Has the Supreme Court Breathed New Life into Patent Trolls in Halo and Stryker?

By Chase Means
June 15, 2016

The chance of a court tripling damages for patent infringement has significantly increased.  The Supreme Court, Halo Electronics, Inc. v. Pulse Electronics, Inc., et al. and Stryker Corporation, et al. v. Zimmer, Inc., et al., granted district courts more discretion to award enhanced damages for willful patent infringement.  However, the Court’s recent decision could have unintended consequences.

Summary of Enhanced Damages

When a company is sued for patent infringement, the key question is whether that company actually produces, sells, or does what is covered by the patent.  Whether the company knew about the patent is immaterial to a court’s analysis on infringement.  In other words, the mindset of a potential patent infringer is irrelevant for determining direct patent infringement.

scotus-supreme-court-350-3However, the United States has an unusual doctrine regarding patent infringement that is not found anywhere else in the world: the court actually considers a potential patent infringer’s mindset when determining whether to increase damages for willfulness.  If willful infringement is found, the court can up to triple the amount of damages owed to the patent owner.

Triple damage awards for willful infringement were almost never awarded prior to the Supreme Court’s decision in Halo and Stryker.  However, on Monday, the Court made triple damage awards (also called enhanced damages) more available to patent owners, including patent trolls.

Prior to Halo and Stryker, triple damage awards could be awarded if an infringer acted recklessly – where a high risk of infringing is either known or so obvious that it should have been known.  The plaintiffs in this case, Halo and Stryker, had both urged the Supreme Court to adopt the standard adopted by the Court in Octane Fitness LLC v. Icon Health & Fitness Inc., where it held that attorney’s fees can be awarded whenever a case “stands out from others” based on the “strength of a party’s litigating position … or the unreasonable manner in which the case was litigated.”  Furthermore, Octane Fitness reduced the amount of evidence needed to award attorney’s fees.

The Court’s Decision in Halo and Stryker

On Monday, the Supreme Court decided two cases, Halo Electronics, Inc. v. Pulse Electronics, Inc., et al. and Stryker Corporation, et al. v. Zimmer, Inc., et al., that explicitly lowered the standard for awarding increased damages to a patent holder when an infringer is found to have willfully infringed the holder’s patent.  In the decision, the high court has overturned the previous Federal Circuit standard from In re Seagate Technology, LLC, 497 F. 3d 1360 (2007) (en banc), which required the objective recklessness standard – clear and convincing evidence that an infringer acted despite an objectively high likelihood that its actions constituted infringement of a patent.  The petitioners in Halo and Stryker argued that the Seagate standard was far too strict, and allowed even the most unscrupulous of copyists the opportunity to escape enhanced damages as long as they came up with (even after the fact) a non-frivolous argument for non-infringement or invalidity of the patent.  With little chance for a patent holder to recover enhanced damages, copyists had little incentive to curtail their behavior, the Court was told.

Ultimately, the Supreme Court sided with the petitioners, and held that the Seagate test is not consistent with willful infringement decisions of the last 200 years and the codification of enhanced damages in 35 U.S.C. § 284.  The result will be significantly increased damages in at least some patent infringement suits.  And patent trolls live off of damages (or at least the threat of them).

Will the Decision Benefit Patent Trolls?

The term patent troll—or less antagonistically, a non-practicing entity—is generally used to refer to a company that purchases patents for the sole purpose of compelling settlements from potential infringers of the patents.  In other words, patent trolls buy patents and seek out money from those who may infringe those patents.  Patent trolls are often looked upon with disfavor and are even accused of being a “tax” on innovation.  Others argue that patent trolls help the patent marketplace operate more efficiently by making the market for patents more liquid, and compensating individual inventors who could not alone commercialize an invention.

The Supreme Court’s relaxation of the requirements for willful infringement could be a game changer for patent trolls.  Patent trolls often threaten to sue companies to convince the threatened party to pay a settlement, rather than engage in a lengthy and expensive court battle that could end with tens or hundreds of millions of dollars in liability.  By creating a better chance at a threefold increase in the potential jackpot a troll could win in a patent lawsuit, the Court may empower patent trolls to extract even higher settlement amounts from those they threaten to sue, or extract settlements from potential infringers that would not have otherwise settled but for a fear of a treble damage award at trial.

