The Renewed Standard for Awarding Enhanced Patent Damages

scotus-supreme-court-nightToday, the U.S. Supreme Court issued an opinion with large ramifications for patent holders and potential infringers alike. Deciding the consolidated cases of Halo Electronics, Inc. v. Pulse Electronics, Inc. and Stryker Corp. v. Zimmer, Inc., the Court ruled that enhanced patent damages are appropriate to punish an infringer’s egregious, deliberate, or flagrant patent infringement. The Court rejected the Federal Circuit’s Seagate test, which had provided an accused infringer with a complete defense to a charge of willfulness (and thus enhanced damages) if the infringer was able to construct, even years after the infringement began, a reasonable argument that the patent was invalid or not infringed, even where the infringer in fact had acted in bad faith. The Court also lowered the required burden of proof from clear and convincing evidence to a preponderance of the evidence. At the same time, it seems clear that mere negligence is not enough to establish entitlement to enhanced damages. While the Supreme Court referred to the 180 years of enhanced damages jurisprudence since the Patent Act of 1836 as setting forth the appropriate approach, it may take several years of additional litigation for predictability to emerge from today’s decision.

Background on the Law of Willfulness

Patent infringement is a strict liability offense[1] that entitles successful claimants to “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty” for the infringer’s use of the invention.[2] A finding of willful infringement, however, permits an award of enhanced damages up to three times the actual amount proven,[3] a result that could be intensified by an additional award of attorney fees.[4] Given the prospect of potentially large damage awards,[5] crafting a legal standard for willfulness that is capable of deterring infringement without spurring excessive litigation is an important policy determination. Over time, the willfulness standard has evolved dramatically, marked by several noteworthy decisions issued by the Court of Appeals for the Federal Circuit.

The Federal Circuit’s 1983 Underwater Devices decision implemented a negligence-type willfulness standard, imposing an affirmative duty of due care on parties with actual notice of a patent’s existence to avoid its infringement.[6] This affirmative duty included an obligation to seek competent legal advice before commencing potentially infringing activity,[7] a requirement that fueled the widespread use of defensive legal opinions. By placing a heavy burden on accused infringers to comply with their duty of due care, and later to demonstrate this compliance during litigation, Underwater Devices lowered the bar for accusers seeking enhanced damages. For more than two decades this pro-patentee willfulness standard shaped the legal landscape for infringement litigation.

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In 2004, however, the pendulum began to swing the other direction. The Federal Circuit held in Knorr–Bremse v. Dana Corp. that an accused infringer’s failure to obtain legal advice, such as an opinion letter, did not give rise to an adverse inference that such advice would have been negative.[8] Neither did an adverse inference arise, the court continued, upon an accused infringer’s invocation of attorney-client privilege or work product protection to resist disclosure of legal advice.[9] Consequently, Knorr-Bremse turned opinion letters into selective tools employed during a company’s product development phase (or even in later litigation) on an as-needed basis.

The Federal Circuit revisited the issue of willfulness again in 2007 with In re Seagate Technology LLC (“Seagate”). Concluding that the negligence-based affirmative duty of due care “fail[ed] to comport with the general understanding of willfulness in the civil context,”[10] the en banc court overruled Underwater Devices and set out a two-pronged standard that required separate showings of both objective recklessness and subjective bad faith. Specifically, the court held that a showing of willfulness required a patentee to offer “clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent,” irrespective of the accused infringer’s actual state of mind.[11] The Federal Circuit later clarified that, while “predicated on underlying mixed questions of law and fact, [objective recklessness] is best decided by a judge as a question of law subject to de novo review.”[12] A patentee satisfying the initial recklessness threshold further had to demonstrate that the “objectively defined risk was either known or so obvious that it should have been known to the accused infringer.”[13] In addition to establishing this two-component standard, the Seagate court reemphasized that potential infringers were no longer compelled to obtain legal opinions of invalidity or non-infringement to dispel accusations of willfulness.[14] By eliminating the affirmative duty of due care and shifting the burden of proof back onto patentees, Seagate raised the bar for proving willfulness and steepened the path toward enhanced damages.

