The U.S. Supreme Court has set a new standard for determining when courts may award enhanced damages in patent disputes.
On June 13, 2016, the Court issued its unanimous opinion in Halo Electronics, Inc., v. Pulse Electronics, Inc. 597 U.S. __ (2016), ruling that the decision to award or deny enhanced damages under 35 U.S.C. section 284 lies within the district court’s discretion. This ruling overturned the precedent set by the Federal Circuit in In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007).
Section 284 provides for enhanced damages in patent cases, stating, in relevant part, that “the court may increase the damages up to three times the amount found or assessed.” 35 U.S.C. § 284 (2016). Under Seagate, a patentee seeking enhanced damages under section 284 was required to satisfy a two-part test designed to show that the infringer’s actions were “willful.” First, the patentee had to establish by clear and convincing evidence that the infringer “acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.” Id. at 1371. But such “objective recklessness” could not be established when, during the infringement proceedings, an accused infringer “raise[s] a ‘substantial question’ as to the validity or noninfringement of the patent.” Bard Peripheral Vascular, Inc. v. W.L. Gore & Assoc., Inc., 776 F.3d 837, 844 (Fed. Cir. 2015). If a patentee was able to satisfy this first “objective” step, they then had to show, by clear and convincing evidence, that the risk of infringement “was either known or so obvious that it should have been known by the accused infringer.” Seagate, 497 F.3d at 1371. A district court was free to exercise its discretion to enhance damages only after both steps of the Seagate inquiry were satisfied. Id.
The Supreme Court held in Halo that the Seagate test was inconsistent with the language of section 284, which explicitly states that a court “may” increase the damages in a patent case (up to three times the amount assessed) without placing any additional limitations on a district court’s discretion. Halo, 597 U.S. at *7-8. The Halo opinion explicitly references the threshold “objective” step of the Seagate inquiry as placing an undue restraint on judicial discretion, pointing out that, although “culpability is generally measured against the knowledge of the actor at the time of the challenged conduct,” an infringer (even if that infringer was a “wanton and malicious pirate”) could avoid enhanced damage liability by simply relying on his attorney’s ability to craft a plausible defense at trial. Id at *9-10.
In place of the Seagate test for willfulness, the Supreme Court in Halo charges district courts to “take into account the particular circumstances of each case in deciding whether to award damages, and in what amount.” Id. at *11. And while the Halo opinion places the exercise of the enhanced damages provision of section 284 squarely within the district court’s discretion, the Court repeatedly emphasized that “discretion is not a whim,” and that the exercise of a court’s discretion under section 284 has been narrowed by two centuries of case law to the point where it is “generally reserved for egregious cases of culpable behavior.” Id at *8-9.
In addition to overturning the Seagate court’s two-part test for willfulness, the Supreme Court in Halo overturned the burden of proof set by Seagate, as well as the standard of review for enhanced damages appeals. Reasoning that no especial burden of proof was explicitly stated in section 284, the Halo Court ruled that the preponderance of the evidence standard, which applies generally to patent infringement cases, also applies to enhanced damages. Id at *12. Further, as the inquiry under section 284 now rests in the discretion of the district court, the Supreme Court ruled that appeals should be examined under the “abuse of discretion” standard, and not under the tripartite review standard that applied under Seagate. Id at *12-13.
Finally, in a concurring opinion joined by Justices Alito and Kennedy, Justice Breyer wrote separately to emphasize several additional points. First, Justice Breyer reemphasized that the Halo opinion does not stand for the proposition that mere knowledge of the asserted patent amounts to the type of “willful misconduct” that should form the basis of an award of enhanced damages. Halo, 579 U.S. at *1 (J. Breyer, concurring). Second, Justice Breyer pointed out that the Halo opinion does not create an affirmative duty to obtain advice of counsel, and that section 298 (prohibiting the use of an accused infringer’s failure to obtain the advice of counsel as proof of willful infringement) still applies. Id. at *2-3. Finally, Justice Breyer reemphasizes the point raised in the majority opinion that enhanced damages under section 284 are meant to be punitive, and not compensatory, and that section 284 should not apply to costs or expenses. Id at *3.
The Court’s opinion in Halo comes only two years after a similar rejection of limitations on judicial discretion in the context of awarding attorney’s fees. See Octane Fitness, LLC v. ICON Health and Fitness, Inc. 572 U.S.___, 134 S. Ct. 1749 (rejecting a two-part test to determine whether a case is “exceptional” for the purposes of awarding attorney’s fees under 35 U.S.C. section 285)1. As was the case in Octane Fitness, it will now be up to the individual district courts to exercise their discretion and determine the exact impact of the Halo ruling on damages awards, and on the patent litigation landscape in general.
- Indeed, the reasoning of the Octane Fitness opinion is referenced throughout the Halo opinion.
Client Alert 2016-151