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

By Gene Quinn
October 21, 2015

lady-justice-scales-335Earlier 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.

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.

The Author

Gene Quinn

Gene Quinn is a Patent Attorney and Editor and founder of IPWatchdog.com. Gene is also a principal lecturer in the PLI Patent Bar Review Course and an attorney with Widerman Malek. Gene’s specialty is in the area of strategic patent consulting, patent application drafting and patent prosecution. He consults with attorneys facing peculiar procedural issues at the Patent Office, advises investors and executives on patent law changes and pending litigation matters, and works with start-up businesses throughout the United States and around the world, primarily dealing with software and computer related innovations. is admitted to practice law in New Hampshire, is a Registered Patent Attorney and is also admitted to practice before the United States Court of Appeals for the Federal Circuit. CLICK HERE to send Gene a message.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 23 Comments comments.

  1. David October 21, 2015 1:00 pm

    The real show will begin with the SCOTUS grants cert to consider the CAFC’s classification of the claim of patent validity as a public right.

  2. angry dude October 21, 2015 1:27 pm

    Gene,

    Does that mean that e.g. Apple, which has an official policy to “circular-file” all licensing proposals coming from 3rd parties, and which was officially put on notice of existence of my patent at least three times (first time by my little “software IP” company now defunct, then by ICAP Patent Brokerage and then again by me via filing lawsuit against a supplier) will now run to negotiation table to sit down with small patent holders like myself and work on a fair licensing deal ?

    Woo-hooo !!! I’m gonna be rich !!!!

    But, seriously, do you think it is grossly naive to think that it can really happen ?

    Me thinks it is 🙂

  3. Alex in Chicago October 21, 2015 4:42 pm

    If the Supreme Court moves away from the rigid structure (as they are likely to do) it will move the patent system towards a 3 tier system that represents something like this:
    1. Noninfringers (no liability)
    2. Infringers (Liability)
    3. Copiers (3x Liability)

    IMO, this is actually the structure Congress initially imagined when they created the statutory scheme that does not have a scienter requirement to find infringement. They recognized that you can optimize a widget and miss or misinterpret a patent, but they also recognized that there are blatant infringers.

    And that distinction was one that the Federal Circuit seems to have been unwilling to make.

  4. Gene Quinn October 21, 2015 4:44 pm

    angry dude-

    You are entitled to think that what I write is grossly naive. I am, however, entitled to know that you are wrong.

    -Gene

  5. Dan October 22, 2015 9:22 am

    It is Black Letter tort law that negligent actors who cause harm face compensatory damages while intentional actors risk punitive damages. The tort of patent infringement should not be an exception. Enhanced damages must be a real risk or large, infringing companies, represented by large law firms, will continue to simply survey the landscape and assess the size and resources of the patent holder and not assess the scope of their conduct. I know of examples where defendants have spent two or three times, in legal expenses, what was offered to them as an early settlement. Their objective was clearly to crush the plaintiff, not to reach a sound business decision. It strikes me that in such cases the lawyers are culpable for not securing a license for their clients for 1/3 of what the made the client pay for continuing the litigation. Who pays 3 times the “list price” for an item, fails to get it, and calls themselves competent, or worse, successful? They should be advised to, “take 2 doses of triple damages and call me in the morning.”

  6. Paul F. Morgan October 22, 2015 11:44 am

    Good article Gene. One does wonder if the Fed. Cir. seems to sometimes prefer setting themselves up for another unanimous reversal by the Sup. Ct. rather than reversing panel decisions by some of their colleagues.
    One aspect of statutory enhanced damages seems to particularly need clarification. Namely, enhanced damages for infringement that will continue after a final decision in favor of the patent owner.

  7. Edward Heller October 22, 2015 3:16 pm

    Gene, another home run! Keep it up.

  8. angry dude October 22, 2015 4:26 pm

    Dan@5

    I know one big law firm’s associate who helped his client to lose over 200M in stock value by refusing to settle for 100K or less
    Guess what ? He is a partner with the same law firm now
    – a very “successful” litigator in SV 🙂

  9. Edward Heller October 22, 2015 5:07 pm

    angry, don’t blame that litigator. Blame the Federal Circuit. As Judge Michel explained, post-Seagate, one can almost never prove willful infringement.

    As a result, accused infringers can stand pat and force litigation without the fear of treble damages.

    Also, even before Seagate, it was and is SOP for litigation counsel to advise clients to not settle. This results in more litigation — which is entirely to the benefit of litigation firms, not so?

    So, the associate made a lot of money for the firm and became partner. What is wrong with that?

  10. angry dude October 22, 2015 7:33 pm

    Edward Heller@9

    You are exactly right: the big law firm was the only money-making party in this.
    Otherwise it was a lose-lose conclusion

  11. Dan October 23, 2015 8:57 am

    Edward, I’m struggling to grasp what seems to be your simple point. Lawyer brings in large fee; lawyer moves up in the firm; all is well? If angry’s facts are correct, that lawyer cost his client $200 M in stock value! That’s 2000 times greater than the $100,000 his client would have paid to settle. That is preposterous or worse! Yet your post did not contain the word “client.” Nor did it contain the word “duty.” Is there no such thing as a duty to do the best for your client? Or is a client merely the vehicle and underwriter for an attorney’s climb to the top?