The Supreme Court Responds

The Supreme Court apparently heard concerns about trolls from the respondents and their amici, addressing the concern about trolls specifically in their decision: “They [Respondents] worry that the ready availability of [enhanced] damages will embolden ‘trolls,’” and that “balance can indeed be disrupted if enhanced damages are awarded in garden-variety cases.”  The Supreme Court rebuts these concerns, however, implying that the standards enumerated in the decision should keep enhanced damages from being awarded in these “garden-variety cases.”  The Court goes on to say that the “policy concerns” of the Respondents “cannot justify imposing an artificial construct such as the Seagate test” on the discretion given to the district courts to impose enhanced damages for willful infringement.

The Supreme Court advises that “although there is ‘no precise rule or formula’ for awarding [enhanced] damages,” a district court’s “‘discretion should be exercised in light of the considerations’ underlying the grant of that discretion.”  (Quoting Octane.)  Ultimately, the Court concludes that a district court should “take into account the particular circumstances” of a case and reserve the punishment of enhanced damages “for egregious cases typified by willful misconduct.”  Such guidance leaves a lot up to the discretion of the district courts.  What’s more, that discretion will now be reviewed under an abuse of discretion standard, which largely defers to the district court (and is much more deferential than the previous de novo standard that was used for part of the Seagate test).

What Could Go Wrong?

The guidance from the Supreme Court in the decision is, in its own words, not precise nor formulaic, leaving room for interpretation of individual judges and courts.  This guidance may, in some cases, not be enough to prevent undesirable results.  Justice Breyer’s concurrence even warns that the discretion granted to district courts must be applied carefully, “to ensure that they only target cases of egregious misconduct.”  Breyer voices several concerns, including, in particular, that it may be difficult for possible infringers to know exactly when they might be on the hook for such enhanced damages.

One way patent owners alert potential infringers that they may be infringing a patent is by sending a demand letter.  A demand letter can put the recipient on “notice” regarding the patent, opening the door for a finding down the road that the infringer was willfully infringing the patent.  Justice Breyer identifies a real concern with how these demand letters might cause confusion among potential infringers:

How is a growing business to react to the arrival of such a letter, particularly if that letter carries with it a serious risk of treble damages?  Does the letter put the company “on notice” of the patent?  Will a jury find that the company behaved “recklessly,” simply for failing to spend considerable time, effort, and money obtaining expert views about whether some or all of the patents described in the letter apply to its activities (and whether those patents are even valid)?  These investigative activities can be costly.  Hence, the risk of treble damages can encourage the company to settle, or even abandon any challenged activity.

If a patent troll, or other entity, can send a letter that discourages a challenged activity because of enhanced damages, this can frustrate the goals of patent system to “promote” the “Progress of Science and useful Arts.”  U. S. Const., Art. I, §8, cl. 8.  Further, demand letters often include little to no merit or helpful information.  The Court’s decision could incentivize patent trolls or other entities to send out these deficient demand letters.

Finally, the Halo and Stryker decision could cause undesirable forum shopping by patent holders of all kinds.  As cases are decided under the new rule, it may become apparent that particular districts or judges are more likely to grant enhanced damages based on a finding of willful infringement.  This could cause undesirable forum shopping, and particularly forum shopping that may disproportionately benefit patent owners.

What Can be Done?

Without strict guidance from the Supreme Court on how to apply a new willfulness standard, one way to mitigate this uncertainty may be to rely on rules that regulate demand letters.  Already, many states have passed laws requiring a certain level of specificity to be included in demand letters, so that an accused infringer is reasonably apprised of the allegations against them: what patents are at issue, what products of the accused allegedly infringe, etc.  This may be a good start, as such rules help recipients of those letters more fairly assess the threat posed by a particular demand letter.  However, these state laws are disparate and have not been passed in every state.

Accordingly, this decision from the Supreme Court may present additional motivation for Congress to harmonize rules nationwide that ensure demand letters meet certain standards for specificity, legislation that Congress has already been considering.  Congress could go one step further, and codify a minimum threshold of specificity for demand letters that qualifies to trigger actual knowledge of a patent for purposes of willful infringement.  Such a law could help alleviate many of Justice Breyer’s concerns, and at least create some meaningful baseline rule for when enhanced damages might be applied.  The leverage a troll might have during settlement negotiations may also be reduced if there is more certainty about when willful infringement might be found at trial.  Predictability for a willful infringement standard could also reduce disparate decisions among different districts and cut down on potentially undesirable forum shopping.

Last, Justice Breyer’s concurrence hints that Opinions of Counsel are likely still helpful for patent holders looking to avoid liability for willful infringement: “I do not say that a lawyer’s informed opinion would be unhelpful.”  However, two things from this decision should be noted.  First, in Halo, the alleged infringer relied on the opinion of an engineer that a patent was invalid.  The lower courts still found willful infringement.  Thus, opinions of legal counsel are advantageous over those of engineers or technical advisors, because a court is likely to give the opinion more weight and opinions from legal counsel are privileged.  Second, the Court appeared to bristle at opinions obtained well into a dispute over infringement that were merely used to satisfy the Seagate test.  Accordingly, if an alleged infringer is to obtain an Opinion of Counsel that a patent is invalid or not infringed, it would seem advisable based on Halo and Stryker to do so early on after learning of the patent.