Nevertheless, final court determinations of willfulness dropped by only 11% after Seagate.[15] The modesty of this decline can be attributed primarily to the consistency exhibited by juries with respect to findings of willfulness both before and after the 2007 decision.[16] The true impact, however, may have been much greater. For instance, the frequency with which judges identified willfulness dropped by over 35%,[17] and the number of summary judgment decisions regarding willfulness rose during the years immediately following Seagate.[18] These effects largely reflected the ability of accused infringers to formulate reasonable defenses during litigation to willfulness allegations.[19] Such defenses often involved assertions of noninfringement or invalidity that, although insufficient to escape liability, were enough to remove from the litigation the possibility of enhanced damages. Furthermore, Seagate may have caused additional, less visible repercussions, such as discouraging patentees from even pursuing willfulness accusations and/or providing more leverage to infringers during settlement negotiations.

Regardless of the size of Seagate’s statistical imprint, the ramifications of the decision have frustrated patentees. Much of the frustration has emanated from courts’ favorable treatment of objectively reasonable defenses to willfulness developed by guilty infringers during litigation, regardless of the infringers’ pre-suit conduct or even knowledge of such defenses.[20] Growing dissatisfaction recently culminated with a pair of consolidated cases, Halo Electronics v. Pulse Electronics (“Halo”) and Stryker Corp. v. Zimmer, Inc. (“Stryker”), reaching the U.S. Supreme Court.

Each of the petitioners in Halo and Stryker owns a patent respectively infringed by the defendants, but neither petitioner was able to demonstrate willful misconduct at the Federal Circuit under the Seagate standard. Citing the recent Octane Fitness[21] and Highmark[22] decisions, in which the Supreme Court rejected the Federal Circuit’s structured approach to attorney fee awards under 35 U.S.C. § 285, the petitioners proposed a discretionary standard for determining enhanced damages more consistent with the plain language of § 284, which makes no reference to willfulness or elevated requirements for damage enhancement.[23]

Today’s Supreme Court Decision

Today, Chief Justice Roberts delivered the unanimous opinion of the U.S. Supreme Court, rejecting the Seagate test in favor of a more flexible standard for awarding enhanced damages that more closely echoes the historical treatment of § 284. District courts now have discretionary authority to find willful infringement and award treble damages based on the culpability of an infringer’s actions at the time of the challenged conduct. The Court explained that, as established by 180 years of enhanced damages jurisprudence, enhanced damages are not available in a typical infringement case, and instead are a punitive sanction for egregious behavior, which could be characterized as “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or—indeed—characteristic of a pirate.” [24] It would seem clear from the Court’s language of willfulness and enhanced damages that mere negligence is not enough to establish entitlement to enhanced damages, and that instead a patentee must show, by a preponderance of the evidence, culpable conduct by the infringer. Justice Breyer wrote a concurring opinion, joined by Justices Kennedy and Alito.

At the outset, the Court deemed the Seagate test to be inconsistent with the plain language of 35 U.S.C. § 284, which “contains no explicit limit or condition [for deciding whether to enhance damages].”[25] By extending beyond the statutory language, the Seagate test “is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts.”[26] As a result, the Court explained, Seagate can insulate “some of the worst patent infringers from any liability for enhanced damages.”[27] Several key aspects of Seagate produce this insulating effect, according to the Court.

First, Seagate prevents district courts from punishing the most culpable infringers without initially establishing that the infringement was objectively reckless, a finding that must be further established by clear and convincing evidence.[28] Pointing to the recent Octane Fitness decision, the Court concluded that “[t]he subjective willfulness of a patent infringer, intentional or knowing, may warrant enhanced damages, without regard to whether his infringement was objectively reckless.”[29] Deciding otherwise would allow infringers to avoid enhanced damages by simply crafting a reasonable defense to infringement years later during litigation, “even if he did not act on the basis of the defense or was even aware of it,”[30] an escape route improperly reliant “on the strength of his attorney’s ingenuity.”[31] While the new discretionary standard continues to acknowledge that exculpatory opinions of counsel are not required, the Court’s renewed focus on the conduct of an infringer at the time that the infringement occurred will likely result in renewed collaboration with counsel during the product development phase, and on increased selective use of defensive legal opinions, to defend the willfulness charge in the event infringement is found. The collective actions of a potential infringer, including decisions to work with legal counsel, will be considered among the circumstances impacting the alleged infringer’s culpability.

