inc., 663 F.3d 1221 (Fed. Cir. 2011).

14 Bard Peripheral Vascular v. W.L. Gore & Assocs., 682 F.3d 1003 (Fed. Cir. 2012) (en banc).

15 663 F.3d at 1236.

16 682 F.3d at 1007. The Bard court further held that the subjective prong of Seagate would be reviewed for substantial evidence on appeal while the overall determination whether to award enhanced damages would be reviewed for abuse of discretion. Id. at 1005, 1008.

17 579 U.S. ____ (2016), Nos. 14-1513, 14-1520, slip op. at 6 (S. Ct. Jun. 13, 2016) (Roberts, C.J.).

18 Id. at 7.

19Id. at 6.

20 Id. at 12.

21 Id. at 10.

22 Id. at 3.

23 Id.

24 Id. at 8.

25579 U.S. ____ (2016), Nos. 14-1513, 14-1520, slip op. at 2 (S. Ct. Jun. 13, 2016) (Breyer, J., concurring).

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