Time will tell whether the Supreme Court has breathed new life into the  patent troll business model; or, on the other hand, if demand letter practice and the decisions of district court judges can be applied in the manner aspired to by the Court, limiting any harmful effects of the additional discretion given to trial judges to increase damages in patent suits.

The Author

Chase Means

Chase Means is an intellectual property attorney at the international law firm of Foley & Lardner LLP. Chase’s practice focuses on patent prosecution, counseling, and Inter Partes Reviews (IPRs) before the USPTO. He holds a degree in electrical engineering and has previously published an article in the University of Illinois Law Review on the topic of willful infringement and enhanced damages. That article was cited in one of the Halo/Stryker Amicus Briefs, which was cited extensively in Justice Breyer’s concurrence and prepared on behalf of Netflix, Inc., Twitter, Inc., Mozilla Corp., LinkedIn Corp., and more. For more information, or to contact Chase, please visit his firm profile page.

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 12 Comments comments.

  1. Pro Se June 15, 2016 10:20 am

    The solution is easy: get a clearance opinion from counsel before releasing any new products. Or, don’t release new products that are missing patent coverage or at least a pending patent.

    The law doesn’t allow anyone to build a house on land that’s not theirs (or leased) just because everyone wants to built on beachfront property.

    Innovation start with ideas, ideas worth anything are developed into products, and patents are the blueprint of products. Always been the rule until the California tech culture arose to prominence.

    Thank God we have the Supreme Court to protect American innovation, not northern California values.

  2. Valuationguy June 15, 2016 11:22 am

    Breathed life into patent trolls: No
    Retarded the current practice of willful ignorance: Yes

    I read your article (The Trouble with Treble Damages:…) and your argument is summed up that it gums up the court system (in expense and time) because patent owner (almost) ALWAYS lose. Well…there is a reason that they (almost) ALWAYS loses…..the CAFC’s Seagate decision set a bar so high that it was DESIGNED for patent owners to lose. Fortunately, the SCOTUS gutted the poor decision….which had led to the ‘efficient infringement’ practice by large corporate entities.

    You talk about how manufacturers are DELIBERATELY maintaining ignorance of patents they could be infringing on….a choice they are making based on legal advice….necessarily a cost-benefit analysis of all the risks and rewards.

    With the old Seagate ruling….the CAFC tilted the field of play by eliminating almost all of the downside of patent infringement (at worst…you only have to pay at most what you would have…had you taking a fair license in the first place…(which itself if a BS argument since no NPE is going to be able to fully prove up the true costs of infringement…thus ‘fair’ is always something LESS)). Under such as legal bar….you might be correct that enhanced damages aren’t worth it. However…it’s a circular argument since the CAFC majority had its proven ‘anti-patent damage’s’ policy thumb on the scale of justice.

    Now that the SCOTUS cut off the offending thumb…we will see some justice restored to the system as the risk to infringers is restored to a more proper level.

    As for the specious argument about ‘patent trolls’ and their 10,000 demand letters….the new Federal Rules nips that at the bud… Let them send their letters…and see what happens when they file their cases in court. As long as the defendant shows up…the bad player’s case would be tossed by any competent lawyer….especially since judges are more likely to award legal fees to the defendant in such egregious cases.

    VG

  3. Bemused June 15, 2016 11:27 am

    Chase,

    Your article bemoans the fact that “patent trolls” will be able to use this new relaxed standard for enhanced damages to shake down infringers for larger settlement amounts. Do you actually practice patent litigation in the real world?

    If its a nuisance value suit, no infringer (represented by patent litigation counsel that practices in the real world) will pay more during early settlement discussions (which is where most patent trolls with borderline cases live) because of the potential possibility (after inter partes review, discovery, Markman, summary judgment, trial, appeals) of enhanced damages.

    The enhanced damages risk will only kick in when: (1) Its a case where there is a good to high probability of validity and infringement and damages are much higher than the cost of defense; and (2) When enough litigation events (see above) have passed that the infringer sees that there is a good to high probability that if the case goes to a jury, there is a real risk of loss. Examples (1) and (2) are not your typical, garden-variety “patent troll” cases.

    Nice try with the scare mongering. That might work with the uneducated or willfully blind dupes (see Breyer) but it won’t play with this crowd.

