On June 13, 2016, the U.S. Supreme Court struck down the Federal Circuit’s test for enhanced damages under In re Seagate. In Halo Electronics, Inc. v. Pulse Electronics, Inc. (No. 14-1513), the Supreme Court held that the Seagate test is “unduly rigid” and is inconsistent with 35 U.S.C. §284. In particular, the Court held that a finding of “objective recklessness” should not be required in every case and that subjective willfulness alone may warrant enhanced damages. The Court considered the potential policy ramifications of allowing district courts discretion to award enhanced damages in patent cases, but nevertheless held that such concern did not justify imposing the strict requirements of Seagate on the discretion of the courts.
At first glance, Halo appears to make it easier to prove enhanced damages by eliminating the requirement of “objective recklessness” and leaving the decision whether to grant enhanced damages solely within the “discretion” of the district courts. However, the Supreme Court in Halo tried to offset this by making it clear that enhanced damages should be reserved only for cases of “egregious infringement.” Moving ahead, it should be more difficult to prove enhanced damages in cases where the defendant’s conduct was not egregious.
Nevertheless, the change of the test for awarding enhanced damages has left some uncertainty for future infringement cases. The Court in Halo repeatedly indicated that the focus of an enhanced damages inquiry should be the accused infringer’s intent at the time of the infringement. Therefore, it may be beneficial to obtain an opinion of counsel before manufacturing or selling certain products to help demonstrate that any adjudged infringement was not intentional and instead was based on a subjective belief of noninfringement at the time the products were manufactured and/or sold.
Seagate and Federal Circuit Precedent regarding Enhanced Damages
In 2007, the Federal Circuit issued the Seagate decision establishing the standard for recovering enhanced damages for patent infringement. In re Seagate Tech., LLC, 497 F.3d 1360 (Fed. Cir. 2007). Seagate held that a plaintiff must show willful infringement in order to recover treble damages and set forth a two-part test for establishing such willfulness. Under the first prong, a patentee must show by clear and convincing evidence that an accused infringer was objectively reckless in acting “despite an objectively high likelihood that its actions constituted infringement of a valid patent.” The second prong of Seagate requires the patentee to show, again by clear and convincing evidence, that the accused infringer knew or should have known of the risk of infringement.
Objective recklessness cannot be established if the accused infringer raises a “substantial question” regarding the validity or infringement of the patent. Furthermore, the determination of objective recklessness is not based on the accused infringer’s state of mind at the time of the infringement but rather the record developed during the infringement litigation. Therefore, willfulness will not be found even if the accused infringer was unaware of the arguable defense at the time of the actual infringement.
Federal Circuit precedent also established a trifurcated appellate review for an award of enhanced damages. The first prong of Seagate – objective recklessness – is reviewed de novo. The second prong of Seagate –knowledge – is reviewed for substantial evidence. Finally, the ultimate determination of awarding enhanced damages is reviewed for abuse of discretion. It was under this framework that the Halo Electronics case was decided.
Halo Procedural Background
The Halo Electronics decision was a consolidation of two cases: (1) Halo Elecs., Inc. (No. 14-1513) and (2) Stryker Corp. v. Zimmer, Inc. (No. 14-1520). In 2002, Halo sent letters to Pulse offering to license its patents. Pulse did not seek an opinion of counsel and instead concluded that Halo’s patents were invalid based on an evaluation by one of its engineers. Pulse then continued to sell its allegedly infringing products. In 2007, Halo sued Pulse, and the jury determined that there was a high probability that Pulse had willfully infringed Halo’s patents. Nevertheless, the district court declined to award enhanced damages because Pulse presented a defense at trial that “was not objectively baseless,” and, thus, Pulse was not objectively reckless as required by the first part of the Seagate test. The Federal Circuit affirmed the district court’s decision.