  12. angry dude October 23, 2015 10:37 am

    Dan@11

    Normally a single patent lawsuit or two from small entities can’t cause much effect on a well-heeled mid-size tech company – the big law firm can drag those for 5 years to trial and then to appeal (making large sums of $$$ for law firm along the way), before plaintiffs can see any returns, assuming plaintiffs can stay afloat for that long…
    It’s only at a time of some critical transition in company’s life such thing becomes possible…
    To be fair, that lawyer didn’t have to tell his client about the odds of losing their biggest customer at the most critical time in corporate life cycle and inevitable stock collapse
    – it was CEO’s and corporate board’s fiduciary duty to evaluate the risks.
    Needless to say, CEO was named in a class-action lawsuit by disgruntled shareholders…

  13. Edward Heller October 23, 2015 2:27 pm

    Dan, if you haven’t worked in a law firm, you probably have no idea what I am talking about.

    Making money for the firm is job number 1. Therefor, advising the client in a manner best adapted to make money for the firm is job number 1.

    So the client has a patent problem. Advice — don’t settle, litigate. Generally, just before trial, the strategy is to advise the client to settle. The result — the client does not lose in court. He settles for a fair amount, generally for an amount he could have settled before trial.

    But the firm makes out like a bandit.

    The

  14. Edward Heller October 23, 2015 2:29 pm

    Alex, if you read the Supreme Court cases cited in the petitions and amicus briefs, one is lead to conclude that an accused infringer cannot simply refuse to take a license and force patent the owner to sue. If he has a defense, he must bring it to court through a DJ action. In all other circumstances, he is a willful infringer and treble damages should be awarded including counsel fees.

    If that is what Supreme Court holds in this case, there are going to be a lot of very unhappy big corporations who now simply refuse to even consider discussing patent matters with patent owners. Viz, Judge Michel discussions of this issue. “Sue me,” is their position.

    That is about to change.

  15. angry dude October 23, 2015 3:29 pm

    Edward Heller@13

    And this strategy usually works just fine for them, except for those rare moments when client is squeezed between an ipo and an introduction of a major new product by the client’s biggest customer
    Then all bets are off…

  16. Dan Wood October 24, 2015 1:34 pm

    Edward@13
    I’m still a bit puzzled over whether you are expressing a personal view, which is concordant with the reality of firms “looking out for number 1” or simply stating, “that’s life in the big city” without approval. I understand the latter. But I still (naively?) think that such a capitalistic-based approach was never contemplated or ordained by the Cannons of Ethics or the Constitution (which has no provision that says, “All enumerated powers, grants of authority, or privileges or immunities are subject to the vicissitudes of the profit motive.” My only point is that law firms should be held to a higher, fiduciary-like standard of conduct than Monsanto.

  17. Anon October 24, 2015 2:24 pm

    Dan,

    I would expressly view the opposite: that the canons are put together to ward off such a callous and “too bad for the client” view.

    I do hope that Mr. Heller was merely caught up in the moment and that this does not reflect his actual views on ethics and on our noble profession.

  18. Dan Wood October 25, 2015 9:20 pm

    Edward@14

    I could certainly live with such a decision, although I have not looked at the briefs, yet. The Fed Circuit has recently doubled down on the position that any defense asserted at any time, even those NOT asserted at trial, would be examined for “baselessness” and could defeat the objective prong of Seagate. I’ve puzzled over such a holding where the defendant was found to be willfully blind to the 2nd element of inducement (knew their products infringed). There ought to be an estoppel argument that the ONE time you would not be allowed to assert a later defense would be where you never asserted one because you avoided looking for one.

  19. Dan Wood October 25, 2015 9:25 pm

    Anon,

    I had a logic professor who, on the proposition that “if the premises are true, then the conclusion is true,” preferred to state it as, “if the premises are true, then the conclusion CANNOT be false.” He thought it carried more moral force. I agree with him and you.

  20. Edward Heller October 27, 2015 11:58 am

    anon and dan, so long as no one is ever punished for putting the interests of the firm over the interests of the client, the interests of the firm will always prevail.

    This is why inside executives and counsel need to be a lot more active in decision making as they are never going to reliably get the best advice from litigation counsel.

  21. Edward Heller October 27, 2015 12:03 pm

    Dan, the way I view it, the Federal Circuit believe the PTO has been issuing mountains of patents that should never have been issued and has simply decided that in this era that the presumption of validity has been flipped to a presumption of invalidity. This view is consistent with their behavior and their holdings.

  22. angry dude October 27, 2015 1:47 pm

    Edward Heller@20

    Smaller to mid-size companies don’t have in-house legal counsels:
    in one example I am very familiar with they hired in-house counsel/legal VP only after the company had lost all the money they could possibly lose…

  23. angry dude October 27, 2015 1:56 pm

    Edward Heller@21

    “…the Federal Circuit believe the PTO has been issuing mountains of patents that should never have been issued…”

    I side with Federal Circuit on this one: just look at Mark Cuban-owned invalid patent (http://www.google.com/patents/US8738278) issued after the first(!!!) office action
    I can find TONS of patents like that (and those are NOT “software patents”, or at least they pretend not to be 🙂

    However this can’t justify punishing the owners of valid patents