In June 2016, the United States Supreme Court issued a decision in Halo Electronics, Inc. v. Pulse Electronics, Inc., discarding the Federal Circuit's Seagate test for finding willful infringement and awarding enhanced damages in patent cases. This article discusses Halo decision and its likely effects on patent litigation in the United States.
Section 284 of the U.S. Patent Act provides that, in a case of infringement, courts "may increase the damages up to three times the amount found or assessed." Prior to Halo, the Federal Circuit had decided that a plaintiff seeking enhanced damages must show that the infringement was "willful," and adopted a two-prong test for establishing willfulness, in In re Seagate Technology, LLC, 497 F. 3d 1360 (Fed. Cir. 2007). Under the first objective prong, a patent owner 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." Under the second subjective prong, the patent owner must 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."
The Supreme Court's Halo decision involved appeals from two Federal Circuit cases -- Halo Electronics Inc. v. Pulse Electronics Inc., 769 F.3d 1371 (Fed. Cir. 2014) and Stryker Corp. v. Zimmer, Inc., 782 F.3d 649 (Fed. Cir. 2015). In both cases, the Federal Circuit held no willful infringement based on the Seagate test.
In Halo, a jury found that it was highly probable that Pulse's infringement was willful. But the district court nevertheless held there was no willfulness, because Pulse's defense was not objectively baseless and, therefore, the objective prong of the Seagate test was not met. On appeal, the Federal Circuit agreed with the district court.
In Stryker, a jury found that Zimmer had willfully infringed and awarded treble damages. On appeal, the Federal Circuit reversed the willfulness finding on the ground that Zimmer's defenses were not objectively unreasonable.
The Supreme Court's Decision in Halo
In Halo, the Supreme Court rejected the Federal Circuit's Seagate test. The Court acknowledged that the Seagate test in many respects reflected a sound recognition that enhanced damages are generally appropriate only in egregious cases, but found that the test "is unduly rigid" and "can have the effect of insulating some of the worst patent infringers from any liability for enhanced damages."
First, the Court rejected the idea that a defendant had to be objectively reckless. The Court pointed out that the "objective recklessness" prong of the Seagate test shields many of the most culpable infringers from punishment. The Court noted that, if the infringer can muster a reasonable, even though unsuccessful, defense at trial, the existence of such defense will insulate the infringer from enhanced damages under the Seagate test, even if he did not act on the basis of the defense or was even aware of it. But, the Court observed, culpability is generally measured against the knowledge of the actor at the time of the challenged conduct. Accordingly, the Court concluded that courts should take into account the particular circumstances of each case in deciding whether to award enhanced damages, and exercise their discretion in a manner free from the inelastic constraints of the Seagate test.
Second, the Court rejected the "clear and convincing" standard of proof, and adopted the lower "preponderance of the evidence" standard generally applied to infringement. The Supreme Court found that nothing in the statute imposes any specific evidentiary burden, and nothing in historical practice supports a heightened standard.
Third, the Supreme Court rejected the Federal Circuit's standard of appellate review for findings on willful infringement. Under the old standard, court findings of objective recklessness were reviewed de novo; jury findings of subjective knowledge were reviewed for substantial evidence; and the ultimate decision—whether to award enhanced damages—was reviewed for abuse of discretion. Rejecting this tri-part standard, the Court instead adopted the simple "abuse of discretion" standard.
Litigation Trends on Willful Infringement After Halo
In a period of generally unfavorable decisions for patent owners from the Supreme Court, the Halo and Stryker decisions stand out. Because the Supreme Court essentially relaxed the standard for finding willful infringement, patent owners will be more likely than before to pursue a willful infringement claim and enhanced damages. Post Halo, an accused infringer cannot solely rely on the presence of objectively reasonable defenses in the litigation to defeat a patent owner's willful infringement claim. If the patent owner can show that the accused infringer had knowledge at the time of the challenged conduct, the court can still find willful infringement even if the infringer's defenses at trial are objectively reasonable. Even more potentially problematic for defendants, the willfulness decision will probably now be made by juries, who have little experience with patent cases when compared to most judges.
Accordingly, accused infringers should build a record that the company did not act in bad faith, such as obtaining an opinion letter from counsel, as soon as possible. For example, when a company receives an infringement notice letter and decides not to take a license from a patent owner, the company should build the record that supports the reasonableness of its decision, to show that the company did not act in bad faith. Although not required, more companies will likely obtain an opinion letter from counsel regarding noninfringement or invalidity, which will be more important than they were pre-Halo in defeating a willful infringement claim if raised in litigation.
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