Patent Reform Dead if CAFC Reviews Willfulness En Banc

Last week the United States Court of Appeals for the Federal Circuit issued a decision in Halo Electronics, Inc. v. Pulse Electronics, Inc. While the decision is no doubt important to the parties involved, this decision may have more far reaching implications for patent reform in 2015 and beyond. The issue of particular interest in this case was willful infringement. In a concurring opinion, Judge O’Malley, who was joined by Judge Hughes, wrote that she felt constrained by the Federal Circuit’s precedent in In re Seagate and Bard Peripheral Vascular v. W.L. Gore, but that recent Supreme Court decisions call into question the continued viability of that precedent.

As such, Judges O’Malley and Hughes have urged the Federal Circuit to reconsider en banc the standard for awarding enhanced damages under 35 U.S.C. 284.

If enhanced damages for willful infringement is back on the table any prospects for broad-based patent reform is dead. The America Invents Act (AIA) was famously and permanently stalled until the issue of willful infringement and damages was removed from the legislation. With the damages logjam broken the forces pushing for patent reform were able to coax the legislation across the finish line.

I foresee no scenario where the type of patent reform that the tech industry will want could become law if this renewal of the issue of damages rears its head once again. The AIA gained the traction of a runaway train once the pharmaceutical companies and big biotech became aligned with Silicon Valley. But pharma and biotech companies have far fewer patents than companies in the high-tech sector. In fact, there is really only a single claim in a single patent that most pharmaceutical companies are worried about; namely the claim that covers the version of the drug actually approved by the Food and Drug Administration (FDA). With damages in the spotlight again patent reform proponents will line up on opposite sides once again, with the high-tech Silicon Valley companies on one side facing off against the pharmaceutical industry, biotechnology industry, Universities and independent inventors. This faceoff lead to 5+ years of stalemate before the legislative wrangling broke through the resistance and ultimately concluded with the passage of the AIA.

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The Procedural Setting

Halo Electronics, Inc. (“Halo”) appealed from multiple decisions of the United States District Court for the District of Nevada. First, Halo appealed the granting of summary judgment that Pulse Electronics, Inc. and Pulse Electronics Corp. (collectively “Pulse”) did not sell or offer to sell the accused products within the United States the accused products they manufactured for delivery to buyers outside the United States. Second, Halo also appealed the granting of summary judgment that Pulse did not directly infringe Halo’s U.S. Patents 5,656,985 (the “’985 patent”), 6,297,720 (the “’720 patent”), and 6,344,785 (the “’785 patent”) (collectively “the Halo patents”). Finally, Halo appealed the holding that Pulse’s infringement of the Halo patents with respect to certain accused products that Pulse sold and delivered in the United States was not willful.

Pulse also cross-appealed from multiple decisions of the district court as well. First, Pulse appealed the district court’s claim relative to the limitation “electronic surface mount package” in the Halo patents. Pulse also appealed the district court’s claim construction of the limitation “contour element” in Pulse’s U.S. Patent 6,116,963 (the “’963 patent”) that Pulse asserted in its counterclaim. Finally, Pulse appealed the district court’s holding that the asserted claims of the Halo patents were not invalid for obviousness.

The Decision

In a majority opinion written by Judge Lourie, the Federal Circuit concluded that Pulse did not sell or offer to sell within the United States those accused products that Pulse manufactured, shipped, and delivered outside the United States, thereby affirming summary judgment of no direct infringement of the Halo patents by those products. The Federal Circuit also found Halo’s argument on appeal concerning the issue of willfulness unpersuasive and affirmed the judgment of no willful infringement of the Halo patents with respect to products that were delivered in the United States.

On the cross-appeal, Federal Circuit found no reversible error in the contested claim constructions, and therefore affirmed the judgment of direct infringement of the Halo patents with respect to products that Pulse delivered in the United States and the judgment of inducement with respect to products that Pulse delivered outside the United States but were ultimately imported into the United States by others, as well as the judgment of noninfringement of Pulse’s ’963 patent. The Federal Circuit further affirmed the judgment of the district court that the asserted claims of the Halo patents were not invalid for obviousness.

