The Supreme Court recently decided two cases, Halo Electronics, Inc. v. Pulse Electronics, Inc., et al. and Stryker Corporation, et al. v. Zimmer, Inc., et al., dealing with the standard that courts must use when determining whether or not to award enhanced damages to a patent plaintiff. As an enhanced damage award can often be “treble damages” – that is, a tripling of the actual damages caused by the infringement – it is important for any company that expects to ever be on the receiving end of a patent lawsuit to be aware of this standard.
The Statutory Law
Following the award of damages by a jury or the trial judge, 35 U.S. Code § 284 gives a court discretion to increase the awarded damages “up to three times the amount found or assessed.” Historically, this has provided courts with the opportunity to consider a patent infringer’s mindset as part of the damage award, and given courts some flexibility to distinguish willful infringement from non-willful infringement in a meaningful way. While a patent defendant that has accidentally infringed a patent might only be held liable for a reasonable royalty, a patent defendant that a court considers to have more deliberately infringed the patent may be held liable for a higher award.
The prior standard establishing when enhanced damages should be awarded to a patent plaintiff was set forth in a 2007 Federal Circuit case, In re Seagate Technology, LLC, 497 F. 3d 1360 (2007) (en banc). In Seagate, the Federal Circuit set forth a two-pronged test for the award of enhanced damages under 35 USC §284. In the first prong, a patentee was required 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.” If the first, objective prong was satisfied, the patentee was then required to prove “subjective recklessness,” which meant proving that the objectively defined risk was either known or should have been known to the accused infringer.
The petitioners in Halo and Stryker argued that this standard was far too strict, and that it was very rare that even a blatant infringer would be found to be liable for enhanced damages under Seagate. Even an ex post facto argument for non-infringement of the patent, or for the invalidity of the patent, would typically be enough to allow the infringer to escape the Seagate standard, so long as the argument was in some way defensible and non-frivolous. (This typically applied even if the infringer came up with the argument after the fact.)
Halo and Stryker
The Supreme Court rejected the Seagate test as inconsistent with the language of 35 USC §284. First, the Court noted that §284 allows lower courts to punish a range of culpable behavior, and is not limited to showings of both objective and subjective willfulness. As such, the inelastic constraints of the Seagate test were “unduly rigid.” The Court instead adopted a newer, more ambiguous standard, under which a lower court could exercise discretion to punish a full range of culpable behavior on the part of a patent infringer, though noting that “such punishment should generally be reserved for egregious cases.”
The Court also struck down the heightened clear and convincing standard required for enhanced damages required by Seagate as inappropriate and inconsistent with §284. It noted, instead, that “patent infringement litigation has always been governed by a preponderance of the evidence standard.” Under its reasoning, the same standard should be applied to the award of damages under §284.
Effects of Halo and Stryker
The effect of Halo and Stryker was to lower the burden on receiving treble damages in patent litigation, and increase the influence of judicial discretion on patent cases.
This case represents a rare victory for patent holders in the Supreme Court, after case after case has eroded patent rights based on the threat of so-called “patent trolls.” Under Seagate, enhanced damages were almost never awarded, but under Halo and Stryker, patent holders can expect to have a somewhat better chance at receiving them. This may be a nail in the coffin of the practice of “efficient infringement,” whereby a corporation or other entity would deliberately fail to do patent due diligence and ignore patent demand letters based on the expectation that defending against an occasional patent lawsuit would be a more efficient use of resources. Certainly, “efficient infringement” looks like far less of a favorable gamble.
However, any company that expects to be on the receiving end of a patent lawsuit may have cause for concern after Halo and Stryker. The standard set forth by the Supreme Court for when enhanced damages should be awarded is intentionally a muddy one, or, in its words, not governed by a “‘precise rule or formula.’” As such, judges have a great deal of discretion in when they can choose to award or choose not to award enhanced damages.
First, this means that a great deal of money – up to twice as much money as the actual amount of damages caused by the infringement – is now riding on the subjective opinion of the district court judge that hears the infringement case. This makes it significantly more desirable for a patent plaintiff to shop around for a favorable forum before filing suit, based on which districts or which judges are found to be more likely to grant enhanced damages based on a finding of willful infringement, or based on the size of the enhanced damages awards that they provide. This means that companies can no longer rely on being sued in one of just a few locations around the country, such as the Eastern District of Texas, and must anticipate being sued in any district where the court would have jurisdiction over the company. (For example, District Court judges that are less experienced with patent law may be more likely to see particular conduct on the part of a company as unusually egregious, simply because they would not be familiar with the patent practices of as many companies as a more experienced judge. As such, they may be more likely to give higher enhanced damage awards.)
Second, the greater likelihood of an award of enhanced damages for “egregious misconduct” and looser definition of what constitutes “egregious misconduct” means that it is now more important for companies to investigate demand letters more closely and seek non-infringement opinions. Justice Breyer noted that a jury may well find that a company behaved “recklessly” for failing to follow up on a demand letter, even a somewhat ambiguous demand letter, if the company is later found to infringe one or more of the patents that are identified in the demand letter. This may put the company at risk for treble damages. However, the greater weight that must be given to a demand letter may also encourage non-practicing entities, or “patent trolls,” to send out more demand letters of more dubious merit, knowing that a target company may have a greater incentive to settle or abandon a challenged activity if they must spend time investigating even a dubious demand letter.
Third, Halo clarified that it is most valuable to specifically seek a legal opinion on patent non-infringement from a legal practitioner. In Halo, the alleged infringer, Pulse Electronics, had sought an opinion of one of its engineers that a patent was invalid; even based on this opinion, the lower courts still found that Pulse had willfully infringed. However, Justice Breyer’s concurrence notes that the informed opinion of legal counsel would be more helpful in reducing the probability of a finding of willful infringement. Thus, based on Halo, it appears that one of the best approaches that can be taken by a company wishing to avoid an award of treble damages for patent infringement is to seek an informed opinion of counsel, rather than an opinion of an engineer or technical advisor, early after being informed of the patent. In addition to the fact that courts are likely to give the opinion of legal counsel more weight, opinions from legal counsel are also protected by the attorney-client privilege.