The United States Supreme Court continued its string of dramatic alterations to fundamental patent law this week by changing the standard for enhanced damages under Section 284 of the Patent Act.1 Section 284 provides that, if a defendant is found liable for patent infringement, "the court may increase damages up to three times the amount found or assessed."2 In this week's decision in the Halo and Stryker cases, the Supreme Court held that district courts are vested with the discretion to award enhanced damages under Section 284 where the infringing conduct is egregious. The award need only be based on a preponderance of the evidence, and the Federal Circuit should review a district court's finding for abuse of discretion. This new standard arguably makes it easier for patent owners to obtain treble damages in patent litigation. Practically, the new standard presents some challenges in identifying the best practices for addressing potential infringement issues to ensure that an accused infringer's conduct is not later found to be egregious.
Although Section 284 provides no standard for awarding enhanced damages, the Federal Circuit's 2007 Seagate decision required the patent owner to show by clear and convincing evidence that (1) "the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent," and (2) the risk of infringement "was either known or so obvious that it should have been known to the accused infringer."3 The objective prong was viewed as a question of law subject to de novo review on appeal, while the subjective prong was reviewed on appeal under the substantial evidence standard, and the ultimate decision on enhanced damages was reviewed for abuse of discretion. Harkening back to its 2014 decisions in Octane Fitness and Highmark, the Supreme Court rejected the Federal Circuit's test for enhanced damages as "unduly rigid," further noting that "it impermissibly encumbers the statutory grant of discretion to district courts."4
As we reported in our February 24, 2016 alert, the oral argument in Halo and Stryker foreshadowed a change to the Seagate standard. Chief Justice Roberts commented that "to erect this fairly elaborate standard on the basis of [the statutory] language I think is surprising." Justice Breyer agreed, but expressed some concern about finding the right policy balance amid the tension between patent trolls and start-up companies. Based on their questions and comments during oral argument, we find it unsurprising that Chief Justice Roberts wrote the opinion for a unanimous Court, while Justice Breyer wrote a separate concurrence to draw attention to patent troll issues.
The unanimous opinion of the Court notes that there is "no precise rule or formula" for an award of enhanced damages under Section 284, but "a district court's 'discretion should be exercised in light of the considerations' underlying the grant of that discretion."5 The Court then traces the punitive nature of Section 284, noting that "[t]he 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."6 Although the Court recognized that "Section 284 permits district courts to exercise their discretion in a manner free from the inelastic constraints of the Seagate test," "such punishment should generally be reserved for egregious cases typified by willful misconduct."7
In the end, enhanced damages are now a very real threat, and the Halo and Stryker decision will likely increase the prevalence of enhanced damages claims. Although the Supreme Court's decision is true to the statutory language in Section 284, it unfortunately does not provide accused infringers with a clear roadmap of how to guard against enhanced damages. Most certainly, claims for enhanced damages will increase; whether the district courts will exercise their discretion to award enhanced damages is a completely different question altogether. And given that enhanced damages awards will be reviewed for abuse of discretion, the Federal Circuit might affirm inconsistent decisions by two district judges faced with similar facts. Nonetheless, both the unanimous opinion of the Court and Justice Breyer's concurrence provide helpful factors for accused infringers and their counsel to consider when facing infringement issues.
An invalidity or non-infringement opinion from competent counsel is neither mandatory nor a safe harbor per se, but it will go a long way in defending against a claim of willful infringement. Still, as Justice Breyer noted, sometimes the cost of an opinion of counsel might exceed the risk against which it mitigates, particularly where the patent owner is a troll requesting a minimal licensing fee. The apparent message underlying the Court's opinion and Justice Breyer's concurrence is that accused infringers must consider and react to each infringement issue, allegation or threat in a manner commensurate with the perceived level of risk at the time of the accused conduct. Only "egregious cases" should qualify for enhanced damages, and the nature of the threat and the level of risk associated therewith are factors district courts should consider in determining whether enhanced damages are appropriate. The Federal Circuit's consideration of these cases on remand and patent owners' renewed quests for enhanced damages should provide some assistance in formulating best practices.
Our Intellectual Property and Technology team has substantial experience in drafting invalidity and non-infringement opinions to protect against enhanced damages and in litigating enhanced damages issues on behalf of both patent owners and accused infringers. Please contact one of the authors listed above should you have any questions about the content of this alert.
1 Halo Elecs., Inc. v. Pulse Elecs., Inc. and Stryker Corp. v. Zimmer, Inc., 579 U.S. ___ (June 13, 2016), slip opinion available here.
2 35 U.S.C. § 284.
3 In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007).
4 Halo, Slip Op. at 9 (quoting Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S.Ct. 1749, 1755 (2014)); see also Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S.Ct. 1744, 1748 (2014).
5 Halo, Slip Op. at 8.
7 Id. at 11.