Second, the Seagate test incorrectly requires clear and convincing evidence of recklessness.[32] Again referencing Octane Fitness, the Court emphasized that § 284 specifies no particular evidentiary burden, especially not such a high one.[33] Instead, enhanced damages are no exception to the traditional standard for patent-infringement litigation, which merely requires a preponderance of evidence.[34]

Flowing from its rejection of the Seagate test, the Supreme Court also clarified that the multifaceted appellate review framework set forth by the Federal Circuit is no longer applicable to awards of enhanced damages.[35] Commensurate with the district court’s discrenetionary authority to grant enhanced damages, decisions on appeal now will be reviewed for abuse of discretion.[36]

By discarding the rigid framework set forth in Seagate, today’s opinion represents a swing of the pendulum in favor of the patentee, as it significantly lowers the bar for awarding enhanced damages. Although still reserved for egregious cases of infringement, courts may now exercise their discretion in awarding enhanced damages, a shift in authority soon to play out on remand for petitioners Halo and Stryker.

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[1] In re Seagate Tech., LLC, 497 F.3d 1360, 1368 (Fed. Cir. 2007).

[2] 35 U.S.C. § 284.

[3] Id.

[4] See 35 U.S.C. § 285.

[5] Seaman, Christopher B., Willful Patent Infringement and Enhanced Damages After In re Seagate: An Empirical Study, 97 Iowa L. Rev. 417, 419 (2012) (explaining that willful infringement awards may routinely skyrocket into the tens of millions of dollars) (hereinafter “Seaman”).

[6] Underwater Devices, Inc. v. Morrison-Knudsen Co., Inc., 717 F.2d 1380, 1389-90 (Fed. Cir. 1983).

[7] Id.

[8] Knorr–Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337, 1345-46 (Fed. Cir. 2004) (en banc).

[9] Id. at 1344-45.

[10] Seagate, 497 F.3d at 1371.

[11] Id.

[12] See Bard Peripheral Vascular, Inc. v. W.L. Gore & Assocs., Inc., 682 F.3d 1003, 1007 (Fed. Cir. 2012).

[13] Seagate, 497 F.3d at 1371.

[14] Id.

[15] Seaman at 420.

[16] Id. at 421 (“At trial, juries found willful infringement at similar rates both before and after Seagate.”).

[17] Id. at 445.

[18] Id. at 439.

[19] Id. at 452.

[20] Brief of Mykey Technology, Inc. as Amicus Curiae in Halo Electronics, Inc. v. Pulse Electronics, Inc. at 5; see also Brief of Petitioner-Appellant, Stryker Corp., et al. v. Zimmer, Inc. et al., No. 14-1520 at 13.

[21] Octane Fitness, LLC v. ICON Health Fitness, 134 S. Ct. 1749 (2014).

[22] Highmark Inc. v. Allcare Health Management System, Inc., 134 S. Ct. 1744 (2014).

[23] Brief of Petitioner-Appellant, Stryker Corp., et al. v. Zimmer, Inc. et al., No. 14-1520 at 10.

[24] Halo Electronics, Inc. v. Pulse Electronics, Inc., 579 U.S.___, ___ ­­­(2016) (slip op. at 8).

[25] Id.

[26] Id. at 9 (citing Octane Fitness, 572 U.S., at ___(slip op. at 7)).

[27] Id.

[28] Id.

[29] Id. at 10.

[30] Id.

[31] Id.

[32] Id. at 15.

[33] Id.

[34] Id.

[35] Id.

[36] Id. at 13.

The Author

Kenneth Levitt

Kenneth Levitt is a partner at the international law firm Dorsey & Whitney and the chair of the Minneapolis patent group. Mr. Levitt helps businesses pursue strategies for IP litigation, particularly by developing technical strategies for patent litigation. He also counsels businesses on how to build successful strategies for their patent and trade secret portfolios, licensing, and product clearance, and helps them analyze validity and infringement concerns. For more information, or to contact Mr. Levitt, please visit his firm profile page.

Kenneth Levitt

Erik Nyre is an associate with Dorsey & Whitney. Mr. Nyre drafts new patent applications and assists with prosecution to meet the needs of a broad range of clients from the conception of a new idea to patent issuance and beyond. Erik offers services across many technological areas, advancing innovation in biotechnology, mechanical engineering, computer science, and agriculture.

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 as of the time of publication and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

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There are currently 1 Comment comments.

  1. Edward Heller June 14, 2016 9:05 am

    Filed in 2001, the Seagate case is still being litigated. Convolve, Inc. v. Compaq Computer Corp., 812 F.3d 1313 (Fed. Cir. 2016). I wonder how the Supreme Court’s reversal of Seagate will affect this case?