In 2010, Stryker sued Zimmer for patent infringement. During the trial, the jury heard testimony that Zimmer had “all-but instructed its design team to copy Stryker’s product” and had decided to accept a high-risk strategy of competing immediately and “opt[ing] to worry about the potential legal consequences later.” The district court awarded Stryker enhanced damages because of the “flagrancy and scope of Zimmer’s infringement.” On appeal, the Federal Circuit affirmed the judgment of infringement but vacated the treble damages award because Zimmer had presented “reasonable defenses” at trial.
The Supreme Court granted certiorari to decide the question of whether the Seagate test is consistent with the statute that provides for enhanced damages, 35 U.S.C. §284.
The Supreme Court held that the Seagate test is inconsistent with §284 because it is “unduly rigid, and. . . impermissibly encumbers the statutory grant of discretion to district courts.” Instead, district courts have discretion in deciding whether, and in what amount, to award enhanced damages. However, such discretion is not unlimited and instead dictates that enhanced damages should be reserved for willful or wanton infringement. The Court noted that the subjective willfulness of an infringer alone may warrant enhanced damages, “without regard to whether his infringement was objectively reckless.”
The Court also held that a patentee need not establish willful infringement by “clear and convincing” evidence and instead the applicable standard is a preponderance of the evidence.
Finally, the Court rejected the Federal Circuit’s tripartite framework for appellate review. Because the Court rejected the two-part Seagate test and instead held that an award of enhanced damages is within the discretion of the district court, the Court held that the decision of whether to award enhanced damages should therefore be reviewed for abuse of discretion.
The Court vacated and remanded both the Halo Elecs. and Stryker cases because they were both decided under the Seagate test.
In reaching its decision, the Court first looked to the language in §284, which provides that a district court “may increase the damages up to three times the amount found or assessed.” 35 U.S.C. §284. The Court noted that the word “may” connotes discretion and that the language in §284 contains no limit on the ability of courts to increase damages for patent infringement. Halo Elecs., Slip Op. at 7-8. However, the Court noted that the “discretion” to award enhanced damages should not be unlimited or mere “whim.” Looking to past cases regarding enhanced damages, the Court warned that enhanced damages should not be meted out in typical infringement cases but instead should be reserved for egregious infringement behavior, such as infringement that is “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or—indeed—characteristic of a pirate.” Halo Elecs., Slip Op. at 8.
In analyzing the Seagate test, the Court noted that the objective recklessness requirement impermissibly limits the discretion of the district courts and can prevent them from increasing damages even for the worst patent infringers, such as a “pirate” who intentionally infringes another’s patent without any defense at the time, as long as the pirate can come up with a reasonable defense at trial. Halo Elecs., Slip Op. at 9-10.
The Court analogized the case to a recent case dealing with attorney’s fees under 35 U.S.C. §285 – Octane Fitness, LLC v. ICON Health & Fitness, Incorporated, 134 S. Ct. 1749 (2014). There the Court rejected the Federal Circuit’s two-part test for determining whether a case was “exceptional,” which required a showing of objective baselessness and subjective bad faith, and held that subjective bad faith alone could be enough to warrant an award of attorney’s fees. Halo Elecs., Slip Op. at 10. Similarly, the Court held that subjective willfulness of a patent infringer could warrant enhanced damages under §284, regardless of whether the infringer can later present a reasonable defense at trial. The Court noted that culpability should be measured at the time of the challenged conduct, rather than after the fact at trial. Id.
The Court also considered respondents’ policy argument that eliminating the Seagate test and allowing district courts “unlimited” discretion would impede innovation and embolden patent trolls because the potential for higher infringement damages could be much greater. However, the Court noted that enhanced damages should not be awarded in typical infringement cases and instead should be reserved for egregious or willful conduct. Furthermore, the Court noted that such policy considerations did not justify imposing the artificial limits of Seagate on the discretion granted under §284.