All About Willfulness

While the entirety of the decision is no doubt riveting reading for the parties, the issue that will potentially consume the industry relates to willful infringement and the proper standard for determining whether enhanced damages are appropriate.

Citing In re Seagate, Judge Lourie explained that establishing willful infringement requires a two-prong analysis that combines both an objective and a subjective inquiry. On the first prong, the patentee 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 prong, which represents the subjective inquiry, the patentee must demonstrate that this objectively-defined risk was either known, or so obvious that it should have been known, to the accused infringer.

The district court held here that the objective prong was not met because it concluded that the obviousness defense that Pulse presented at trial was not objectively baseless. Therefore, in light of the record, the Federal Circuit agreed with the district court that Pulse’s obviousness defense was not objectively unreasonable.

But is this the right standard to apply in light of the Supreme Court’s recent decisions in Highmark Inc. v. Allcare Health Management Systems, Inc., 134 S. Ct. 1744 (2014) and Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014)?

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The Concurrence

Judge O’Malley wrote separately, and was joined by Judge Hughes. O’Malley wrote that she agreed with the conclusion of the majority, but that she thought this issue was ripe for consideration by the entire Federal Circuit. She wrote:

I believe it is time for the full court to reevaluate our standard for the imposition of enhanced damages in light of the Supreme Court’s recent decisions in Highmark Inc. v. Allcare Health Management Systems, Inc., 134 S. Ct. 1744 (2014) and Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014), and the terms of the governing statutory provision, 35 U.S.C. § 284 (2012).

Our current two-prong, objective/subjective test for willful infringement set out in In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc) is analogous to the test this court prescribed for the award of attorneys’ fees under § 285 in Brooks Furniture Manufacturing, Inc. v. Dutailier International, Inc., 393 F.3d 1378, 1381–82 (Fed. Cir. 2005), overruled by Octane Fitness, 134 S. Ct. at 1757–58…

As such, our standard for the award of enhanced damages under § 284 has closely mirrored our standard for the award of attorneys’ fees under § 285. See, e.g., Bard Peripheral Vascular, Inc. v. W.L. Gore & Assocs., Inc., 682 F.3d 1003, 1007 (Fed. Cir. 2012)…

Indeed, our willfulness test, as described in Seagate and Bard, and our old § 285 test, under Brooks Furniture, both were predicated on our interpretation of the Supreme Court’s decision in Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc. (“PRE”), 508 U.S. 49 (1993), which we believed required a two-step objective/subjective inquiry before either enhanced damages or attorneys’ fees could be awarded.

The Supreme Court has now told us that our reading of PRE was wrong.

Indeed, the Supreme Court told the Federal Circuit that their reading of PRE was too narrow. PRE was a limited decision that dealt with determining whether a case is a “sham litigation.” In Octane Fitness the Supreme Court explained that the narrow PRE test required that in order for a lawsuit to be deemed a “sham litigation” it had to be “objectively baseless” and “brought in an attempt to thwart the competition.” The Supreme Court pointed out that in terms of 35 U.S.C. 285, there is no textual support for applying the same objective/subjective test to determine the appropriateness of awarding attorneys fees.

Conclusion

It is hard to reconcile how a objective/subjective test could be appropriate for determining willfulness under 35 U.S.C. 284 when the Supreme Court has discredited the Federal Circuit’s understanding and application of PRE. In fact, I tend to think that the best ruling here would have been to recognize that the Supreme Court’s rulings in Highmark and Octane Fitness implicitly overruled Seagate and Bard.

In any event, ultimately Judge O’Malley urged the entire Federal Circuit to take up this issue en banc in order to reevaluate the Circuit’s willfulness jurisprudence in light of the Supreme Court’s decision in Highmark and Octane Fitness. This will no doubt lead to a petition for rehearing en banc, and we know how Judges O’Malley and Hughes will vote. The question is whether enough of the other judges will agree with Judges O’Malley and Hughes. My guess is that given the compelling argument made by Judge O’Malley the Federal Circuit will take this case for en banc rehearing, and that is when things will really get interesting on Capitol Hill.