Will the Supreme Court bring balance back to the patent market?

Earlier this week the United States Supreme Court accepted certiorari in two patent cases, which were consolidated by the Court for consideration. These two cases, Halo Electronics, Inc. v. Pulse Electronics, Inc. (14-1513) and Stryker Corporation v. Zimmer, Inc. (14-1520), will force the Court to dive head first into one of the most thorny political patent issues of our time – the issue of enhanced damages for willful patent infringement.

The statute in question says very little that is relevant, merely saying that the district court judge “may increase the damages up to three times the amount found or assessed.” 35 U.S.C. § 284. Simple and straight forward enough, but over the years the United States Court of Appeals for the Federal Circuit has issued rulings that make it virtually impossible for a victorious patent owner to ever receive enhanced damages. The rigid structure of the enhanced damages test has effectively removed the permissive and discretionary language of the statute, which just says that the district court judge “may increase the damages.”

In 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) the Court, interpreting 35 U.S.C. § 285, found that there was no textual support in the statute to impose an onerous, rigid test for the awarding of attorneys’ fees to a prevailing party in a patent infringement lawsuit. Most notably, the Supreme Court explained to the Federal Circuit that they misinterpreted a key ruling of the Supreme Court when they created the test that would result in attorneys’ fees never being award. That same exact misinterpretation is at the heart of Federal Circuit case law relating to the awarding of enhanced damages to a victorious patent owner. Therefore, it seems a virtual certainty that the Supreme Court will overrule the Federal Circuit and give district courts discretion to award enhanced damages where appropriate.

Why the Federal Circuit did not take the opportunity to sit en banc and correct this matter without need for further Supreme Court consideration is curious to say the least. The handwriting couldn’t be any clearer after the Supreme Court’s decisions in Octane Fitness and Highmark, yet the Federal Circuit continued to apply the same faulty interpretations and misunderstandings of law that they had prior to those Supreme Court decisions. That the Federal Circuit would be so obstinate in the face of a clearly correct decision is bizarre given how they seem pathologically fearful of refining Supreme Court precedent relative to patent eligibility. Even when there is no way the Supreme Court could have ever intended their broad patent eligibility pronouncements about horribly written claims to apply to truly innovative technologies the Federal Circuit has blindly been willing to follow the literal overstatements as if there is some greater good in taking sweeping statements out of context.

[Patent-Business]

Of course, even with what seems to be open and shut cases it is difficult, if not impossible, to actually predict how the Supreme Court will rule. Still, given that patent matters are handled only by the Federal Circuit the fact that the Supreme Court accepts a case suggest there are serious doubts about how the Federal Circuit has ruled, and that is before full briefing and oral arguments. Furthermore, the Supreme Court doesn’t take Federal Circuit cases to congratulate them on their brilliant understanding of patent law. While the Federal Circuit is affirmed from time to time the odds are generally in favor of a reversal. Where the Supreme Court would have to create a distinction without a difference and distinguish Octane Fitness and Highmark, the odds of a reversal go way up.

Despite the way it looks on the surface, how the matter of enhanced patent damages will play at the Supreme Court could be a bit of a mystery. Patent damages generally, and enhanced damages specifically, are a patent political powder keg because there are so many corporations that are users of technology. These technology using, or technology usurping, corporations would rather not have to worry about the consequences of infringing patents. This has caused the so-called infringer lobby to put a premium on the issue of damages, specifically advocating positions that would minimize patent damages. Indeed, the infringer lobby has done an excellent job weakening patent rights and impairing the enforceability of patents over the last decade, both in the federal courts and on Capitol Hill. The Supreme Court has even several times mentioned the patent troll problem without the issue being before the Court and neither party being accused of being a troll.

Over the last decade it has been exceptionally difficult for a victorious patent owner to obtain a permanent injunction, it has become easier for challengers to demonstrate that patent claims are obvious, it has become easier to challenge patent claims in a one-sided proceeding at the Patent Office that swings heavily in favor of the challenger, and some of the most important innovations our technology companies work on today are no longer patent eligible. As important to the infringer lobby as all this has been it is the rulings that make obtaining enhanced damages virtually impossible to obtain that many view as sacrosanct. This means the heavy guns will come out.

We can expect numerous amicus filings, closed-door meetings to attempt to get the government to support the Federal Circuit’s restrictive view of enhanced patent damages, and if all else fails there will be a renewed push to include patent damages reform into any patent reform. Of course, if patent damages are added to the patent reform equation that should effectively kill any hopes of reform for the foreseeable future. That the future of patent reform hangs in the balance means there is a lot that will be riding on convincing the Supreme Court not to give district court judges discretion.

Over time the law rarely stays in what could be described as a happy medium, or equilibrium status. Instead the law swings, sometimes quickly and violently, between recognizing strong patent rights and enforceability to substantially weakening the system and making patents far less valuable and enforceable. Today we are at or near the high point of the swing toward a patent system that has become rather suddenly, and staggeringly, anti-patent. But the Supreme Court considering the Halo Electronics and Stryker Corporation cases should almost instantly change the patent industry, at least if the Supreme Court does what they have signaled they will do in those two similar cases – Octane Fitness and Highmark – that are less than two years old.

A ruling by the Supreme Court that district courts have discretion to award up to triple damages will send shockwaves through the entire patent industry. Infringer companies have made a business of ignoring patent rights for at least the last decade. So confident have they become that they will not be punished for infringing that attorneys for these infringer companies gleefully proclaim to industry gathers that they simply “circular file” all licensing inquiries or infringement notices they receive. The best alternative to a negotiated resolution for infringers is to force the patent owner to have to fight a long and expensive battle that will be difficult to win. That results in many patent owners simply have no remedy for infringement today.

“We used to have, for the most part in this country, what I’ll call an honor system where companies that were using technologies patented by others willingly took licenses without being forced by court orders to do so,” former Federal Circuit Chief Judge Paul Michel explained at an event in April. “The honor system now is largely gone.”

So significantly has the landscape shifted over the last decade in favor of infringers that there are virtually no arms length negotiations any more, which means that the law and the legal system have failed. When expensive litigation is the only option that means the law has become so one-sided that private resolution cannot happen. The prospect of triple damages would instantly change the calculus and force infringers to the bargaining table, an occurrence that would lead to a far more functional system.

If the Supreme Court opens up a real possibility that enhanced damages could be obtained, giving the district court discretion and making the ultimate decision difficult to challenge on appeal, that would quickly and dramatically even the playing field between infringer and patent owner. The risk of being hit with triple damages would be too great and those infringer attorneys who now so arrogantly explain that their job is nothing more than ignoring patent owners will do so only at great risk. Such a ruling would truly open up the private marketplace rather than to force all disputes into litigation. The Supreme Court could bring sanity back to the patent market while staying philosophically true to the belief that there should be few rigid tests and district courts should be given the ability to exercise broad discretion where the statute grants such discretion.

As crazy as it sounds, the Supreme Court seems well positioned to fix the errors of the Federal Circuit. At the same time they will hand the Federal Circuit another embarrassing reversal the Supreme Court will also take a critical first step toward restoring a functioning patent marketplace built on relationships and arms length negotiations.