Post-Halo Decisions on Enhanced Damages
The Supreme Court in Halo repeatedly warned that enhanced damages should be not be awarded in standard infringement cases and should only be reserved for egregious infringement. Thus far, two district courts have declined to award enhanced damages post-Halo. In Chrimar Sys., Inc. v. Adtran, Inc., No. 6:15-cv-00618 (J. Love) (E.D. Tex. June 30, 2016), Judge Love declined to award enhanced damages where the accused infringer had failed to participate in the proceedings and a default judgment was issued. Although Judge Love noted that the defendant’s failure to participate in proceedings was objectively reckless, the court held that a finding of willful infringement was a prerequisite for enhanced damages and that such willfulness could not be established without evidence regarding the subjective intent of the defendants.
In Trustees of Boston Univ. v. Everlight Elecs. Co., No. 1:12-cv-11935 (J. Saris) (D. Mass. July 22, 2016), Judge Saris expressly declined to award enhanced damages despite a jury finding of willfulness. The court acknowledged that the factors set forth in Read Corp. v. Portec, Inc., 970 F.2d 816 (Fed. Cir. 1992) can be instructive in determining whether to award enhanced damages. However, the court noted that “the touchstone for awarding enhanced damages after Halo is egregiousness” and held that “defendants’ conduct did not rise to the level of egregiousness meriting an award of enhanced damages” despite the jury’s verdict of willful infringement.
However, one district court has upheld its previous finding of enhanced damages by specifically noting that Halo lowered the standard for proving willfulness and, thus, an award of enhanced damages based on both objective and subjective willfulness under Seagate was sufficient to withstand the lower standard of Halo. The district court also noted that the Read Corp. factors – (1) whether the infringer deliberately copied the ideas or design of another; (2) whether the infringer, when he knew of the other’s patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed; (3) the infringer’s behavior as a party to the litigation; (4) the defendant’s size and financial condition; (5) closeness of the case; (6) duration of defendant’s misconduct; (7) remedial action by the defendant; (8) defendant’s motivation for harm; and (9) whether defendant attempted to conceal its misconduct – are instructive in determining whether conduct is egregious and, thus, whether to award enhanced damages. Arctic Cat Inc. v. Bombardier Recreational Prods., Inc., No. 14-cv-62369 (J. Bloom) (S.D. Fla. July 27, 2016).
Other post-Halo district court cases have expressly held that a judgment of willful infringement is a question of fact that should be reserved for the jury. Nevertheless, none of these courts has yet decided whether to grant enhanced damages based on a jury’s findings regarding willfulness.
Elimination of the Seagate test could lead to more uncertainty in predicting whether a given case will warrant an award of enhanced damages. However, throughout its opinion the Court noted that the district courts’ discretion is not unlimited and that enhanced damages should only be awarded for egregious or wanton infringement, such as pirating or intentional copying without regard to the patent’s validity. Thus far, it appears that district courts are exercising their discretion sparingly to only grant enhanced damages where there is evidence of egregiousness.
Although no clear standard has yet been established, some cases have indicated that the Read Corp. factors may be used to analyze egregiousness and, thus, whether enhanced damages are appropriate. One of the Read Corp. factors is whether defendant investigated the scope of the patent and had a good-faith belief that it was invalid or not infringed. Therefore, obtaining an opinion of counsel regarding invalidity or noninfringement of a patent may be useful in preventing possible awards of enhanced damages.
 See Presidio Components, Inc. v. Am. Tech. Ceramics Corp., No. 3:14-cv-02061 (J. Huff) (S.D. Cal. June 17, 2016), TransData, Inc. v. Centerpoint Energy Houston Elec. LLC, No. 6:10-cv-00557 (J. Love) (E.D. Tex. June 29, 2016) and Sociedad Espanola de Electromedicina y Calidad, S.A. v. Blue Ridge X-Ray Co., Inc., No. 1:10-cv-00159 (J. Reidinger) (W.D. N.C. July 8, 2016).