United States: Enhanced Damages And Willful Infringement Depend On What The Infringer Knew At Time Of Infringement

Abstract

In June, the Supreme Court in Halo Electronics, Inc. v. Pulse Electronics, Inc. rejected the "Seagate" test for enhancing patenting infringement damages as unduly rigid. On remand from the Supreme Court, the Federal Circuit vacated the district court's finding of no willful infringement made under the Seagate framework and directed the district court to reconsider whether enhanced damages were appropriate under the circumstances. The Federal Circuit directed the district court to focus on whether the patent infringer intentionally or knowingly infringed the patent considering what the infringer knew or had reason to know at the time of infringement.

In 2007, the Federal Circuit established the "Seagate" test for proving willful infringement to support an award of enhanced damages for infringement under the Patent Act.  Under Seagate, establishing willful infringement required a two-prong analysis comprised of an objective and subjective component.  First, the patentee 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."  This "objective recklessness" prong was determined without regard to the infringer's state of mind and could be defeated if the infringer raised a "substantial question" about whether the patent was valid or infringed.  Second, if the objective threshold was met, the patentee was required to show that the objectively-defined risk "was either known or so obvious that it should have been known to the accused infringer."  In Halo Electronics, Inc. v. Pule Electronics, Inc., the Supreme Court rejected the Seagate "objective recklessness" requirement as "unduly rigid" and inconsistent with the district court's discretion to enhance damages under the Patent Act.  On remand, the Federal Circuit considered the impact of the Supreme Court's rejection of the Seagate test on the district court's finding of no willful infringement. 

Background

In 2007, Halo Electronics, Inc. ("Halo") sued Pulse Electronics, Inc. ("Pulse") in federal district court for patent infringement of three patents directed to surface mount electronic packages containing transformers for mounting on a printed circuit board.  Pulse allegedly knew of Halo's patents as early as 1998.  In 2002, Halo offered Pulse licenses to its patents, but did not accuse Pulse of infringement.  Upon receiving the license offer from Halo, a Pulse engineer reviewed the Halo patents and concluded that they were invalid in view of Pulse products.  Pulse did not seek the advice of counsel on the validity of the patents and continued to sell its products.

Following a trial on Halo's claims of infringement, a jury found that Pulse infringed Halo's patents and that it was highly probable that Pulse's infringement was willful. On a post-trial motion for enhanced damages, the district court applied the Seagate test for willfulness and concluded that the objective prong of the two-part test was not met because Pulse reasonably relied on its internal review and determination that the patents were obvious in light of prior Pulse products. The district court determined that this obviousness defense was not baseless and thus concluded that Pulse's infringement was not willful based on the threshold, objective prong of Seagate.  On appeal, the Federal Circuit affirmed the judgment of no willful infringement. On appeal from the Federal Circuit, the Supreme Court rejected the rigid, two-part Seagate test for enhanced patent infringement damages, vacated the Federal Circuit's affirmance of no willful infringement, and remanded to the Federal Circuit.

The Federal Circuit's Halo Decision

On remand, the Federal Circuit considered the impact of the Supreme Court's Halo opinion on the district court's finding of no willful infringement. In particular, the Federal Circuit discussed the rejection of Seagate's requirement of "a finding of objective recklessness in every case before district courts may award enhanced damages." According to the Supreme Court, this requirement excluded a finding of willful infringement against "many of the most culpable offenders, such as the 'wanton and malicious pirate' who intentionally infringes another's patent—with no doubts about its validity or any notion of a defense—for no purpose other than to steal the patentee's business." Rather, "the subjective willfulness of the patent infringer, intentional or knowing, may warrant the award of enhanced damages." 

In view of the Supreme Court's Halo opinion, the Federal Circuit vacated the district court's determination of no willful infringement, which was based on the objective prong of Seagate—that is, the determination that Pulse's obviousness defense was not objectively baseless. The Federal Circuit remanded for the district court to exercise its discretion in determining whether enhancement of damages is warranted. The Federal Circuit specifically directed the district court to consider the jury's finding of subjective willfulness and what Pulse knew or had reason to know at the time of the infringement of Halo's patents, citing the Supreme Court's guidance that "culpability is generally measured against the knowledge of the actor at the time of the challenged conduct." This direction to the district court was given in view of Halo's argument that Pulse's invalidity defense was developed after the lawsuit was filed and that Pulse did not actually rely on any invalidity defense when selling the accused products.  

Strategy and Conclusion

The rejection of Seagate's objective recklessness requirement has likely removed a common obstacle to proving willful infringement. As demonstrated in Halo, avoiding liability for willful infringement may require more than simply showing, post-hoc, the existence of a substantial question about whether the patent was valid or infringed. Instead, more focus will likely be put on what the infringer knew or had reason to know at the time of infringement, including the infringer's knowledge of any defenses at the time of infringement.

 Footnotes

1. The Federal Circuit Halo opinion may be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2016/HaloElectronicsInc_v_Pulse%20ElectronicsInc.13-1472_2016-08-05.pdf.

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