Earlier today, in a unanimous decision delivered by Chief Justice John Roberts in Halo Electronics, Inc. v. Pulse Electronics, Inc., the United States Supreme Court did what much of the patent world expected it would do, which is to overrule the Federal Circuit’s “unduly rigid” test for the awarding of enhanced damages for willful damages put in place by In re Seagate Technology, LLC, 497 F. 3d 1360, 1371 (2007)(en banc).
Under Seagate, in order for a patent owner to be entitled to receive enhanced damages of up to triple the original damages award the patent owner first had to “show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.” Then, the patentee was required to demonstrate, again by clear and convincing evidence, that the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.” The Supreme Court held that this test was not consistent with the express language of 35 U.S.C. §284.
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 was at the heart of Federal Circuit case law relating to the awarding of enhanced damages to a victorious patent owner, and was why so many believed that the Supreme Court would grant district courts the same discretion with respect to enhanced damages that they were given with respect to attorneys fees in 2014 in Highmark and Octane Fitness.
Ultimately, the same logic employed by the Supreme Court in 2014 prevailed today. In re Seagate adopted a two-part test for determining when a district court could increase damages pursuant to §284, which was simply too rigid. If we have learned anything about this Supreme Court and their approach to patent law over the last decade it is that they dislike all bright line or rigid rules, that is unless of course they are their own bright line or rigid rule. Here, the rigid rule adopted by the Federal Circuit ignored the easy to understand, straight-forward language of the statute could not stand.
It is, however, worth noting that the Supreme Court explained that in many respects the Seagate test rightly reflects the historic guidance the Court has given on the issue of enhanced damages. It is, however, “unduly rigid, and . . . impermissibly encumbers the statutory grant of discretion to district courts.”
The single issue accepted by the Supreme Court is as follows:
Whether the Federal Circuit erred by applying a rigid, two-part test for enhancing patent infringement damages under 35 U.S.C. § 284, that is the same as the rigid, two-part test this Court rejected last term in Octane Fitness, LLC v. ICON Health & Fitness, Inc. for imposing attorney frees under the similarly-worded 35 U.S.C. § 285.
The Federal Circuit Halo Electronics 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.
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.
The two statutes at issue in this case were 35 U.S.C. § 284 and § 285. The text of these statutes reads as follows:
35 U.S.C. § 284, in relevant part reads:
[T]he court may increase the damages up to three times the amount found or assessed.
35 U.S.C. § 285:
The court in exceptional cases may award reasonable attorney fees to the prevailing party.
The Holding in Halo Electronics
When interpreting § 285 in Octane Fitness and Highmark, the Supreme Court noted that there is no statutory support for a restrictive test that takes discretion away from the district court with respect to determining when to award attorneys’ fees to a prevailing part in patent infringement litigation. Similarly, in deciding Halo Electronics today the Supreme Court similarly held that the language of § 284 “contains no explicit limit or condition, and we have emphasized that the “word ‘may’ clearly connotes discretion.” (citations omitted).
Notwithstanding, the Court did explain that the awarding of increased damages is not to be done on a whim, or ordinarily awarded. The Court went on to explain that those cases where enhanced damages have been authorized have “been variously described in our cases as willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or—indeed—characteristic of a pirate.”
The Supreme Court concluded that while district courts do have discretion to award enhanced damages, “such damages are generally reserved for egregious cases of culpable behavior.”
Ultimately, the Supreme Court concluded:
Section 284 gives district courts the discretion to award enhanced damages against those guilty of patent in- fringement. In applying this discretion, district courts are “to be guided by [the] sound legal principles” developed over nearly two centuries of application and interpretation of the Patent Act. Martin, 546 U. S., at 139 (internal quotation marks omitted). Those principles channel the exercise of discretion, limiting the award of enhanced damages to egregious cases of misconduct beyond typical infringement. The Seagate test, in contrast, unduly con- fines the ability of district courts to exercise the discretion conferred on them. Because both cases before us were decided under the Seagate framework, we vacate the judgments of the Federal Circuit and remand the cases for proceedings consistent with this opinion.
Much more will be written about this case in the coming days, weeks and months. Stay tuned!