  4. Steve June 15, 2016 11:31 am

    Supreme Court Breathes New Life Into Protecting America’s Inventors

    There you go, Chase — headline fixed.

  5. Edward Heller June 15, 2016 12:19 pm

    Chase Means: “A company that purchases patents for the sole purpose of compelling settlements.” Supreme Court: “Trolls, in the patois of the patent community, are entities that hold patents for the primary purpose of enforcing them against alleged infringers.”

    We cannot keep our definitions straight.

    Now, if an patent owner actually sues, proves infringement and defends validity, is such a patent owner a troll by any measure within the definition of Mr. Means?

  6. Anon June 15, 2016 1:43 pm

    Mr Heller mentions the difficulty in “keeping definitions straight,” which is a pretty funny comment considering that the very use of the word “Tr011” is meant to be a decisive pejorative.

    Maybe if we drop entirely the word, we might realize that any “culprit” or “bad actor” can be divorced from a characterization of WHO has the property that is known as a patent, and instead – and in much more neutral and objective terms – discuss directly the actions that people are finding upsetting.

    When a term becomes a sound byte more known for its emotional invective than for any true “label” on an issue, it is HIGH time that a spade is called a spade and the anti-patent propaganda that oh so typically involves the use of the term “Tr011” is seen for the propaganda that it is and we diffuse that propaganda.

    Articles such as this one by Mr. Means – no matter how well (or not) intended – are part of the problem.

    Enforcing a property right (regardless of how that property right was obtained, or who the owner of the right is) MUST stop in the attempted vilifications.

  7. Night Writer June 15, 2016 1:47 pm

    Of course we hear yapping about patent trolls and yet the only real unbiased study done by the government at OMB said there was no troll problem. So, we get this trotting out of one or two cases of problems and that’s it. By that standard, we should abolish any punishment for murder.

  8. Patent Investor June 15, 2016 3:51 pm

    >>>Chase’s practice focuses on patent prosecution, counseling, and Inter Partes Reviews (IPRs) before the USPTO. He holds a degree in electrical engineering and has previously published an article in the University of Illinois Law Review on the topic of willful infringement and enhanced damages. That article was cited in one of the Halo/Stryker Amicus Briefs, which was cited extensively in Justice Breyer’s concurrence and prepared on behalf of Netflix, Inc., Twitter, Inc., Mozilla Corp., LinkedIn Corp., and more<<<

    First off, I'm going to venture a guess that much more of your IPR work is done on the petitioner's side than not. If I were a patent owner you'd NEVER work for me after publishing an article so clearly disdainful of your perceived patent trolls. How I could I be in any way assured you don't extend that label to my business as well?

    Congratulations on being cited extensively by Judge Breyer, I've read before (I believe in a comment on this website) that he admittedly believes everything to be true that he reads in Amicus briefs. If true, how very convenient for taking whichever side pushes your agenda, no need to worry about the truth. However, this sure dampens the value of claiming his citation of your material.

    It's already been pointed out here, but when presented with a "patent troll" letter I'm pretty sure the business owner would know if he was already aware of the patent or not (willful infringement). A demand letter, even if a subsequent lawsuit ensues, would put this immediately into your garden variety infringement suit (not willful). Not many Federal judges out there like to feed the trolls.

  9. Anon June 15, 2016 5:08 pm

    Gene,

    Perhaps a guest post by Ron Katznelson with an update on his pursuit of the “Tr011” issue – as that term was abused by the White House propaganda paper – would be in order?

    I read the “official” response that took over a year to be presented, and I was vastly unferwhelmed (even with expectations set very very low).

    I would be curious what Mr. Katznelson’s next steps are (and thank him again for championing the removal of such propaganda from a reasoned discussion of the patent system).

  10. Edward Heller June 15, 2016 5:41 pm

    Just in case anyone needed to know about Lemley, he argued in his amicus brief that

    “This Court should make the standard for awarding treble damages more stringent not less.”

    http://www.scotusblog.com/wp-content/uploads/2016/01/14-1513-14-1520-bsac-Internet-Companies.pdf (LinkedIn, Mozilla, Netflix, Pinterest, Roku and Twitter.)

  11. Night Writer June 15, 2016 11:54 pm

    @10 interesting. I’d bet that his citations do not hold water if his brief is anything like his law journal “articles.” But, then I’d guess the Supreme Court bar wouldn’t care. No relief there either.

  12. Night Writer June 16, 2016 7:43 am

    And by the way, I challenge Lemley to stand up for himself. I can devise an objective test of whether or not Lemley’s cites are fair or not.