Supremes Sink Seagate

Darrin Auito | June 15, 2016

Halo Electronics, Inc. v. Pulse Electronics, Inc., et al.

June 13, 2016

SummaryThe U.S. Supreme Court unanimously vacated the Seagate test for enhanced damages as inconsistent with §284.  District courts have discretion to award enhanced damages where appropriate “as a sanction for egregious infringement behavior.”

Details

I.  Background

 35 U.S.C. §284 – Damages (emphasis added)

Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.

When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed. Increased damages under this paragraph shall not apply to provisional rights under section 154(d).

The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances.

Recent Willfulness History

  • 1983–2004: The CAFC held that “Where . . . a potential infringer has actual notice of another’s patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing.” Underwater Devices Inc. v. Morrison-Knudsen Co.. 717 F.2d 1380, 1389–90 (CAFC 1983).
  • 2004-2007: The CAFC held that “failure to obtain an exculpatory opinion of counsel shall no longer provide an adverse inference or evidentiary presumption that such an opinion would have been unfavorable,” – Knorr-Bremse Systeme Fuer Natzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337, 1346 (Fed. Cir. 2004).
  • 2007-2016: In re Seagate Technology, LLC, 497 F.3d 1360 (CAFC 2007) (en banc)

 Under Seagate, the CAFC held that a plaintiff seeking enhanced damages under §284 must satisfy the following two-part test to establish willfulness:

  1. Patent owner 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.”
  1. Patent owner must demonstrate 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 CAFC also held under Seagate that an award of enhanced damages was subject to trifurcated appellate review: Step 1 – de novo; Step 2 – substantial evidence; and the ultimate decision – abuse of discretion.

II.  Facts

In this case, petitioner Halo Electronics, Inc (Halo) and respondents Pulse Electronics, Inc., and Pulse Electronics Corporation (Pulse) each supply electronic components.  Halo alleged that Pulse infringed its patents for electronic packages containing transformers designed to be mounted to the surface of circuit boards.  In 2002, Halo sent a couple of letters offering to license its patents, but Pulse continued to sell the allegedly infringing products after one of its engineers concluded that the patents were invalid.

In 2007 (Seagate-era), Halo sued Pulse and the jury subsequently found that Pulse had willfully infringed the patents.  However, the District Court declined to award enhanced damages under §284 after determining that Pulse had presented a defense at trial that “was not objectively baseless.”  Thus, the court concluded that Halo failed Step 1 by not proving objective recklessness by clear and convincing evidence.

Applying de novo review, the CAFC affirmed. The U.S. Supreme Court granted certiorari to address the following issue:

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 fees under the similarly worded 35 U.S.C. § 285.

The Supreme Court unanimously held that the Seagate test is not consistent with §284.

III. Opinion (J. Roberts)

The Court emphasized the discretionary language recited in the statute (emphasis added):  “the court may increase the damages up to three times the amount found or assessed.”  However, the Court warned “[d]iscretion is not whim” and stated “[a]wards of enhanced damages under the Patent Act over the past 180 years establish that they are not to be meted out in a typical infringement case, but are instead designated as a ‘punitive’ or ‘vindictive’ sanction for egregious infringement behavior.  The sort of conduct warranting enhanced damages has been variously described in our cases as willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or – indeed – characteristic of a pirate.”

The Court rejected the two-part test in Seagate, specifically the “objective reckless” requirement of Step 1 because it “is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district court” and remarked that such requirement would exclude a “wanton and malicious pirate” who intentionally infringes – with no doubts about its validity or any notion of a defense – and only later relies on his “attorney’s ingenuity” to muster a reasonable (even unsuccessful) defense at trial.  “Culpability is generally measured against the knowledge of the actor (infringer) at the time of the challenged conduct.”  Thus, “[t]he subjective willfulness of a patent infringer, intentional or knowing, may warrant enhanced damages, without regard to whether his infringement was objectively reckless.”  The Court’s position is consistent with the its holding in Octane Fitness v. Icon Health, 134 S. Ct. 1749 (2014), which allows district courts to award attorney’s fees to prevailing parties under §285 of the Patent Act in “exceptional” cases without requiring the asserted claims be both objectively baseless and brought in subjective bad faith.

The Court, relying on Octane Fitness, rejected the “clear and convincing” standard found in the Seagate test in favor of a “preponderance of the evidence” standard.  “Like §285, §284 ‘imposes no specific evidentiary burden, much less such a high one’ … [and] nothing in historical practice supports a heightened standard.”

The Court, relying on Highmark Inc. v. Allcare Health Management System, Inc. 572 U.S. _ (2014) (building on Octane Fitness), rejected the CAFC’s “rigid” tripartite framework for appellate review, stating that “Section 284 gives district courts discretion in meting out enhanced damages … and that decision is to be reviewed on appeal for abuse of discretion.”

The Court rejected Pulse’s policy argument that “allowing district courts unlimited discretion to award up to treble damages in infringement cases will impede innovation … [and] embolden ‘trolls.”  The Court held that an award of enhanced damages should be limited to “egregious cases of misconduct beyond typical infringement,” and not “garden-variety cases.”

IV.  Concurring Opinion

The concurring opinion expresses Justice Breyer’s (joined by Justices Kennedy and Alito) understanding of the limits of §284.

First, an infringer’s knowledge about the patent and nothing more does not mean that a court may award enhanced damages.

Second, the failure of an infringer to obtain the advice of counsel … may not be used to prove that the accused infringer willfully infringed.  However, J. Breyer recognizes that “consulting counsel may help draw the line between infringing and non-infringing uses.”

Third, enhanced damages may not “serve to compensate patentees” for infringement-related costs or litigation expenses.

Take Away

  • The Halo decision increases the value of patents by making it easier for patent owners to obtain enhanced damages in cases of egregious (no longer willful) behavior by the infringer.
  • Post Halo, Companies should reassess policies on whether to secure legal non-infringement opinions for at least the following reasons:

(1) increased potential for enhanced damages;

(2) focus on culpability at the time of the challenged activity; and

(3) preponderance of evidence standard

(4) lower chance of dismissing willfulness claims during early stages of litigation

  • Increase in litigation-related activities points to an increase in PTAB validity challenges.
  • The Halo decision may impact the timing of the willfulness determination—possibly pushing the determination of the issue from the pleadings or summary judgment stages (defendants could get dismissed earlier due to higher evidentiary standard) to the trial and post-trial stages.
  • Supreme Court’s current trend is to strike overly rigid CAFC tests in favor of statutory language and historical precedence: Octane Fitness (§285), KSR (§103),  Bilski (§101), and now Halo (§284).

Full Opinion

 

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